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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 0-20701
COMPOSITECH LTD.
(Name of small business issuer 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)
Issuer's telephone number: (516) 436-5200
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Redeemable Common Stock Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for fiscal year ended December 31, 1996: $327,411
As of March 20, 1997, there were 6,138,939 shares of the registrant's
Common Stock, $.01 par value outstanding. The aggregate market value of Common
Stock held by non-affiliates of the registrant, as of March 20, 1997 was
approximately $15,650,000.
DOCUMENTS INCORPORATED BY REFERENCE: PORTIONS OF THE ISSUER'S PROXY STATEMENT
FOR ITS 1997 ANNUAL MEETING OF STOCKHOLDERS SCHEDULED TO BE HELD ON JUNE 24,
1997, ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes ___
No _X_
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Compositech Ltd. (the "Company" or "Compositech") was founded in 1984
by Jonas Medney and Fred Klimpl, its Chairman and President, respectively, to
develop and market innovative and superior copper-clad fiberglass epoxy
laminates used to make printed circuit boards required by the electronics
industry. The Company was incorporated in the State of New York on June 13, 1984
and was merged into a newly formed Delaware corporation on January 29, 1988. The
primary innovation of Compositech was to replace the fiberglass cloth component
of the laminate with a more modern and structurally efficient fiberglass core
resulting from a uniform, orthogonally layered construction. The Company has
received grants of nineteen patents covering its products, processes and
apparatus, including five in the United States, and has submitted eleven
additional patent applications. The Company has been a development stage company
through 1996 and has expended over $24 million since its inception in developing
its business and its technology and enlarging its patent estate. Based on the
level of production and sales anticipated for 1997, the Company believes it is
no longer in the development stage.
On July 9, 1996, the Company received net proceeds of approximately
$9.9 million from its initial public offering ("IPO"). Approximately $4.3
million was used to reduce debt substantially and pay accrued interest. The
Company used the remaining proceeds to add production modules to its existing
equipment and for working capital.
The Company's innovative laminates are produced using proprietary
processes and machinery, designed by the Company's engineering staff. The
patents on the laminates, processes and apparatus are supplemented with other
proprietary technology unprotected by patents and considered by the Company to
be of substantial value.
Compositech's laminate construction is structurally more efficient,
resulting in enhanced smoothness and greater dimensional stability. The Company
believes, based on results of customers' evaluations, that its improved products
can economically replace the fiberglass woven cloth epoxy laminates currently
used in the electronics industry. According to the Institute for Interconnecting
and Packaging Electronic Circuits (the "IPC"), this market exceeded $2.5 billion
in 1995.
The Company successfully constructed, debugged and operated its first
pilot plant production equipment for laminates with a panel size of 24" x 24" in
1991. In 1991 and 1992, Compositech recruited an initial sales staff to develop
the market potential of its product, continued refining its product and
designing its production equipment to manufacture laminates with a panel size of
36" x 48" and initiated a sampling program targeted at major potential
customers. In 1994, the Company started up and began debugging its first
production module to manufacture 36" x 48" laminates and, in 1995 and 1996,
produced laminates on this equipment in limited quantities for the purpose of
making modifications to the production processes constituting the module and
reformulating the laminates produced by the module. In the last quarter of 1996,
the Company began installation of advanced production equipment which is
expected to be fully operational in the second quarter of 1997.
INDUSTRY OVERVIEW
Initially, most circuit boards had circuits (traces) on one or two sides
. In the last ten years, rapid technological advances in both semiconductor
design and fabrication techniques have placed significant demands on the
performance of printed circuit boards. Greater circuit density, complexity and
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miniaturization have increased demand for more sophisticated printed circuit
boards. In response to this demand, multilayer printed circuit boards were
developed which incorporate multiple layers of metallic traces. The several
layers of circuitry are aligned and bonded together in a stack to form a
multilayer board with both horizontal and vertical electrical interconnections.
Further circuit board sophistication is currently being achieved by decreasing
the width and separation of the traces, drilling and plating smaller holes to
connect the internal trace layers and precisely situating the traces and pads
on the board surface to accommodate surface mount components.
These trends in the printed circuit board industry have placed
increasingly rigorous demands on the electrical, thermal, chemical and
mechanical properties of laminates. Mechanical properties must be increasingly
more uniform and tightly controlled in order to align the various layers in a
multilayer printed circuit board. Electrical properties of laminates must be
highly consistent and predictable in order to avoid circuit timing
malfunctions. Thermal stability is also critical for attaching the components
and for dense, high speed systems, because of the heat generated.
Compositech's technology is targeted at the fiberglass laminate segment
of the laminate industry. According to the IPC, in 1995 the single- and
double-sided laminate market was approximately $1 billion and the
multilayer/high performance laminate market was approximately $1.5 billion,
totaling $2.5 billion. In these two segments, the United States' share was
approximately $658 million. Based upon IPC statistics, the Company estimates
that U.S. market growth in 1996 was 8%.
PRODUCTS
PRINTED CIRCUIT BOARD LAMINATES. Printed circuit boards are the basic
platforms used to interconnect the microprocessors, integrated circuits and
other components essential to the functioning of electronic products. They
consist of a pattern of electrical circuitry resulting from etching copper foil
laminated to a composite made of insulating materials usually comprised of
fiberglass and epoxy. The laminate itself, therefore, is the copper-clad,
fiberglass and epoxy core from which printed circuit boards are produced.
COMPOSITECH'S LAMINATES. CL200+ is the introductory Compositech
laminate. This laminate uses the same basic raw materials as conventional
laminates: fiberglass yarn, epoxy resin and copper foil. Compositech combines
these materials into a unique, more efficient laminate. Conventional laminates
are made from woven fiberglass cloth in which the yarn is twisted and crimped
in the weaving process. The resultant weave pattern is impressed into the
copper foil, thereby roughening the surface of the laminate. In the
construction of Compositech's laminates, the filaments of fiberglass are not
twisted but are wound in orthogonal layers of flat, continuous parallel
filaments. This construction creates the enhanced smoothness and improved
dimensional stability of Compositech's laminates.
High processing temperature tolerance is necessary for soldering
components to circuit boards. CL200+ uses a proprietary epoxy resin formulation
that, according to Company tests, results in a thermal rating over 200(degree)
C, which is generally 20(degree) C to 80(degree) C higher than other copper-clad
fiberglass epoxy laminates. Certain laminates produced from materials other than
fiberglass epoxy, addressing a small, higher cost end of the market, have
thermal ratings which equal or exceed those of the Company's introductory CL200+
laminates.
Management believes that the benefits of Compositech's laminates should
enable the printed circuit board industry to:
* Decrease costs through reducing waste in the manufacture of
existing boards because the improved dimensional stability,
temperature tolerances and enhanced smoothness increase
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manufacturers' yields.
* Accelerate the development of new products requiring denser
circuitry by permitting finer lines and smaller pads. A pad is
a portion of a conductive pattern which is usually, but not
exclusively, used for the connection and/or attachment of
components.
COMPOSITECH'S STRATEGY
The Company's objective is to be the leading manufacturer of
copper-clad fiberglass epoxy laminates for electronics equipment. The Company
expects to achieve this position through the effective exploitation of its
patented and proprietary products and processes.
Management has targeted the $1.5 billion multilayer laminate market
sector for its initial sales efforts to establish its laminates as the
leading-edge technology for current and future economical production of printed
circuit boards.
Management believes that the strategic value of the Company's products
to its prospective customers is to enable them economically to produce
increasingly sophisticated circuit boards in a shorter time cycle. This
combination of benefits is a basic element of Compositech's product technology
thrust.
The Company has patented and developed a flexible manufacturing process
that it believes can be exceptionally responsive to the ever-changing product
iterations required by the rapid introduction of new designs into the
electronics market. The manufacturing capacity can be expanded incrementally in
response to increased market demand.
Management believes that the Company's technology has global potential.
According to IPC data, approximately 70 percent of the world laminate market is
outside of North America. The Company plans to export its products and form
strategic alliances to manufacture and market its laminates internationally.
On March 29, 1996, the Company signed a Memorandum of Understanding
with the Fonds de solidarite des travailleurs du Quebec (FTQ), Societe generale
de financement du Quebec and Societe Innovatech du Grand Montreal, three Quebec
institutional investors (collectively, the "Quebec Investors"), providing for
the initiation of certain studies and procedures which may lead to the
establishment of a plant in the greater Montreal area to manufacture
Compositech's laminates. The Company and the Quebec Investors each initially
contributed approximately $37,000 to fund the studies in connection with this
project. On February 6, 1997, the parties agreed in principle to form a 50/50
joint venture, with Fonds Regional de Solidarite Ile de Montreal, Limited
Partnership, being named as an additional Quebec Investor. The parties are
preparing definitive agreements. The project cost is estimated to be
approximately $24.5 million with an initial capitalization by the parties of
$11.2 million with the balance to be in debt financing from a bank and other
sources. The parties have received a firm commitment from the National Bank of
Canada for a term loan of $9.8 million and a short-term working capital facility
for $3.5 million and are negotiating the balance of financing from other
sources. The Company's $5.6 million capital investment in the joint venture is
to be funded by the Quebec Investors purchasing 941,176 shares of the Company's
Common Stock at $5.95 per share. The Quebec Investors will have an option to
sell their 50% interest in the project to the Company for an additional 941,176
shares of the Company's Common Stock and, under certain conditions, the Company
will have an option to purchase the Quebec Investors' interest in the project
for a like number of shares. The establishment of this project is subject, among
other things, to the execution of definitive agreements and the obtaining of the
balance of the financing. The Company is unable to predict when, if ever, such
conditions will be satisfied.
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MARKETING AND CUSTOMERS
The Company's marketing efforts are directed to establishing good
working relations with leading-edge producers of circuit boards. According to
the IPC, there are over 670 manufacturers of printed circuit boards in North
America with 18 companies comprising over one-third of the market. The Company
has sold its laminates principally on a test basis to a select group of these
companies considered to be the key companies for Compositech's growth. During
the past three years, Compositech has encouraged benchmark comparisons of its
laminates with current laminates. In virtually all of these evaluations, CL200+
has proven superior to current laminates. These results have led several
manufacturers to begin to use CL200+ for current production applications, but
such use has been limited by the Company's inability to supply laminates in
large quantities because of working capital and production constraints. These
companies include AMP Incorporated ("AMP"), Lucent Technologies, Inc. (formerly
part of AT&T Corp.), HADCO Corporation, Merix Corporation and North American
Printed Circuits (a division of TYCO International Ltd.). Customers benefit from
increased production yield primarily by reducing waste caused by circuitry
misalignment.
Compositech's laminates are designed and have proven to be directly
substitutable for conventional laminates in the circuit board production process
as demonstrated by their use in production by customers. This compatibility
enables the circuit board manufacturer to substitute Compositech's laminates
without the need for additional equipment or new process technology.
The Company markets to circuit board manufacturers in the United States
and Canada with its own direct sales force which it plans to expand in 1997. The
Company's sales force currently consists of its President, its Vice President of
Sales and a marketing assistant. The Company may also use independent sales
representatives and distributors to expand sales.
Although the Company does not believe that ultimately its business will
be dependent upon a single customer, in view of limited production capacity the
Company currently is focusing its efforts on a number of select accounts. In
1996, HADCO Corporation and Merix Corporation represented 50.8% and 46.4%
respectively, of the Company's net sales. The printed circuit board industry
generally follows a "just-in-time" strategy by purchasing laminates only as they
are required for production runs. Accordingly, the Company currently does not
have a significant backlog of sales commitments as the orders are matched to the
Company's present production capacity. The Company expects the backlog to
increase in relation to its planned production expansion.
COMPETITION
The laminate business is highly competitive. The Company has many
competitors of varying sizes and financial resources located in the United
States, Western Europe and the Far East. Competition in the laminate market is
based upon factors such as product quality, performance, technological
capability, responsiveness to customers, delivery, service and price. The
Company believes there are more than 40 competitors worldwide, with more than
ten in the United States. The Company believes that its major domestic and
international competitors are ADI/Isola, AlliedSignal Laminate Systems (a
subsidiary of AlliedSignal, Inc.), Arlon Inc., General Electric Company, Hitachi
Chemical Co. Inc., Matsushita Electric Industrial Co., Nan Ya Plastics Corp.,
Nelco International Corp. (a subsidiary of Park Electrochemical Corp.), Polyclad
Laminates, Inc. (a subsidiary of Cookson Group), Sumitomo Bakelite Co. Ltd., and
Toshiba Chemical Corp. The Company's competitors consist of companies that are
usually divisions or subsidiaries of some of the world's leading electronics and
manufacturing concerns and have significantly greater financial resources than
the Company.
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The Company believes its patented and proprietary technology will
enable it to become an effective competitor by offering customers products with
a higher value. The unique physical characteristics of the Company's products
should, in the Company's opinion, allow it to penetrate the market and increase
sales. However, there is no assurance that the Company's products will prove to
be economically competitive or that the Company will continue to develop
technologically competitive products in the future.
MANUFACTURING
The Company occupies a leased building at 120 Ricefield Lane,
Hauppauge, New York, which includes its corporate offices, laboratory, machine
shop, engineering offices and manufacturing operations. The building is large
enough to allow the Company's production line to be expanded to meet near-term
needs. The technologically advanced products manufactured by the Company require
clean environments to ensure high yields. Clean rooms are utilized by the
Company in certain areas of the production line to control contamination from
small particles.
Compositech's manufacturing process is unique and patented. The
manufacturing equipment has been designed by the Company's engineering staff.
Much of the equipment incorporates proprietary designs including hardware and
software. Management believes that the Company's manufacturing process
eliminates many manufacturing steps compared to the conventional manufacturing
process, including weaving the fiberglass cloth.
The Company's manufacturing process enables the Company to control the
consistency of mechanical, thermal and electrical properties of laminates in
various thicknesses. In addition, the Company's process eliminates the use of
solvents as an integral part of the manufacturing process although it uses small
amounts of solvents for the sole purpose of cleaning some of its equipment.
Compositech's CL200+ laminate is comprised of copper, fiberglass and epoxy.
Other combinations of materials usable in this process include aramid fibers,
quartz fibers, carbon fibers, cyanate ester resins, polyimide resins and other
conductive metal foils.
The expansion of the Company's production facilities currently underway
is expected to increase the annual capacity significantly. This expansion is the
first production-scale expansion planned by the Company, and consequently no
assurances can be made that the Company's production facilities will meet the
Company's production targets in a timely way or that the resultant product will
meet the high commercial standard needed for successful market penetration.
Furthermore, the expanded production facilities may not be able to provide
adequate efficiency and yield.
MATERIALS AND SOURCES OF SUPPLIES
The principal materials used in the manufacture of the Company's
laminates are copper foil, fiberglass yarn and specially formulated resins and
chemicals. The Company's policy is to identify and concentrate on a limited
number of chosen suppliers. The Company's major suppliers are Oak-Mitsui Inc., a
joint venture between AlliedSignal, Inc. and Mitsui Mining, Inc., for copper
foil; Owens Corning for fiberglass yarn; Eastech Chemical Company for resins;
and Lonza Inc. for certain chemicals. The Company attempts to develop and
maintain close working relationships with those chosen suppliers who comply with
the Company's stringent technical requirements and specifications. The Company
has identified alternative sources of supply for each of the required materials.
However, there exists a limited number of qualified suppliers of these
materials, and although the Company considers its relationships with its
suppliers to be satisfactory, a disruption of the supply of material from one or
more of the Company's principal suppliers could adversely affect its business.
Substitutes for some of these materials are not readily available, and an
inability to obtain essential materials, if prolonged, could materially
adversely affect the business of the Company.
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In 1995, some raw material shortages were reported to the Company by
certain of its suppliers. Although the Company is not experiencing any such
shortages currently, no assurance can be made that it can obtain adequate
supplies necessary for its planned expansion.
PATENTS AND PROPRIETARY INFORMATION
The Company continues to build a patent estate to protect its
technology. Nineteen patents have been granted in the United States and
internationally. The U.S. patents granted expire from 2007 to 2012. The foreign
patents generally have expiration dates from 2004 to 2009. Eleven patent
applications in the U.S. and internationally are currently pending. These
patents and applications cover the unique laminate product and the process and
equipment used for producing the laminates. The patents also cover a precision
multilayer process and a circuit transfer process. Additional inventions have
been disclosed to the Company's patent attorneys, and may be the subject of
future patent applications.
In addition, the Company has developed extensive proprietary
information considered to be of substantial value. The Company has no patents
for this proprietary information. The Company believes that, although such
information, techniques and expertise are subject to misappropriation or
obsolescence, development of improved methods, processes and techniques by the
Company will continue on an ongoing basis.
In June 1990, HT Troplast AG ("HT"), a former manufacturer of laminates
for printed circuit boards and an indirect subsidiary of the Veba Group, a
German industrial group, invested $6 million in the Company and agreed to
provide technical and marketing assistance at no cost for a 25% equity share in
the Company and the exclusive right to produce and market Compositech's
laminates in Europe, the countries of the former Soviet Union and Turkey. To
date, HT has provided assistance with product quality standardization, customer
evaluations, laboratory testing, engineering, patent advice, research,
manufacturing cost comparisons, Asian prospective licensee contacts and
production management. In accordance with the corporate strategy of its parent
company, HT discontinued its manufacturing operations for epoxy and fiberglass
laminates in 1994 and for all laminates in 1995, but it continues to make
technical and marketing assistance available to the Company. Pursuant to
existing agreements with HT, the Company has the obligation to sell in the above
described territories only through HT, and HT continues to retain Board
representation and certain other rights with respect to the Company.
In February 1993, AMP and AKZO Electronics B.V. ("AMP/AKZO"), which at
the time were operating a joint venture, loaned the Company $2.8 million under
nonrecourse notes collateralized by two licenses. The Company used these funds
in its development program for production equipment for 36" x 48" laminates. In
May 1994, the above-mentioned licenses were canceled, and AMP/AKZO provided an
additional $2 million and converted the $2.8 million note plus approximately
$213,000 in interest into a payment to Compositech for immunity from prosecution
under the Company's product patent in order to permit the manufacture of
laminates using their own process which was under development. The immunity
agreement does not cover the Company's patented process or apparatus.
The Company expended approximately $153,000 and $2,406,000 for
research and development during the years ended December 31, 1996 and 1995,
respectively.
ENVIRONMENTAL MATTERS
Unlike other laminate manufacturing operations, Compositech
does not use solvents as an integral part of its manufacturing
process. However, the Company uses copper and chemicals in its
manufacturing process and limited amounts of solvents for the
sole purpose of cleaning some of its equipment and is
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subject to a variety of applicable environmental laws. The Company believes
that its facilities comply in all material respects with applicable federal,
state and local environmental laws and believes that costs arising from
compliance with existing environmental laws will not have a material adverse
effect on the Company's operations. However, environmental laws could become
more stringent over time, imposing greater compliance costs and increasing risks
and penalties associated with a violation.
EMPLOYEES
The Company has 74 full-time employees. None of the employees is
subject to collective bargaining agreements. Management considers its labor
relations to be satisfactory and believes that there is an adequate pool of
labor available to satisfy foreseeable hiring needs.
IMPORTANT FACTORS REGARDING FUTURE RESULTS
Information provided by the Company, including information contained in
this Annual Report, or by its spokespersons from time to time may contain
forward-looking statements concerning projected financial performance, market
and industry segment growth, product development and commercialization or other
aspects of future operations. Such statements, made pursuant to the safe harbor
established by recent securities legislation, are based on the assumptions and
expectations of the Company's management at the time such statements are made.
The Company cautions investors that its performance (and, therefore, any
forward-looking statement) is subject to risks and uncertainties. Various
important factors, including but not limited to the following, may cause the
Company's future results to differ materially from those projected in any
forward-looking statement.
DEVELOPMENT STAGE COMPANY; ABILITY TO CONTINUE AS GOING CONCERN; UNCERTAINTY OF
FUTURE FINANCIAL RESULTS
The Company has been a development stage company through December 31,
1996 and has had limited revenues from the sale of laminates, has incurred
significant losses and has had substantial negative cash flow since its
inception. As of December 31, 1996, the Company had an accumulated deficit of
$20,573,767. The Company's independent auditors have included an explanatory
paragraph in their report covering the December 31, 1996 financial statements,
which paragraph expresses substantial doubt about the Company's ability to
continue as a going concern. The Company will require, and is negotiating for,
additional financing to cover operating expenses and expenditures for additional
production equipment until revenues from operations are sufficient for these
purposes. The Company expects significant operating losses to continue into
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.
NEED FOR ADDITIONAL FINANCING
The Company's available funds, without giving effect to alternative
sources of revenue, may not be sufficient to raise the Company's production
level to profitability or provide sufficient working capital for expansion of
sales. Consequently, additional financing is being sought. The Company is
currently negotiating a private placement of $5 million. Such financing may be
raised through additional equity offerings, joint ventures or other
collaborative relationships, borrowings or other financings. There can be no
assurance that additional financing will be sufficient and available or, if it
is available, that it will be available on acceptable terms. If additional funds
are raised through the issuance of equity securities, the percentage ownership
of then current stockholders of the Company will be reduced and such securities
may have rights, preferences or privileges senior to those of the holders of
Common Stock. If adequate funds are not available to satisfy either
short-term or long-term capital requirements, the Company may be required
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to limit its operations significantly.
COMPETITION
The laminate manufacturing business is highly competitive. The
Company's competitors include major corporations, such as General Electric
Company and AlliedSignal Inc., which have substantial financial, marketing and
technical resources. In 1994, the Company granted patent immunity on its product
patents to AMP/AKZO, which, at the time, were operating a joint venture which
was developing a new process to make linear laminates. The Company may need to
raise substantial additional resources to compete effectively. There is no
assurance that the Company will be able to compete successfully in the future.
MANAGEMENT OF GROWTH
The Company intends to expand significantly its overall level of
operations. Any such expansion, however, is expected to strain the Company's
management, technical, financial and other resources. To manage growth
effectively, the Company must add manufacturing capacity and personnel while
maintaining a high level of quality and achieving good manufacturing efficiency
and while expanding, training and managing its employee base. The Company's
failure to add capacity and manage growth effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RELIANCE UPON KEY PERSONNEL
The Company believes that its success will depend to a significant
extent upon the efforts of its senior management, in particular Jonas Medney,
its Chairman and Chief Executive Officer, and Fred E. Klimpl, its President and
Chief Marketing Officer, who together invented its technology and founded the
Company. The Company maintains and is the beneficiary of $2 million key person
life insurance policies on each of Messrs. Medney and Klimpl. The loss or
unavailability of either Mr. Medney or Mr. Klimpl or other senior management
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON SINGLE MANUFACTURING FACILITY
The Company's current laminate manufacturing operations are centralized
in one building in Hauppauge, New York, although a joint venture is planned to
build an additional and larger plant in Montreal. Because the Company currently
does not operate multiple facilities in different geographic areas, a disruption
of the Company's manufacturing operations resulting from sustained process
abnormalities, human error, government intervention or a natural disaster such
as fire, earthquake or flood could cause the Company to cease or limit its
manufacturing operations and consequently have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAINTY OF PRODUCTION QUALITY AND PRODUCTION COSTS; PROCESS DISRUPTION
The Company has limited experience in producing laminates on its first
production-scale module. The Company currently is adding production modules to
achieve higher quantity levels and economies of scale. This expansion is the
first production-scale expansion undertaken by the Company, and consequently
no assurances can be made that the Company's production facilities will meet
the Company's production targets in a timely way or that the resultant
product will meet the high commercial standard needed for successful
market penetration. Furthermore, the expanded production facilities
may not be able to provide adequate efficiencies and produce high
yields. In addition, the costs of production may not be as low as
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management expects, in which case the Company may not achieve profitable
operations. The Company's business involves highly complex manufacturing
processes which are subject to disruption. Process disruptions have occurred,
resulting in delays in product shipments. Process disruptions were due to
machine breakdowns, lack of adequate interior atmospheric control of temperature
and humidity, electric utility power failures, problems of breaking in an
expanded workforce and particles generated during installation of equipment.
There can be no assurance that disruptions will not occur in the future. The
loss of revenue and earnings to the Company from such a disruption could have a
materially adverse effect on its results of operations.
SIGNIFICANT CUSTOMERS
Due to limited productive capacity, the Company has been focusing its
efforts on a few select accounts. During 1996, HADCO Corporation and Merix
Corporation accounted for 50.8% and 46.4%, respectively, of sales. Loss of these
customers could have a material adverse effect on the Company's business.
TECHNOLOGICAL CHANGE
The Company's laminates are used in the electronic printed circuit
board industry which could encounter competition from new technologies in the
future and reduce the number of circuit boards required in electronic equipment
or render existing interconnect technology less competitive or obsolete.
AVAILABILITY OF MATERIALS; DEPENDENCE UPON THIRD-PARTY SUPPLIER
Raw materials used by the Company to produce laminates are purchased by
the Company and in certain circumstances the Company bears the risk of price
fluctuations. In addition, shortages of certain types of materials have occurred
in the past and may occur in the future. Future shortages or price fluctuations
in raw materials could have a material adverse effect on the Company's business,
financial condition and results of operations. Owens Corning a major fiberglass
manufacturer, has developed and continues to develop products to meet the
Company's processing and product requirements. Should this manufacturer not
continue supplying the Company's quality and quantity needs, the Company would
have to secure another supplier. Such event could have a material adverse effect
on the Company's ability to supply customers and could reduce expected sales and
increase the costs of manufacture. No assurances can be given that an
alternative supplier could meet the Company's quality and quantity needs on
satisfactory terms.
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
The Company believes that its patent estate and its know-how are
important for the protection of its technology. No assurance can be given that
any patents issued to the Company will not be challenged, invalidated or
circumvented or that such patents will provide substantial protection with
respect to the Company's product, process or competitive position. In addition,
certain proprietary information which is considered to be of substantial value
is not covered by patents and, along with the Company's other intellectual
property, is subject to misappropriation or obsolescence. In addition, the
Company has granted certain immunities on its product patents to a potential
competitor of the Company, AMP/AKZO. The Company also has granted HT the
exclusive right to produce and market Compositech's laminates in Europe, the
countries of the former Soviet Union and Turkey. HT has exited the laminates
business and no longer pursues an active role therein. Pursuant to the existing
license agreement with HT, the Company has the obligation to sell only through
HT in such territories.
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ENVIRONMENTAL COMPLIANCE
The Company uses copper and chemicals in its manufacturing process and
limited amounts of solvents for the sole purpose of cleaning its equipment.
Although the Company believes that its facility complies in all material
respects with existing environmental laws and regulations, there can be no
assurance that violations will not occur. In the event of any future violations
of environmental law and regulations, the Company could be held liable for
damages and for the cost of remedial actions. In addition, environmental laws
could become more stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with a violation.
CONTROL BY EXISTING STOCKHOLDERS
As at December 31, 1996, officers, directors and other significant
stockholders of the Company owned approximately 51% of the Company's Common
Stock and voting preferred stock, including stock options and warrants
exercisable within 60 days. It is expected that these stockholders will continue
to control the management and policies of the Company, including, without
limitation, the power to elect and remove a majority of directors of the Company
and the power to approve any action requiring common stockholder approval. In
addition, some of these officers, directors and other stockholders, in
connection with certain outstanding loans, have a security interest in the
Company's manufacturing equipment and all of the Company's patents and patent
applications or in the Company's U.S. patents and patent applications.
CERTAIN RESTRICTIVE CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation and Bylaws empower the Board
of Directors, without approval of the stockholders, to issue shares of preferred
stock and to fix the rights and preferences thereof, and to prohibit
stockholders of the Company from calling a special meeting unless requested by
at least a majority of the outstanding voting shares. The certificate does not
provide for cumulative voting for election of directors. In addition, the Bylaws
of the Company provide that while the removal of a director or the entire board
of directors, with or without cause, may be accomplished by the holders of the
majority of shares entitled to vote, any director designated by HT may only so
be removed for cause. These provisions could have the effect of deterring
unsolicited takeovers or other business combinations or delaying or preventing
changes in control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for the securities over
then-current market prices. In addition, these provisions may limit the ability
of stockholders to approve transactions that they may deem to be in their best
interests.
ITEM 2. DESCRIPTION OF PROPERTY
The Company occupies approximately 33,000 square feet of leased office
space and manufacturing facilities in Hauppauge, New York. The lease for such
space has a five-year term expiring August 31, 2000, with an annual rent of
$156,000 until August 31, 1998 and $168,000 for each of the two years
thereafter, and with a renewal option for an additional five years.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings are currently pending against the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year.
ITEM 4A. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following chart lists the Company's current directors and executive
officers.
NAME AGE POSITION(S) WITH THE COMPANY
- --------------- --- ------------------------------------
Jonas Medney 68 Director, Chairman
Fred E. Klimpl 62 Director, President and Secretary
Samuel S. Gross 70 Director, Executive Vice President,
Treasurer, and Assistant Secretary
Richard Lucier 63 Vice President, Sales
Ralph W. Segalowitz 38 Vice President, Engineering
Kenneth J. Varker 64 Vice President, Technology
John F. Gahran (1) (2) 64 Director
Willard T. Jackson 69 Director
Robert W. Middleton (2) 58 Director
Heinz-Gerd Reinkemeyer (1) 59 Director
James W. Taylor (1) (2) 78 Director
- -----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
MANAGEMENT AND DIRECTORS
JONAS MEDNEY, Director, Chairman and Chief Executive Officer, has over
40 years of experience in the composites industry and has more than 43 U.S.
patents. Mr. Medney has been a director and Chairman of the Company since its
inception in 1984. He co-founded Lamtex Industries, a public company which was a
pioneer in filament-wound composites, which was acquired by Koppers Company in
1963. He co-founded Fiberglass Resources Corporation, a manufacturer of filament
wound epoxy pipes and conduits, with Mr. Klimpl. This company was acquired by
Koch Industries in 1983. Mr. Medney is a graduate of the Massachusetts Institute
of Technology (B.S. Mechanical Engineering).
FRED E. KLIMPL, Director, President and Secretary, has over 35 years of
experience in the composites industry and has over 18 U.S. patents. Mr. Klimpl
has been a director, President and Secretary of the Company since its inception
in 1984. He was co-inventor and a key manager in the development and marketing
of the fiberglass underground gasoline tank program for Owens-Corning Fiberglas
Corp. He was subsequently responsible for the start-up and marketing of a
fiberglass pipe business for Ciba-Geigy Corporation. Mr. Klimpl is a graduate of
Lowell University (B.S. Textile Engineering) and Stevens Institute of Technology
(M.S. Industrial Management).
SAMUEL S. GROSS, Director, Executive Vice President, Treasurer,
Assistant Secretary and Chief Financial Officer, is a certified public
accountant and has been Executive Vice President and Treasurer of
the Company since 1990. He had been a consultant to the Company
and a director since 1987. He was previously a partner at Ernst
& Young LLP where he was responsible for the Fiberglass Resources
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Corporation account. Mr. Gross was affiliated with Ernst & Young LLP and its
predecessors for 39 years. He is a director and Secretary/Treasurer of the
National Mental Health Association, Chairman of the Board of Directors of the
Mental Health Association in New York State, Inc., and a director and former
president of Long Island Transportation Management, Inc. Mr. Gross is a
graduate of City College of New York (B.B.A.).
RICHARD LUCIER, Vice President, Sales, has been with the Company since
1992. He was Corporate Accounts Manager with Polyclad Laminates, Inc. (Cookson
Group) from 1989 to 1992 and Senior Vice President with Fortin-Westinghouse from
1980 to 1989. Prior to that time, he was employed at Honeywell, Raytheon and
GTE. He is a graduate of Northeastern University (B.S. Mechanical Engineering).
RALPH W. SEGALOWITZ, Vice President, Engineering, has been with the
Company since 1990. From 1985 to 1990, he was with Robotic Vision Systems Inc.,
where his final position was as a project manager responsible for automated
manufacturing systems. From 1981 to 1985, he was a product engineer with
Databit, Inc., a manufacturer of data transmission equipment. He is a graduate
of the State University of New York at Stony Brook (B.S. Mechanical Engineering
and M.S. in Industrial Management).
KENNETH J. VARKER, Vice President, Technology, has been with the
Company since 1990. From 1987 to 1990, he was Director of Technology for the
Multiwire Division of Kollmorgen Corporation. From 1955 to 1987, he was with IBM
in various assignments, the latest being Senior Manager and Engineer responsible
for development of an alternate manufacturing method for large multilayer
circuit boards used in IBM mainframe computers. Mr. Varker has five U.S. patents
in the multilayer or printed circuit board areas and has chaired or participated
in several industry technical committees. He is a graduate of Lehigh University
(B.S. Mechanical Engineering).
BOARD OF DIRECTORS. The Board of Directors consists of Messrs.
Medney, Klimpl and Gross and five outside directors: John F. Gahran,
Willard T. Jackson, Robert W. Middleton, Heinz-Gerd Reinkemeyer and James W.
Taylor.
JOHN F. GAHRAN has been a director since 1985. He has been President of
Gahran & Company, a consulting and management engineering company in
Haddonfield, New Jersey, since 1976. Mr. Gahran had previously been President
and General Manager of divisions of Macrodyne Industries Inc. and A & E Plastic
Pak. Mr. Gahran is a graduate of the Massachusetts Institute of Technology (B.S.
Mechanical Engineering) and Temple University (M.B.A.).
WILLARD T. JACKSON, private investor, retired in 1988 as a partner of
Brundage, Story and Rose, a New York investment counseling firm in which he
became a partner in 1969. He has been a director since January 1988. Mr. Jackson
is a graduate of Middlebury College (A.B.) and Columbia University (M.B.A.).
He is a trustee emeritus of Middlebury College.
ROBERT W. MIDDLETON was elected as a director in March 1996 and has
acted as an investment banker to the Company in its prior financings and with
respect to the IPO. He has been Managing Director-Corporate Finance of Trautman
Kramer & Company, Inc., an investment banking firm, since 1993. From 1985 to
October 1993, Mr. Middleton was, successively, Director of Corporate Finance of
Barclay Investments, Inc., and a Vice President at C.L. King & Associates, Inc.
Prior to that time, he was associated with Fahnestock & Company from 1983 to
1985 and was a general partner from 1984-1985. From 1974 to 1983, Mr. Middleton
held various positions with Burgess & Leith, Inc., including Senior Vice
President and Director, while serving as Manager of the New York office. He
attended Princeton University. Mr. Middleton is the designee of Trautman Kramer
& Company, Inc. to the Board pursuant to the terms of a financing agreement.
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HEINZ-GERD REINKEMEYER has been a director since 1990. He had been
Director of the Industrial Plastics Division of HT, a German manufacturer and
subsidiary of the Rutgers Group, which is an affiliate of the Veba Group.
Currently, he is a consultant for the Rutgers Group. Mr. Reinkemeyer has a
degree in mechanical engineering and from 1961 he had been with Dynamit Nobel, a
manufacturer of laminates, until it was acquired by HT in 1988. Mr. Reinkemeyer
is the designee of HT to the Board.
JAMES W. TAYLOR has been a director since 1987. He has been
President of Reuter Manufacturing Inc. since 1992. He is a certified
management consultant. He was a director from 1967 to 1973 and
President from 1970 to 1973 of the international management consulting
firm, Booz Allen & Hamilton. Mr. Taylor was President and a
director of Bradford Trust from 1973 to 1975. He has served
as a director of Insilco Corporation, Times Fiber Communications,
Inc., The Enterprise Companies, Techalloy, Inc., Amphenol Inc. and
Knogo Corporation. He is a life trustee of Carnegie Mellon University. He
was a trustee of Beaver College and was a vice president and director of the
Association of Consulting Management Engineers and of the Institute of
Management Consultants. He holds a B.S. from Carnegie Mellon University.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In July 1996, the Company completed an initial public offering ("IPO")
of 2,415,000 shares of Common Stock and 2,415,000 Redeemable Common Stock
Warrants (the "Redeemable Warrants"). Prior to the IPO, there was no public
market for the Company's Common Stock. The Company's Common Stock and Redeemable
Warrants are traded on the Nasdaq SmallCapSM Market under the symbols "CTEK" and
"CTEKW", respectively.
The following sets forth the range of the high and low bid prices for
the Common Stock for third and fourth quarters of 1996, as reported on the
Nasdaq SmallCap Market.
1996
----
High Low
----- -----
Third quarter 8 1/8 5 1/2
Fourth quarter 6 1/2 5 1/4
There were approximately 85 holders of record of shares of Common Stock
as of March 14, 1997.
The Company has never paid cash dividends on its Common Stock. The
Company does not intend to pay cash dividends on its Common Stock in the
foreseeable future.
On April 1, 1996, the Company sold 152,000 shares of Common Stock, as
adjusted, to an institutional investor. The shares were sold in a private
placement pursuant to Regulation D under the Securities Act of 1933, as amended.
The aggregate consideration was $760,000 and commissions were $30,400 in cash
and 6,080 shares of Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS ON PLAN OF OPERATION
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 and is in the
process of assembling and debugging additional production modules necessary to
achieve commercial levels of production.
During 1995 and 1996, the Company produced and sold its laminates in
limited quantities for qualification and use in production by its customers. The
quantities produced have been limited because of working capital and production
constraints. Through December 31, 1996, the Company has been in the development
stage because it has not earned significant revenues from its planned principal
operations. Based on the level of production and sales anticipated for 1997, the
Company believes it is no longer in the development stage.
On July 9, 1996, the Company received net proceeds of approximately
$9.9 million from its IPO. Approximately $4.3 million was used to reduce debt
substantially and pay accrued interest. The Company is using the remaining
proceeds to add production modules to its existing equipment and for working
capital.
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RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1996 AND 1995
Sales of laminates increased to $327,411 in 1996 from $90,788 in 1995.
The increase resulted from additional orders of laminates by customers, but was
limited by the Company's working capital (in the period before the IPO) and
production constraints. In addition, the 1995 period included more debugging of
equipment and more intensive establishment of specifications for the Company's
manufacturing process.
Research and development expense decreased to $152,870 in 1996 from
$2,405,955 in 1995. The decrease was due to the change in the focus of the
Company's activities from research and development to commercial production.
Manufacturing expenses were $2,525,619 in the year ended December 31,
1996. There were no manufacturing expenses in the 1995 period. This was due to
the transition of the Company's activities from research and development to
commercial production. The increases in manufacturing expenses in 1996 compared
with research and development expenses in 1995 were due to added personnel,
purchases of materials, overhead and other expenses related to commercial
production.
Selling, general and administrative expenses increased to $1,274,476 in
1996 from $800,284 in 1995. Legal and consulting fees increased by approximately
$126,000 due principally to increased activity relative to being a public
company. Patent expense increased by approximately $32,000 due principally to
increased activity in the further development of the Company's international
patent estate. Other increases were in personnel, recruiting and travel costs as
the Company increased its administrative staffing, sales development and
international activities, including approximately $64,000 related to a proposed
project in Canada.
Interest income increased to $154,027 in 1996 from $32,300 in 1995 due
to interest income on the Company's cash and short-term investment balances,
principally following the IPO in July 1996.
Interest and amortization of debt expense increased to $497,377 for
1996 from $346,783 for 1995. The increase was due principally to an increase in
the amortization of debt expense of approximately $76,000 as well as the
borrowing costs associated with the 10% Secured Notes of 1995 and 1996 which
were substantially repaid in July 1996 with the proceeds of the IPO. The write
off of deferred private placement fees and expenses in 1996 of $227,657 resulted
from the repayment of the debt before its due date.
Following the development of a new method for a portion of its
production process, the Company made a provision of $348,309 for loss on
disposal of production equipment that ceased operation in November 1996 or will
no longer be used after February 1997, including $119,976 applicable to
construction in progress.
The foregoing resulted in the Company having a net loss of $4,534,195
for 1996 compared with $3,352,244 for 1995. The increased loss was principally
the result of the amortization and write-off of deferred placement expenses,
loss on disposal of production equipment and greater expenses incurred in
preparation for anticipated increases in manufacturing and sales volume.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995 AND 1994
The Company had income from a patent immunity agreement with
AMP/AKZO of $5,013,000 in 1994 which did not recur in 1995. This
income resulted from an agreement with AMP/AKZO, which, at
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the time, were operating a joint venture which was developing its own process
to make a laminate similar to the one covered by one of the Company's product
patents. Income of this nature is unlikely to recur.
Sales of laminates increased to $90,788 in 1995 from $21,613 in 1994.
This increase resulted from additional orders of laminates by customers, but was
limited by the Company's working capital and production constraints. As
mentioned above, the production equipment was designed and assembled by the
Company and had to be debugged and specifications established for its use as
part of the Company's development program thus limiting time available for
production.
Research and development expenses increased to $2,405,955 in 1995 from
$1,867,954 in 1994. The increase was due principally to the need for increased
payroll costs and material purchases related to developing specifications for
laminates made on the Company's first module of production equipment. This
equipment module was first put into production in late 1994 for the purpose of
making modifications to the production processes constituting the module and
reformulating the laminates produced by the module.
Selling, general and administrative expenses did not materially differ
between 1995 and 1994.
Interest and debt expense increased to $346,783 in 1995 from $196,071
in 1994 due principally to increased borrowing under 10% Secured Notes to
support the Company's development program.
The foregoing resulted in the Company having a net loss of $3,352,244
in 1995 compared with net income of $1,995,795 in 1994. The principal cause of
the difference was the income from the aforementioned patent immunity agreement
of $5,013,000 in 1994.
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.
At December 31, 1996, the Company had cash and short-term investments
of approximately $3,058,000, of which approximately $1,100,000 was required for
the completion and installation of production equipment. The balance of funds is
available for current operations (which require approximately $350,000 a month
based upon current 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 are
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. See Item 1. "Description of Business-Important Factors Regarding Future
Results." 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. In addition, in order to provide funds for additional
working capital and the purchase of additional production equipment, the Company
is negotiating a private placement of $5 million. Beyond 1997, the Company plans
to obtain additional financing for further expansion from the exercise of the
warrants issued as part of the IPO or commercial financing sources.
The Company has been a development stage enterprise and has had limited
revenues from the sale of laminates, has incurred significant losses and has had
substantial negative cash flow since its inception. While the Company expects
significant operating losses and negative cash flow to continue into 1997,
the Company anticipates achieving significant revenues so as to conclude
its development stage in 1997. There can be no assurance that the Company
will successfully complete expansion of its production equipment,
17
<PAGE>
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. See Item 1. "Description of Business Compositech
Strategy."
The Company has incurred losses since its inception and, therefore, has
not been subject to federal income taxes except for the alternative minimum tax
in 1994. As of December 31, 1996, the Company had net operating loss ("NOL") and
tax credit carryforwards for income tax purposes of approximately $18,900,000
and $940,000, respectively, which may be available to reduce future taxable
income and future tax liabilities. These carryforwards begin to expire in 2003.
The Internal Revenue Code ("IRC") includes provisions which significantly limit
potential use of net operating losses in situations where there is a change in
ownership, as defined, of more than 50% during a three-year period. Accordingly,
if a change in ownership occurs, the ultimate benefit realized from these
carryovers may be significantly reduced in total, and the amount that may be
utilized in any given year may be significantly limited. The limitation is
computed based upon the fair market value of the Company at the time of the
ownership change multiplied by the federal long-term tax-exempt borrowing rate.
The common stock issuance in the IPO combined with the other stock issuances
completed by the Company during the past three years have initiated a change in
ownership as defined in the IRC. Accordingly, the Company is currently subject
to an annual limitation of NOL carryforwards of approximately $1,170,000.
Additionally, because there is a limit on the time during which NOL
carryforwards and tax credits may be applied against future taxable income, the
Company may not be able to take full advantage of these attributes when the
Company generates taxable income.
1996 COMPARED WITH 1995
Net cash and temporary investments used in operating activities
increased to $3,462,491 for 1996 from $2,391,691 for 1995. The principal reason
for the difference was the increased activity in 1996 referred to above
mitigated by increases in accounts payable, the effect of the amortization of
debt financing costs and the provision for disposal of property and equipment.
Net cash and cash equivalents used in investing activities for capital
expenditures and advance payments for equipment increased to $2,603,677 for 1996
from $184,934 for 1995. The increase resulted from design, engineering and
construction of additional production modules as part of the expansion program
and the upgrading of existing equipment. In 1996, $2,384,700 was used in
investing activities for short-term investments representing purchases of
$5,305,789 from proceeds of the IPO less redemptions of $2,921,089 for current
needs.
Cash flows from financing activities increased to $8,198,104 for 1996
from $3,248,927 for 1995. The principal financing activities in the 1996 period
were (i) the receipt of net proceeds from the issuance of common stock in the
IPO of $9,920,071 and in private placements of $1,488,059, (ii) the collection
of $750,000 of notes receivable received in connection with the 10% Secured Note
financing in 1995, (iii) the receipt of net proceeds from the issuance of
additional 10% Secured Notes of $145,687 and (iv) the payment of notes payable
of $4,137,500, of which $4,055,000 was from the proceeds of the IPO. The only
financing activity in the 1995 period was the private placement of 10% Secured
Notes which netted $2,604,800.
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1995 COMPARED WITH 1994
Net cash and cash equivalents used in operating activities increased to
$2,391,691 in 1995 from $54,222 in 1994. The principal reason for the difference
was that 1994 reflected the receipt of $2 million in cash under the patent
immunity agreement.
Net cash and cash equivalents used in investment activities
representing capital expenditures for equipment decreased to $184,934 in 1995
from $1,223,870 in 1994. The principal reason for the decrease was that 1994
included the acquisition of the Company's first production module for producing
36" x 48" laminates.
Cash flows from financing activities increased to $3,248,927 in 1995
from $252,419 in 1994. The principal financing activity in 1995 was the private
placements of the 10% Secured Notes which netted $3,349,243, after deducting
$750,000 which was paid for with notes receivable. The principal financing
activities in 1994 were the private placement of Series A Convertible Preferred
Stock which netted $1,062,264 and the repayment of debt of $850,000, including
$750,000 of bank debt which had been guaranteed by HT.
ITEM 7. FINANCIAL STATEMENTS
The required Financial Statements and the notes thereto are contained
in a separate section of this report beginning with the page following the
signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements exist between the Company and Ernst & Young LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as noted in the following paragraph, the information required by
Items 9, 10, 11 and 12 is included in the Company's definitive Proxy Statement
to be filed pursuant to Regulation 14A not later than 120 days after the close
of fiscal 1996 in connection with the Company's 1996 Annual Meeting of
Stockholders, and such information is incorporated by reference into Part III of
this Form 10-KSB.
The information called for by Item 9 with respect to Executive Officers
of the issuer appears as Item 4A under Part I of this Report.
20
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ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8K
(a) Exhibits:
Exhibit Exhibit Note
Number Number
- --------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Registrant. (1)
3.3 By-Laws, As Amended, of the Registrant. (2)
4.1 Specimen Common Stock Certificate. (2)
4.2 Specimen Warrant Certificate. (2)
4.3 Representative's Unit Purchase Option dated as of July 9, 1996. (2)
4.4 Warrant Agreement dated as of July 9, 1996 between
Compositech Ltd. and Continental Stock Transfer & Trust Company. (2)
4.5 Form of 10% Secured Note. (2)
4.5.1 Security Agreement dated August 3, 1995 among the Registrant
and certain secured parties. (2)
4.6 Form of Secured Note. (2)
4.6.1 Security and Intercreditor Agreement dated as of
October 30, 1992 among the Registrant and certain secured
parties covering listed patent collateral. (2)
4.7 Notes issued by the Registrant between May 28, 1992 and
February 16, 1993 in the aggregate amount of $550,000 payable
to Willard Jackson. (2)
4.8 Agreements between the Registrant and certain officers,
directors and stockholder/creditors to defer maturity of
Secured Notes, 10% Secured Notes, and certain other notes. (2)
4.9 Agreements between the Registrant and certain officers,
directors and stockholder/creditors to defer maturity of
Secured Notes, 10% Secured Notes, and certain other notes. (1)
10.1 Lease Agreement dated August 29, 1990 between Compositech and
Ricefield Number Six. (2)
10.1.1 First Amendment of Lease dated June 30, 1995 between the
Registrant and Ricefield Number Six. (2)
10.2 Confidentiality Agreement dated October 15, 1989 between
Compositech and HT Troplast AG. (2)
10.3 Patent Immunity Agreement dated March 15, 1994, among the
Registrant and AKZO Electronic Products B.V. and
AMP Incorporated. (2)
10.4 Stock Purchase Agreement dated as of June 22, 1990, between the
Registrant and HT Troplast AG. (2)
10.4.1 Amendment No. 1 to Stock Purchase Agreement dated
June 22, 1990 between the Registrant and HT Troplast AG
(Amendment No. 1 dated January 10, 1996). (2)
10.5 Technical Cooperation Agreement between the Registrant and
HT Troplast AG dated as of June 22, 1990. (2)
10.6 License Agreement between the Registrant and HT Troplast AG
dated as of June 22, 1990. (2)
10.6.1 Amendment to the License Agreement dated May 18, 1994 between
the Registrant and HT Troplast AG. (2)
10.7 Form of Subscription Agreement for Common Stock issued on
June 10, 1991. (2)
10.8 Consent to the transfer of rights of Huls Troisdorf AG in
respect of the Registrant to Mora Beteiligungs AG
(now HT Troplast AG) dated February 4, 1994. (2)
10.8.1 Acknowledgment of assumption of obligations of Huls Troisdorf AG
in respect of the Registrant by HT Troplast AG dated
August 19, 1994. (2)
10.9 Form of Subscription Agreement for Common Stock issued on
February 24, 1992 and March 12, 1992. (2)
10.10 Form of Warrants issued on May 28, 1992. (2)
10.11 Form of Warrants issued on November 16, 1993. (2)
10.12 Form of Subscription Agreement for Series A Convertible
Preferred Stock issued in 1994. (2)
10.13 Placement Agreement dated April 27, 1995 between the Registrant
and Trautman Kramer & Company, Inc. (2)
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10.13.1 Amendment No. 1 to Placement Agreement dated October 31, 1995
between the Registrant and Trautman Kramer & Co., Inc. (2)
10.13.2 Amendment No. 2 to Placement Agreement dated January 2, 1996
between the Registrant and Trautman Kramer & Co., Inc. (2)
10.14 Form of Warrants issued or amended between August 3, 1995 and
March 12, 1996. (2)
10.15 Form of Subscription Agreement for Common Stock issued on
March 12, 1996. (2)
10.16 Memorandum of Understanding among the Registrant, Fonds de
solidarite des travailleurs du Quebec, Societe generale de
financement Quebec and Societe Innovatech du Grand Montreal,
dated as of March 29, 1996. (2)
10.17 Common Stock Purchase Agreement between the Registrant and
Win Win Venture Capital Corporation dated as of April 1, 1996. (2)
10.18 Agreements to defer salary between the Registrant and certain
employees of the Registrant. (2)
10.19 Form of 18-month lock-up agreement. (2)
10.20 Form of 24-month lock-up agreement. (2)
*10.21 Nonqualified Stock Option Plan dated April 12, 1988. (2)
*10.22 Stock Award Plan. (2)
*10.23 Employment Agreement dated as of January 1, 1996 between the
Registrant and Samuel S. Gross. (2)
*10.24 Employment Agreement dated as of January 1, 1996 between the
Registrant and Fred E. Klimpl. (2)
*10.25 Employment Agreement dated as of January 1, 1996 between the
Registrant and Jonas Medney. (2)
*10.26 Common Stock Purchase Agreement between the Registrant and
Win Win Venture Capital Corporation dated as of June 26, 1996. (2)
11.1 Statement re: computation of loss per common share. (1)
-----------
* Management contract, compensatory plan or arrangement.
(1) Filed herewith.
(2) Incorporated by reference to a previously filed Exhibit to the
Company's Registration Statement on Form SB-2, Reg. No. 333-3564-NY.
(b) Form 8-K Reports:
No current report on Form 8-K was filed by the Company during the
fourth quarter of 1996.
22
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
COMPOSITECH LTD.
Date: March 31, 1997 By: /S/ Jonas Medney
------------------------------
Jonas Medney
Chairman and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
/S/ Jonas Medney March 31, 1997
- ------------------------------------------
Jonas Medney
Chairman of the Board; Director
(Principal Executive Officer)
/S/ Fred E. Klimpl March 31, 1997
- ------------------------------------------
Fred E. Klimpl
President, Secretary and Director
/S/ Samuel S. Gross March 31, 1997
- ------------------------------------------
Samuel S. Gross
Executive Vice President, Treasurer,
Assistant Secretary and Director
(Principal Financial and Accounting Officer)
/S/ John F. Gahran March 31, 1997
- ------------------------------------------
John F. Gahran, Director
/S/ Willard T. Jackson March 31, 1997
- ------------------------------------------
Willard T. Jackson, Director
/S/ Heinz-Gerd Reinkemeyer March 31, 1997
- ------------------------------------------
Heinz-Gerd Reinkemeyer, Director
/S/ James W. Taylor March 31, 1997
- ------------------------------------------
James W. Taylor, Director
/S/ Robert W. Middleton March 31, 1997
- ------------------------------------------
Robert W. Middleton, Director
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Pages
Report of Independent Auditors................................................F2
Balance Sheets as of December 31, 1995 and 1996...............................F3
Statements of Operations for the years ended December 31, 1995
and 1996, and cumulative from June 13, 1984
(date of inception) through December 31, 1996...............................F4
Statements of Stockholders' Equity (Deficiency) for the years
ended December 31, 1995 and 1996, and period from
June 13, 1984 (date of inception) through December 31, 1996.................F5
Statements of Cash Flows for the years ended December 31, 1995 and
1996, and cumulative from June 13, 1984 (date of inception) through
December 31, 1996...........................................................F7
Notes to Financial Statements.................................................F8
F1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Compositech Ltd.
We have audited the accompanying balance sheets of Compositech Ltd. (a
development stage company) (the "Company") as of December 31, 1995 and 1996, and
the related statements of operations, stockholders' equity, and cash flows for
the years then ended and the cumulative amounts from June 13, 1984 (date of
inception) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compositech Ltd. (a development
stage company) at December 31, 1995 and 1996, and the results of its operations
and its cash flows for the years then ended and the cumulative amounts from June
13, 1984 (date of inception) to December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's existing
working capital is insufficient to cover continuing operating expenses and
expenditures for additional production equipment. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
(s) Ernst & Young LLP
Melville, New York
January 22, 1997
F2
<PAGE>
<TABLE>
<CAPTION>
COMPOSITECH LTD.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<S> <C> <C>
DECEMBER 31 DECEMBER 31
1995 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $925,848 $673,084
Short-term investments 2,384,700
Notes receivable and accrued interest 762,500
Inventories 127,302 217,974
Accounts receivable trade - net 25,866 66,293
Prepaid expenses and other 75,587 66,880
------------ ------------
Total current assets 1,917,103 3,408,931
Property and equipment at cost - net 2,055,772 3,866,140
Advance payments on construction-in-progress 114,712
Deferred private placement fees and expenses,
net of accumulated amortization of $ 66,516 (1995) 321,676
Other assets and deferred charges, net of accumulated amortization
of $ 19,955 (1995) and $ 75,770 (1996) 78,096 58,087
------------ ------------
Total assets $4,372,647 $7,447,870
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable $218,076 $691,763
Deferred salaries - $ 495,481 (1995) and $ 539,904 (1996)
to officers/stockholders 865,648 715,728
Accrued interest - $ 84,687 (1995) and all (1996) to stockholders 188,039 61,816
Other accrued liabilities 275,245 227,889
Current maturities of long-term debt - $112,500 (1995) and all (1996)
to stockholders 182,500 100,000
------------ ------------
Total current liabilities 1,729,508 1,797,196
Long-term debt - $ 1,100,000 (1995) and all (1996) to stockholders 5,350,000 1,495,000
Capital lease obligations 30,946 19,336
Other liabilities 37,500 37,500
Commitments
Stockholders' equity (deficiency):
Undesignated preferred stock; authorized 4,000,000 shares,
none issued and outstanding (1996)
Series A convertible preferred stock, par value $3.00 per share;
authorized shares - 714,161, issued and outstanding shares -
714,161 (1995) and 684,161 (1996)" 2,142,483 2,052,483
Convertible preferred stock, par value $5.00 per share;
authorized shares - 433,500, issued and outstanding shares -
433,500 (1995) 2,167,500
Common stock, par value $.01 per share; authorized shares - 25,000,000,
issued and outstanding shares - 3,014,189 (1995) and 6,118,939 (1996) 30,142 61,189
Additional paid-in capital 8,924,140 22,558,933
------------ ------------
Deficit accumulated during the development stage (16,039,572) (20,573,767)
------------ ------------
Total stockholders' equity (deficiency) (2,775,307) 4,098,838
------------ ------------
Total liabilities and stockholders' equity (deficiency) $4,372,647 $7,447,870
============ ============
See accompanying notes.
</TABLE>
F3
<PAGE>
<TABLE>
<CAPTION>
COMPOSITECH LTD.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<S> <C> <C> <C>
Cumulative from
June 13, 1984
Year ended (date of inception)
December 31 through
--------------------------- December 31,
1995 1996 1996
------------- ------------ -------------------
Revenues:
Income from patent immunity agreement $5,012,515
Sales $90,788 $327,411 462,582
------------- ------------ -------------------
Total revenues 90,788 327,411 5,475,097
Costs and expenses:
Research and development 2,405,955 152,870 14,954,141
Manufacturing expenses 2,525,619 2,525,619
Selling, general and administrative 800,284 1,274,476 7,206,284
------------- ------------ -------------------
Total operating expenses 3,206,239 3,952,965 24,686,044
------------- ------------ -------------------
(Loss) from operations (3,115,451) (3,625,554) (19,210,947)
Other income (expenses):
Interest income 32,300 154,027 726,835
Interest and amortization of debt expense
(net of interest capitalized of $ 21,000 (1995),
$ 27,000 (1996) and $ 147,000 (cumulative) ) (346,783) (497,377) (1,450,398)
Write off of deferred private placement fees and expenses (227,657) (227,657)
Loss on disposal of property and equipment (348,309) (348,309)
Other 77,690 10,675 36,709
------------- ------------ -------------------
(236,793) (908,641) (1,262,820)
( Loss ) before provision for income taxes (3,352,244) (4,534,195) (20,473,767)
Provision for income taxes 100,000
------------- ------------ -------------------
Net (loss) ($3,352,244) ($4,534,195) ($20,573,767)
============= ============ ===================
Net (loss) per share ($0.85) ($0.83) ($6.26)
============= ============ ===================
Shares used in computing net (loss) per share 3,956,165 5,491,737 3,287,341
See accompanying notes.
</TABLE>
F4
<PAGE>
<TABLE>
<CAPTION>
COMPOSITECH LTD.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended December 31, 1995 and 1996 and the period from
June 13, 1984 (date of inception) through December 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEFICIT
SERIES A CONVERTIBLE CONVERTIBLE ACCUMULATED TOTAL
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE STOCKHOLDER'S
-------------------- --------------- --------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE (DEFICIENCY)
-------------------------------------------------------------------------------------------------
Common stock issued on
October 30, 1984 in
connection with organization
of Company for $200 per share
($.0078 per share restated for
25,778 for 1 stock exchange
on January 29, 1988) 75 $15,000 $15,000
Contribution to capital on
January 29, 1988 of amounts
due to stockholders ($221,461)
and recording of a 25,778 for 1
stock exchange 1,933,261 4,333 $217,128 221,461
Net proceeds from issuance from
January 29, 1988 through
April 1988 of 249,916 shares
of common stock for $7.50 per
share in connection with a
private placement, net of
related costs of $118,111 244,919 2,449 1,716,318 1,718,767
Net proceeds from issuance on
March 3, 1989 and June 2, 1989
of 433,500 shares of convertible
preferred stock for $5.00 per
share through a private placement,
net of related costs of $267,379 433,500 $2,167,500 (267,279) 1,900,121
Proceeds from the exercise of a
stock option for 1,500 shares
of common stock at $7.50 per
share on March 31, 1989 1,500 15 11,235 11,250
Net proceeds from issuance on
June 22, 1990 of 798,834
shares of common stock for
$7.52 per share plus know-how
and services to be received,
through a private placement,
net of related costs of $280,277 798,834 7,989 5,711,734 5,719,723
Services received from stockholder
in connection with above issuance 872,000 872,000
Net proceeds from issuance on
February 19, 1991 and June 10,
1991 of 18,000 shares of common
stock for $17.00 per share
through a private placement,
net of related costs
of $24,162 18,000 180 281,658 281,838
Net proceeds from issuance on
February 24, 1992 and March
13, 1992 of 16,000 shares
of common stock for
$20.00 per share through
a private placement, net of
related costs of $2,648
in cash and 1,600 shares
of common stock 17,600 176 317,176 317,352
Net proceeds from issuance from
July 29, 1994 through November
3, 1994 of 714,161 shares of
Series A convertible preferred
stock for $3.00 per share
through a private
placement, net of related costs
of $35,730 714,161 2,142,483 (35,730) 2,106,753
Net (loss) for the period from
June 13, 1984 (inception) to
December 31, 1994 (12,687,328) (12,687,328)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1994 714,161 2,142,483 433,500 2,167,500 3,014,189 30,142 8,824,140 (12,687,328) 476,937
</TABLE>
F5
<PAGE>
<TABLE>
<CAPTION>
COMPOSITECH LTD.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended December 31, 1995 and 1996 and the period from
June 13, 1984 (date of inception) through December 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEFICIT
SERIES A CONVERTIBLE CONVERTIBLE ACCUMULATED TOTAL
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE STOCKHOLDER'S
-------------------- --------------- --------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE (DEFICIENCY)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1994
(carried forward) 714,161 2,142,483 433,500 2,167,500 3,014,189 30,142 8,824,140 ($12,687,328) 476,937
Services received from
stockholder in connection
with prior issuance of stock 100,000 100,000
Net (loss) for the year ended
December 31, 1995 (3,352,244) (3,352,244)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1995 714,161 2,142,483 433,500 2,167,500 3,014,189 30,142 8,924,140 (16,039,572) (2,775,307)
Net proceeds from issuance on
March 12, 1996 of 250,000
shares of common stock for
$2.50 per share through a
private placement, net of
related costs of $91,407 250,000 2,500 531,093 533,593
Net proceeds from issuance on
April 1, 1996 and June 26, 1996
of 200,000 shares of common
stock for $5.00 per share
through a private placement,
net of related costs of $45,534
in cash and 8,000 shares of
common stock 208,000 2,080 952,386 954,466
Net proceeds from issuance on
July 9, 1996 of 2,415,000
shares of common stock for $5.00
per share through an initial
public offering, net of related
costs of $2,154,929 2,415,000 24,415 9,895,921 9,920,071
Net proceeds from issuance on
July 9, 1996 of 210,000 Unit
Purchase Options for $0.001
per option 210 210
Conversion of Convertible Preferred
Stock to common stock on
July 9, 1996 as a result of the
initial public offering (422,500)(2,167,500) 216,750 2,167 2,165,333
Conversion of Series A Convertible
Preferred Stock to common stock
in October 1996 (30,000) (90,000) 15,000 150 89,850
Net (loss) for the year ended
December 31, 1996 (4,534,195) (4,534,195)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1994 684,161 $2,052,483 -- -- 6,118,939 $61,189 $22,558,933 (20,573,767) $4,098,838
=================================================================================================
See accompanying notes.
</TABLE>
F6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cumulative from
June 13, 1984
Year Ended (date of inception)
December 31, through
--------------- ------------- December 31
1995 1996 1996
--------------- ------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) ($3,352,244) ($4,534,195) (20,573,767)
Adjustments to reconcile net (loss) to net cash and
cash equivalents used in operating activities:
Depreciation and amortization, including capital leases 275,028 324,288 2,148,465
Stockholder services credited to additional paid-in-capital 100,000 972,000
Loss on disposal of property and equipment 348,309 874,021
Private placement fee and expenses 86,046
Write off and amortization of debt financing costs 77,342 380,734 549,267
Non-recourse notes applied to patent immunity agreement (3,012,515)
Changes in operating assets and liabilities:
Accrued interest on notes receivable (12,500) 12,500
Inventories (87,707) (84,672) (211,974)
Accounts receivable - trade (22,213) (40,427) (66,293)
Prepaid expenses and other (15,919) 8,707 (66,880)
Other assets (810) (35,806) (58,807)
Accounts payable (41,643) 473,687 691,763
Deferred salaries 426,479 (149,920) 715,728
Accrued interest 175,339 (126,223) 61,816
Other accrued liabilities 187,157 (39,473) 220,437
Income taxes payable (100,000)
--------------- ------------- -------------------
Net cash and cash equivalents used in operating activities (2,391,691) (3,462,491) (17,669,973)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - net (184,934) (2,488,965) (6,775,110)
Advance payments on construction-in-progress (114,712) (114,712)
Short term investments :
Purchases (5,305,789) (5,305,789)
Maturities 2,921,089 2,921,089
--------------- ------------- -------------------
Net cash and cash equivalents used in investing activities (184,934) (4,988,377) (9,274,522)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock (51,070) 11,459,410 19,451,770
Net proceeds from notes payable 4,099,243 145,687 7,603,233
Increase in notes receivable (750,000) (750,000)
Payment received on notes receivable 750,000 750,000
Payment of notes payable (25,000) (4,137,500) (5,512,500)
Proceeds from non-recourse notes plus interest 3,012,515
Net proceeds from issuance of Series A convertible preferred stock 1,062,264
Net proceeds from issuance of convertible preferred stock 1,920,620
Contribution to capital from stockholders 221,461
Payment of capital lease obligations (24,246) (19,493) (87,738)
Private placement expenses - terminated financing (54,046)
--------------- ------------- -------------------
Net cash and cash equivalents provided by financing activities 3,248,927 8,198,104 27,617,579
--------------- ------------- -------------------
Increase in cash and cash equivalents 672,302 (252,764) 673,084
Cash and cash equivalents at beginning of period 253,546 925,848
--------------- ------------- -------------------
Cash and cash equivalents at end of period $925,848 $673,084 $673,084
--------------- ------------- -------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Noncash financing activities:
Capital lease obligations for property and equipment acquisitions $29,440 $120,770
=============== ===================
Cash paid for:
Interest $115,102 $477,240 $981,173
=============== ============= ===================
Income taxes $100,000 $100,000
=============== ===================
See accompanying notes.
</TABLE>
F7
<PAGE>
COMPOSITECH LTD.
(a development stage company)
Notes to Financial Statements
December 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Compositech Ltd. (the "Company") was incorporated in the State of New York on
June 13, 1984. The Company was merged into a newly formed Delaware corporation
on January 29, 1988. Activities during the development stage have included
organizing the Company, developing an advanced laminate for printed circuit
boards for the electronics industry, designing and purchasing prototype and
production equipment and producing and selling the laminates in limited
quantities for qualification and use by customers. In 1994, the Company started
production on its newly installed larger scale production equipment and began
shipments of laminates to customers from such equipment in limited quantities
which continued through December 31, 1996. Significant revenues from the sales
of laminates are anticipated to commence in 1997. Thus, it is expected that the
development stage will be concluded during 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 has
plans to obtain additional funding (see Note 13). The foregoing conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The board of directors authorized and the stockholders approved a one-for-two
reverse split of the outstanding common stock effective June 26, 1996. Effect
has been given to this reverse split as if it occurred on June 13, 1984 (date of
inception). All common share, option and warrant data has been restated to
reflect the reverse split.
SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of cash in banks and highly liquid
investments with maturities of three months or less.
INVESTMENTS
The Company determines the appropriate classification of securities at the time
of acquisition and reevaluates such designation as of each balance sheet date.
At December 31, 1996, all of the Company's investments, consisting of short-
F8
<PAGE>
term U.S. Government securities, with original maturities of more than 90 days
are classified as held to maturity and are valued at amortized cost.
INVENTORIES
Inventories include raw materials, finished goods and inventories of spare
parts. Raw materials and finished goods inventories are stated at the lower of
cost or market based on the first-in, first-out method. Inventories of spare
parts are stated at the lower of cost or market based on specific item cost.
PATENTS
As a result of the Company's development program, the Company has received and
applied for a number of patents in the U.S. and internationally. Such patent
rights are of significant importance to the Company to protect products,
processes and equipment developed. Costs in connection with patents have been
expensed as incurred.
DEPRECIATION AND AMORTIZATION
Equipment, furniture and fixtures are being depreciated on the straight-line
method over the estimated useful lives of the related assets which range from
five to ten years. Leasehold improvements are being amortized over the lesser of
their useful lives or the remaining term of the lease.
DEFERRED PRIVATE PLACEMENT FEES AND EXPENSES (1995)
Deferred private placement fees and expenses relate to the 10% Secured Notes
(see Note 3). Amortization of the costs associated with the notes was provided
over the stated life of the notes ranging from 17 to 27 months. The notes were
repaid out of the proceeds of the initial public offering ("IPO") in July 1996
at which time the unamortized balance of the costs were written off.
(LOSS) PER SHARE
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 of the Securities and Exchange Commission, the common stock equivalents that
were issued during the 12 months preceding the IPO at prices below the estimated
IPO price have been included in the Company's income (loss) per share
computation using the treasury stock method and the estimated 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. All other common stock equivalents
were antidilutive. Loss per share for the year ended December 31, 1996 would
have been ($0.79) had the IPO and the payment of the 10% Secured Notes with part
of the proceeds thereof occurred on January 1, 1996.
F9
<PAGE>
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the financial statements and accompanying notes. Actual results could
differ from these estimates.
RECENT ACCOUNTING PRONOUNCEMENT
In the first quarter of 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. Such adoption had no effect on the accompanying financial
statements.
2. PROPERTY AND EQUIPMENT
December 31
-------------------------------------
1995 1996
----------------- -----------------
Production equipment $2,070,202 $1,951,173
Laboratory equipment 135,045 138,702
Furniture, fixtures and equipment 270,657 353,624
Leasehold improvements 210,275 243,544
Construction-in-progress 53,994 2,086,973
Equipment under capital leases 120,770 120,770
----------------- -----------------
2,860,943 4,894,786
Less accumulated depreciation
and amortization 805,171 1,028,646
----------------- -----------------
$2,055,772 $3,866,140
================= =================
F10
<PAGE>
3. LONG-TERM DEBT
December 31
-------------------------------------
1995 1996
----------------- -----------------
Notes payable to stockholders due
September 30, 1997, as amended,
interest payable semi-annually
at prime rate plus 1 1/2% (10% at
December 31, 1995 and 9.5% at
December 31, 1996)
collateralized by U.S. Patents $932,500 $850,000
10% Secured Notes, including
$1,100,000 (1995) and all (1996) to
stockholders, interest payable
annually 4,600,000 745,000
----------------- ----------------
5,532,500 1,595,000
Less current maturities 182,500 100,000
----------------- ----------------
$5,350,000 $1,495,000
================= ================
Subsequent to December 31, 1996, the due date of $750,000 of notes payable to
stockholders held by directors and officers was extended to March 31, 1998.
The 10% Secured Notes are collateralized by a first lien (pari passu) with up to
$2 million of additional debt) on certain assets including patents, patent
applications and existing production equipment. On February 15, 1996, the
Company borrowed an additional $200,000 under the notes and during July 1996
paid off $4,055,000 of the notes using the proceeds of the IPO. The due date of
the remainder of the notes held by directors and officers was extended to
September 30, 1997. Subsequent to December 31, 1996, the due date was extended
to March 31, 1998.
Interest and debt expense includes interest of $172,690 (1995), $165,478 (1996)
and $564,460 (cumulative to December 31, 1996) applicable to stockholders.
4. STOCKHOLDERS' EQUITY
As part of the sale of stock in 1990 to HT Troplast AG (successor to Huls
Troisdorf AG - "HT"), a German company formerly manufacturing laminates for
printed circuit boards, the Company is receiving contributions of know-how and
technical assistance services. The cumulative technical and marketing assistance
services provided by HT through December 31, 1996 have been valued by management
at $972,000 and included in expenses and credited to paid-in capital.
Future services will be valued and recorded when received.
The convertible preferred stock was automatically converted into common stock as
a result of the IPO. The shares of the Series A convertible preferred stock
are convertible at any time at the option of the stockholder into shares
of common stock at the rate (subject to antidilution adjustment) of
one-half share of common stock for each share of Series A convertible
preferred stock. Each share will automatically be converted into
shares of common stock (at the then applicable conversion rate) upon
the consummation of an underwritten public offering covering
F11
<PAGE>
the sale of common stock with aggregate net proceeds of not less than
$10,000,000 with a price per share equal to or greater than $9.00 per share.
The common stock and Series A convertible preferred stock vote as one class,
with each share of common stock being entitled to one vote. Each holder of the
Series A convertible preferred stock is entitled to the number of votes equal to
the number of shares of common stock into which a share of the preferred stock
could have been converted as of the record date for voting.
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of the Series A convertible preferred stock shall
be entitled to receive up to $3.00 per share, as adjusted, before any payments
are made to the holders of common stock. Each one-half share of common stock
would then be entitled to receive $3.00, as adjusted, from the remaining assets
of the Company. Any remaining assets will be distributed to the holders of all
shares of stock on a pro rata basis.
On July 9, 1996, the Company completed an IPO for the sale of 2,415,000 units at
$5.00 each, aggregating $12,075,000, resulting in net proceeds of $9,920,071
after discounts, commissions and expenses. Each unit consisted of one share of
common stock and one redeemable common stock warrant.
5. WARRANTS AND OPTIONS
WARRANTS AND UNIT PURCHASE OPTION
In connection with sale of notes and the guarantee agreement in 1992 and
February 1993, the Company issued warrants to purchase 65,500 shares of common
stock at $7.50 per share, as adjusted. The warrants are exercisable until May
28, 1999, as amended.
In connection with the sale of notes in November 1993, the Company issued
warrants to purchase 249,000 shares of common stock at $7.50 per share. The
warrants are exercisable until November 16, 1998. Subsequent to December 31,
1996, the exercise date of warrants to purchase 225,000 shares of common stock
was extended to May 16, 2000. These warrants were held by persons who had agreed
to lock-up their warrants for a period of eighteen months from July 9, 1996 in
connection with the IPO.
In connection with the extension of the maturity date of notes payable to
stockholders on May 28, 1994, the Company issued warrants to purchase 157,500
shares of common stock at $7.50 per share. The warrants are exercisable until
May 28, 1999.
In connection with the sale or refinancing of notes in 1995 and 1996, the
Company issued warrants to purchase 810,476 shares of common stock at $3.00 per
share (computed at the lesser of $3.60 per share or 60% of the $5.00 per share
IPO price). The warrants are exercisable at dates ranging from August 3, 2000 to
February 15, 2001. The foregoing include warrants to purchase 45,000 shares of
common stock issued on October 7, 1996 to a stockholder/director whose interim
loan of $250,000 was refinanced in connection with the IPO.
In connection with a private placement of notes through Trautman Kramer &
Company, Inc., the Company issued to them warrants to purchase 76,993 shares of
common stock at $3.96 a share.
F12
<PAGE>
The warrants are exercisable until October 31, 2000. The Company also agreed to
pay Trautman, Kramer & Company, Inc. a consulting fee of $60,000 a year for two
years commencing November 1995.
As part of its IPO which closed on July 9, 1996, the Company sold units which
included Redeemable Common Stock Warrants to purchase 2,415,000 shares of common
stock at $6.25 per share (subject to antidilutive provisions) through July 3,
2001. At any time after July 9, 1997, the warrants may be redeemed by the
Company at $.01 per warrant upon a minimum of 30 days prior written notice to
the holders thereof if the closing bid quotation of the common stock has been at
least 150% of the then exercise price of the warrants on each of the 20
consecutive trading days ending on a day not more than three days prior to the
date of the notice of redemption.
As part of its IPO, the Company sold to the underwriters for $.001 per unit,
Unit Purchase Options to purchase 210,000 units at an exercise price of $7.50
per unit exercisable July 9, 1998 through July 9, 2001. The terms of the units
were substantially identical to the units sold in the IPO and consist of one
share of common stock and a warrant to purchase one share of common stock at an
exercise price of $7.8125 per share. The foregoing prices are subject to
antidilution provisions.
STOCK OPTION PLAN
Under the Company's 1988 non-qualified stock option plan, 150,000 shares of
common stock may be issued to selected key employees and non-employees,
including directors, providing services to the Company. Under the Company's 1994
Stock Award Plan as amended, 575,000 shares of common stock may be issued as
Incentive Stock Options, non-qualified options or restricted stock to selected
key employees or to non-employees, including directors, providing services to
the Company. All options granted have ten year terms and vest and become fully
exercisable between six months and three years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation", requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
123, which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1994 under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1995 and 1996:
risk-free interest rates of 6.10% and 6.278%, respectively; dividend yields of
0%; volatility factors of the expected market price of the Company's common
stock of .50; and a weighted-average expected life of the option of 6 years.
F13
<PAGE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The only options
granted during fiscal year ended December 31, 1995 were granted on December 31,
1995 and, accordingly, there is no pro forma adjustment to report for that
fiscal year.
The Company's pro forma information for 1996 follows:
1996
--------------------
Pro Forma Net (Loss) ($4,903,063)
Pro Forma (Loss) Per Share
Primary ($0.90)
Because SFAS is applicable only to options granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1998.
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
1995 1996
----------------------- ----------------------
Weighted- Weighted-
Average Average
Options Exercise Price Options Exercise Price
------------------------- ------------------------
Outstanding-beginning
of year 166,700 $ 5.59 474,600 $ 3.59
Granted 307,900 2.50 135,000 5.75
Forfeited 9,000 3.03
------------------------- ------------------------
Outstanding -
end of year 474,600 $ 3.59 600,600 $ 4.08
========================= ========================
Exercisable -
end of year 130,184 $ 5.76 387,700 $ 3.75
Weighted average fair
value of options granted
during the year. $ 1.39 $ 3.20
F14
<PAGE>
A summary of options outstanding as of December 31, 1996 follows:
Weighted
Average
Remaining
Options Options Contractual
Exercise Price Outstanding Exercisable Life (Years)
-------------- ----------- ----------- ------------
$ 2.50 300,800 234,100 9.00
5.00 125,300 114,100 5.94
5.75 135,000 0 9.77
7.50 39,500 39,500 1.28
----------- ----------- ------------
600,600 387,700 8.03
=========== =========== ============
Included in the total outstanding as of December 31, 1996 are 360,800 options
for directors.
The Company has reserved 5,260,046 shares of common stock for conversion of
preferred stock and issuance for stock options and outstanding warrants.
6. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, the liability method is used
in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
At December 31, 1996, the Company has net operating loss carryforwards ("NOL")
of approximately $18,900,000 for Federal income tax purposes, expiring at 2003
through 2011. In addition, the Company has research and development credits,
targeted job credits and alternative minimum tax credits of approximately
$940,000 which generally expire through 2011, to offset future taxes. The
Internal Revenue Code ("IRC") includes provisions which significantly limit
potential use of net operating losses and tax credits in situations where there
is a change in ownership, as defined, of more than 50% during a three-year
period. Accordingly, if a change in ownership occurs, the ultimate benefit
realized from these carryovers may be significantly reduced in total, and the
amount that may be utilized in any given year may be significantly limited. The
limitation is computed based upon the fair market value of the Company at the
time of the ownership change multiplied by the federal long-term tax-exempt
borrowing rate. The common stock issuance in the IPO combined with the other
stock issuances completed by the Company during the past three years have
initiated a change in ownership as defined in the IRC. Accordingly, the Company
is currently subject to an annual limitation of NOL carryforwards of
approximately $1,170,000. Additionally, because there is a limit on the time
during which NOL carryforwards and tax credits may be applied against future
taxable income, the Company may not be able to take full advantage of these
attributes when the Company generates taxable income.
F15
<PAGE>
As the Company has had cumulative losses and there is no assurance of future
taxable income, a valuation allowance has been established to offset deferred
tax assets. The components of the Company's net deferred tax for the years ended
December 31 are as follows:
December 31
---------------------------------------
1995 1996
---------------- ----------------
Deferred tax assets:
Deferred salaries $ 294,000 $ 243,000
Net operating loss carryforwards 4,692,000 6,426,000
Research and development
and other credits 950,000 940,000
---------------- ----------------
Total deferred tax assets 5,936,000 7,609,000
Less: Valuation allowance (5,793,000) (7,518,000)
---------------- ----------------
Net deferred tax assets 143,000 91,000
Deferred tax liability:
Tax over book depreciation (143,000) (91,000)
---------------- ----------------
Net deferred tax $ _____ $ _____
================ ================
7. COMMITMENTS
OPERATING LEASES
At December 31, 1996, future minimum annual rentals for leases with initial or
remaining terms in excess of one year are as follows:
1997 $192,000
1998 193,000
1999 183,000
2000 121,000
2001 5,000
---------
$694,000
=========
The Company leases its plant under a net lease expiring August 31, 2000. The
lease is renewable for an additional five years and requires that the Company
pay real estate taxes as additional rent.
Rent expense was approximately $266,000 in 1995, $236,000 in 1996 and $1,614,000
for the period from inception (June 13, 1984) to December 31, 1996. The
foregoing amounts include $77,000, $80,000 and $425,000, respectively, of real
estate taxes paid as additional rent.
CAPITAL LEASES
Future minimum lease payments under capital leases for equipment with a net
book value of approximately $48,000, included in property and equipment for
the years ending December 31, are as follows:
F16
<PAGE>
1997 16,668
1998 15,242
1999 6,472
-------
Total payments 38,382
Less: Amount representing in 6,341
-------
Present value of minimum lease payments
(including $12,705 due within one year included
in accrued expenses) $32,041
=======
EMPLOYMENT CONTRACTS
The Company has employment agreements with three officers/directors providing
for employment through 1998 for an aggregate salary of $330,000 per annum,
severance pay if terminated of one times their annual salary (aggregate
$330,000) and severance pay if they terminate due to a change in control, as
defined, of two times their annual salaries (aggregate $660,000).
8. OFFICERS' LIFE INSURANCE
The Company is the owner and beneficiary of insurance policies of $2,000,000
each on the lives of two of its officers for an aggregate of $4,000,000.
9. INCOME FROM PATENT IMMUNITY AGREEMENT
On February 16, 1993, the Company entered into a Stand-Still Agreement with two
major corporations under which the Company received $2.8 million under
non-recourse notes and the Company agreed to "stand-still" (i.e., not to sell
the Company or grant further licenses for three months) while negotiating with
them to form a joint venture. As security for amounts borrowed under the $2.8
million line, the two corporations received two licenses.
The licenses were to be canceled if (i) the joint venture was formed, or (ii)
the joint venture was not formed and the loan was paid by May 15, 1994. If the
loan was not paid by May 15, 1994, the licenses would have become effective and
the loan would have been deemed to be repaid.
The stand-still period expired without the formation of the joint venture. As of
May 19, 1994, the Company entered into an agreement which provided for (i)
releasing the Company from any obligations under the notes, (ii) canceling the
licenses issued under the aforementioned security agreement and (iii) granting
patent immunity under the Company's product patents for the process being
developed by the two corporations. In return, the Company received an additional
payment of $2 million during June 1994.
The income from the patent immunity agreement of $5,012,515 represents the
$2 million payment and the reversal of the $2.8 million non-recourse note
liability plus accrued interest thereon of $212,515.
F17
<PAGE>
10. LOSS ON DISPOSAL OF PROPERTY AND EQUIPMENT
In November 1996, the Company initiated a new method for a portion of its
production process. Accordingly, the Company provided for the loss on disposal
of production equipment that ceased operation in November 1996 or will no longer
be used after February 1997 and construction-in-progress that was discontinued.
The loss provided of $348,309 consisted of $228,333 applicable to production
equipment and $119,976 applicable to construction-in-progress.
11. DEPENDENCE ON A MAJOR SUPPLIER
Owens Corning, a major fiberglass manufacturer, has developed and continues to
develop products to meet the Company's processing and product requirements.
Should this manufacturer not continue supplying the Company's quality and
quantity needs, the Company would have to secure another supplier. Such event
could have a material adverse effect on the Company's ability to supply
customers and could reduce expected sales and increase the costs of manufacture.
No assurances can be given that an alternative supplier could meet the Company's
quality and quantity needs on satisfactory terms.
12. SIGNIFICANT CUSTOMERS
Customers who individually represent 10% or more of net sales for the respective
years are as follows:
Years Ended December 31
--------------------------------------
1995 1996
---------------- ---------------
Merix Corporation 68.3% 46.4%
HADCO Corporation 10.7% 50.8%
13. SUBSEQUENT EVENTS (UNAUDITED)
On February 6, 1997, the Company agreed in principle with three Quebec
institutional investors (collectively, the "Quebec Investors") to form a 50/50
joint venture for the establishment of a plant in the greater Montreal area to
manufacture Compositech's laminates. The project cost is estimated to be
approximately $24.5 million with an initial capitalization of $11.2 million and
debt of $13.3 million. The Company's $5.6 million investment in the partnership
is to be funded by the Quebec Investors purchasing 941,176 shares of the
Company's common stock at $5.95 per share. The Quebec Investors will have an
option to sell their 50% interest in the partnership to the Company for an
additional 941,176 shares of common stock and the Company will have an option to
purchase the Quebec Investors' interest in the project for a like number of
shares under certain conditions. The establishment of this project is subject,
among other things, to the execution of definitive agreements and the obtaining
of the balance of the financing. The Company is unable to predict when, if ever,
such conditions will be satisfied.
The Company is negotiating for additional financing of $5 million in order to
increase working capital and provide for additional production equipment to
meet anticipated increases in sales.
F18
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE
OF INCORPORATION
OF COMPOSITECH LTD.
COMPOSITECH LTD., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the date of
filing of the original Certificate of Incorporation being January 18, 1988,
under the name of Compositech Delaware, Inc.), hereby restates its certificate
of incorporation to read as follows:
FIRST: The name of the corporation is Compositech Ltd. (the
"corporation").
SECOND: The address of the registered office of the corporation in the
State of Delaware is the Corporation Trust Center, 1209 Orange Street, in the
City of Wilmington, County of New Castle. The name of the registered agent of
the corporation at such address is The Corporation Trust Company.
THIRD: The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
corporation shall have authority to issue is 29,714,161 shares, consisting of
(A) 714,161 shares of Series A Convertible Preferred Stock, par value $3.00 per
share (the "Series A Preferred Stock"), (B) 4,000,000 shares of Preferred Stock,
par value $0.01 per share (the "Preferred Stock"), and (C) 25,000,000 shares of
Common Stock, par value $0.01 per share (the "Common Stock").
The designations of the authorized classes of stock, and the powers,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof, are as follows:
A. VOTING RIGHTS.
Except as otherwise provided by the laws of the State of
Delaware, the Common Stock and the Series A Preferred Stock shall
vote as one class at any meeting of stockholders, with the
holder of each share of Common Stock being entitled to
<PAGE>
one vote for such share of Common Stock and the holder of each share of Series A
Preferred Stock being entitled to the number of votes equal to the number of
shares of Common Stock into which the share of Series A Preferred Stock could
have been converted as of the record date for determining the 5stockholders
having the right to vote at the meeting.
B. DIVIDEND RIGHTS.
Dividends (other than dividends or distributions payable solely in
shares of Common Stock) shall not be paid or declared, and other distributions
shall not be made, with respect to the Common Stock unless there shall have been
paid, or declared and set aside for payment, dividends or distributions with
respect to the Series A Preferred Stock in an amount which the holders of the
Series A Preferred Stock would have received if they had converted their Series
A Preferred Stock to Common Stock immediately prior to the record date for the
dividend or distribution with respect to the Common Stock.
C. LIQUIDATION RIGHTS.
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the corporation, then, before any distribution shall be made to
or set apart for the holders of Common Stock the holders of Series A Preferred
Stock shall be entitled to receive from the assets of the corporation
distributions of $3.00 per share (such amount to be adjusted appropriately in
the event of any stock dividend, stock split or combination or similar
recapitalization affecting such Series A Preferred Stock and as so adjusted to
be herein referred to as the "liquidation preference"), in cash or property plus
an amount per share equal to any dividends required to be paid under paragraph B
hereof. After such distributions shall have been made in full to the holders of
Series A Preferred Stock, the holders of Series A Preferred Stock and Common
Stock shall be entitled to receive distributions from the remaining assets of
the corporation pro rata on a per share of Common Stock basis assuming the
conversion of all outstanding Series A Preferred Stock; provided that there
shall be deducted from distributions which would otherwise be made to a holder
of Series A Preferred Stock the amount of liquidation preference received by the
holder.
D. CONVERSION RIGHTS.
2
<PAGE>
The rights and obligations of the holders of Series A Preferred Stock
to convert into Common Stock shall be as follows:
(1) OPTIONAL CONVERSION. The shares of Series A Preferred Stock shall
be convertible at any time at the option of the respective holders
thereof at the office of the corporation or any transfer agent for
Series A Preferred Stock into fully paid and nonassessable shares of
Common Stock at the rate (subject to any adjustments as provided in
paragraph D(3) hereof, such rate as so adjusted, the "conversion rate")
of one-half of one share of Common Stock for each share of Series A
Preferred Stock. Such optional conversion shall be deemed to have been
made as of the date of the surrender of the certificates representing
the shares of Series A Preferred Stock to be converted at the office of
the corporation or the transfer agent, together with written notice to
the corporation or the transfer agent of the election to convert the
same.
(2) MANDATORY CONVERSION; REDEMPTION IN CERTAIN CIRCUMSTANCES.
(a) The shares of Series A Preferred Stock shall be converted
automatically into fully paid and nonassessable shares of Common Stock
at the conversion rate upon the consummation of an underwritten public
offering pursuant to an effective registration statement under the
Securities Act covering the offer and sale of Common Stock to the
public which results in aggregate net proceeds of not less than
$10,000,000 at a price per share equal to or greater than an amount
equal to 150% of the liquidation preference per share of the Series A
Preferred Stock. The Series A Preferred Stock may be redeemed by the
corporation, at a price per share equal to the liquidation preference
therefor, upon 60 days notice to the holders of record of the Series A
Preferred Stock at any time subsequent to the consummation of an
underwritten public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of
Common Stock to the public which results in aggregate net proceeds of
not less than $10,000,000; provided that the closing price, or the
average of the bid and asked prices, of the Common Stock on a national
securities exchange or an automated quotation system shall have been
equal to or greater than an amount
3
<PAGE>
equal to 150% of the then effective liquidation preference for the
Series A Preferred Stock for at least twenty consecutive trading
days prior to the sending of the notice.
(b) Mandatory conversion shall be deemed to have been made as of the
date of the consummation of the applicable underwritten public
offering, and the person or persons entitled to receive the shares of
Common Stock issuable upon the conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock
on such date. On or before the date for mandatory conversion, each
holder of shares of the subject Series A Preferred Stock shall
surrender the certificate or certificates representing such shares to
the corporation or the transfer agent for the Series A Preferred Stock
and shall thereafter receive certificates for the number of shares of
Common Stock to which the holder is entitled.
(c) Written notice of the approximate date of the consummation of the
underwritten public offering which triggers the mandatory conversion of
Series A Preferred Stock will be sent to all holders of record of
affected Series A Preferred Stock at least 60 days prior to that date.
All notices shall be sent by first class mail, postage prepaid, to each
holder of record of subject Series A Preferred Stock at such holder's
address as shown in the records of the corporation.
(3) ADJUSTMENT OF CONVERSION RATE.
(a) In the event of a change in the capital stock of the corporation,
such as a stock dividend, stock split or combination or similar
recapitalization, any holder of shares of Series A Preferred Stock upon
conversion thereof shall be entitled to receive, in lieu of the number
of shares of Common Stock to which the holder would have been entitled
upon conversion at that date had there been no such change, such
number of shares of Common Stock as the holder would have received
pursuant to such change if the conversion of such shares of Series A
Preferred Stock had been effected prior to such change and the
conversion rate shall be adjusted accordingly. Upon each such
adjustment, the corporation shall forthwith give written notice
thereof to the holders of Series A Preferred Stock in the form
of a certificate executed by an officer of the corporation, stating
the new conversion rate and setting forth in reasonable detail the
facts upon which such calculation is based.
4
<PAGE>
(b) In the case of (i) any consolidation or merger of the corporation,
(ii) a sale or transfer of all or substantially all the assets of the
corporation, or (iii) any share exchange whereby the Common Stock is
converted into other securities or property, each holder of each share
of Series A Preferred Stock shall have the right to convert the share
of Series A Preferred Stock into the kind and amount of shares of stock
or other securities or property receivable upon the consolidation,
merger, sale, transfer or share exchange by a holder of the number of
shares of Common Stock into which such share of Series A Preferred
Stock might have been converted immediately prior to the consolidation,
merger, sale, transfer or share exchange.
(4) MECHANICS OF CONVERSION.
(a) As soon as practicable after any conversion and after receipt by
the corporation or the transfer agent of the certificates representing
the Series A Preferred Stock converted or to be converted, the
corporation shall issue and deliver at its office to the person for
whose account such surrender of the shares of Series A Preferred Stock
was made, or to the person's nominee or nominees, certificates for the
number of full shares of Common Stock to which he shall be entitled
together with the cash payment to be made in respect of any fraction of
a share as herein provided.
(b) The Series A Preferred Stock so converted shall be retired and
shall not be reissued. If at any time there are no shares of a class of
Series A Preferred Stock outstanding, then that class of Series A
Preferred Stock shall be cancelled and shall cease to exist as a class
of authorized capital stock of the corporation.
(c) The corporation shall at all times reserve and keep available, out
of its authorized but unissued shares of Common Stock, solely for the
purpose of effecting the conversion of the shares of Series A Preferred
Stock, the full number of shares of Common Stock deliverable upon
conversion of all the shares of Series A Preferred Stock from time to
time outstanding.
5
<PAGE>
(d) No fractional shares or scrip representing fractional shares shall
be issued upon the conversion of any of the shares of Series A
Preferred Stock. All shares of Common Stock (including fractions
thereof) issuable upon conversion
of more than one share of Series A Preferred Stock by a holder thereof
shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If any such
conversion results in a fraction, an amount equal to such fraction
multiplied by the then current market price (as determined in good
faith by the board of directors of the corporation) of one share of
Common Stock shall be paid to such holder in cash by the corporation.
E. PREFERRED STOCK.
The Preferred Stock may be issued from time to time in one or more
series. The number of authorized shares of Preferred Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the voting stock of the
corporation voting as one class. Subject to the limitations set forth herein and
any limitations prescribed by law, the board of directors is expressly
authorized, prior to issuance of any series of Preferred Stock, to fix by
resolution or resolutions providing for the issue of any series the number of
shares included in such series and the designation, relative powers, preferences
and rights, and the qualifications, limitations or restrictions of such series.
Pursuant to the foregoing general authority vested in the board of directors,
but not in limitation of the powers conferred on the board of directors thereby
and by the General Corporation Law of the State of Delaware, the board of
directors is expressly authorized to determine with respect to each series of
Preferred Stock:
I. The designation or designations of such series and the
6
<PAGE>
number of shares (which number from time to time
may be decreased by the board of
directors, but not below the number of such shares of such series then
outstanding, or may be increased by the board of directors unless
otherwise provided in creating such series) constituting such series;
II. the rate or amount and times at which, and the preference and
conditions under which, dividends shall be payable on shares of such
series, the status of such dividends as cumulative or noncumulative,
the date or dates from which dividends, if cumulative, shall
accumulate, and the status of such shares as participating or
nonparticipating after the payment of dividends as to which such shares
are entitled to any preference;
III. the rights and preferences, if any, of the holders of shares of
such series upon the liquidation, dissolution or winding up of the
affairs of, or upon any distribution of the assets of, the corporation,
which amount may vary depending upon whether such liquidation,
dissolution or winding up is voluntary or involuntary and, if
voluntary, may vary at different dates, and the status of the shares of
such series as participating or nonparticipating after the satisfaction
of any such rights and preferences;
IV. the full or limited voting rights, if any, to be provided for
shares of such series, in addition to the voting rights provided by
law;
V. the times, terms and conditions, if any, upon which shares of such
series shall be subject to redemption, including the amount the holders
of shares of such series shall be entitled to receive upon redemption
(which amount may vary under different conditions or at different
redemption dates) and the amount, terms, conditions and manner of
operation of any purchase, retirement or sinking fund to be provided
for the shares of such series;
VI. the rights, if any, of holders of shares of such series and/or of
the corporation to convert such shares into, or to exchange such shares
for, shares of any other class or classes or of any other series of the
same class, the prices or rates of conversion or exchange, and
adjustments thereto, and any other terms and conditions applicable to
such conversion or exchange;
VII. the limitation, if any, applicable while such series is
outstanding on the payment of dividends or making of distributions on,
or the acquisition or redemption of, common stock or any other class or
shares ranking junior, either as to dividends or upon liquidation, to
the shares of such series;
7
<PAGE>
VIII. the conditions or restrictions, if any, upon the issue of any
additional share (including additional share of such series or any
other series or of any other class) ranking on a parity with or prior
to the shares of such series either as to dividends or upon
liquidation; and
IX. any other relative powers, preferences and participating, optional
or other special rights, and the qualifications, limitations or
restrictions thereof, of shares of such series;
in each case, so far as not inconsistent with the provisions of this Restated
Certificate of Incorporation or the General Corporation Law of the State of
Delaware as then in effect. All shares of Preferred Stock shall be identical and
of equal rank except in respect to the particulars that may be fixed by the
board of directors as provided above, and all shares of each series of Preferred
Stock shall be identical and of equal rank except in respect to the particulars
that may be fixed by the board of directors as provided above.
FIFTH: The business and affairs of the corporation shall be managed by
the board of directors, and the directors need not be elected by ballot unless
required by the by-laws of the corporation.
SIXTH: In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the board of directors is expressly
authorized to adopt, amend or repeal the by-laws as specifically provided
therein.
SEVENTH: The corporation reserves the right to amend and repeal any
provision contained in this Restated Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware. All rights herein conferred are
granted subject to this reservation. In addition to the foregoing, and not by
way of limitation, this Restated Certificate of Incorporation may be amended to
increase or decrease the number of authorized shares of any class of stock
(but not below the number of shares then outstanding) upon the affirmative vote
of the holders of a majority of the voting stock of the corporation.
EIGHTH: A. Directors of the corporation shall not be liable to the
corporation or the stockholders for monetary damages for any breach of any
8
<PAGE>
fiduciary duty as a director, provided that this provision shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the corporation or the stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law (iii) under Section 174 of the Delaware General Corporation Law, with
respect to unlawful payment of dividends or unlawful approval of stock purchases
or redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. If the General Corporation Law of the State of
Delaware is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended. Any repeal or modification of this Section A by the stockholders of the
corporation shall not adversely affect any right or protection of a director of
the corporation existing at the time of such repeal or modification.
B. (1) Each person who was or is made a party or is threatened
to be made a party to or is involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she or a person of whom he or she is the legal
representative is or was a director or officer of the corporation or is or was
serving at the request of the corporation as a director, officer or employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the corporation to the fullest extent authorized by the General Corporation Law
of the State of Delaware as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the corporation to provide broader indemnification rights than said law
permitted the corporation to provide prior to such amendment), against all
expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably
9
<PAGE>
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that except as provided in
paragraph (2) of this Section B with respect to proceedings seeking to enforce
rights to indemnification, the corporation shall indemnify any such person
seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the board of directors of the corporation. The right to
indemnification conferred in this Section B
shall be a contract right and shall include the right to be paid by the
corporation the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that if the General Corporation Law of
the State of Delaware requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding, shall be made
only upon delivery to the corporation of an undertaking by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section B or otherwise.
(2) If a claim under paragraph (1) of this Section B is not
paid in full by the corporation within thirty days after a written claim has
been received by the corporation, the claimant may at any time thereafter bring
suit against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any, is required, has been tendered to the corporation) that the
claimant has not met the standards of conduct which make it permissible under
the General Corporation Law of the State of Delaware for the corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the corporation. Neither the failure of the corporation
(including its board of directors, independent legal counsel or stockholders) to
10
<PAGE>
have made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in the General Corporation
Law of the State of Delaware, nor an actual determination by the corporation
(including its board of directors, independent legal counsel or stockholders)
that the claimant has not met such applicable standard of conduct, shall be a
defense to the action or create a presumption that the claimant has not met the
applicable standard of conduct.
(3) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in this Section B shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Restated
Certificate of Incorporation, Restated By-Law, agreement, vote of stockholders
or disinterested directors or otherwise.
(4) The corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law of the State of Delaware.
(5) The corporation may, to the extent authorized from time
to time by the board of directors, grant rights to indemnification, and rights
to be paid by the corporation the expenses incurred in defending any proceeding
in advance of its final disposition, to any employee or agent of the corporation
to the fullest extent of the provisions of this Section B with respect to the
indemnification and advancement of expenses of directors and officers of the
corporation.
This Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of Section 245 of the General
Corporation Law of Delaware. This Restated Certificate of Incorporation only
restates and integrates and does not further amend the provisions of the
Certificate of Incorporation as previously amended and supplemented and there is
no discrepancy between those provisions and this restated certificate.
11
<PAGE>
IN WITNESS WHEREOF, COMPOSITECH LTD. has caused this
certificate to be signed by its Chairman and attested by its Secretary on this
18th day of February, 1997.
Attest: By: (s) Jonas Medney
_________________
Jonas Medney
Chairman
(s) Fred S. Klimpl
________________________
Fred E. Klimpl
Secretary
12
<PAGE>
Exhibit 4.9
January 31, 1997
Compositech Ltd.
I hereby agree to extend the due date of the following note as indicated below:
AMOUNT OF NOTES ORIGINAL DUE DATE NEW DUE DATE
$550,000 5/28/96 3/31/98
$310,000 IPO closing or 3/31/98
3/30/97
$250,000 IPO closing or 3/31/98
3/30/97
Signed: /S/ Willard T. Jackson
---------------------------------
Willard T. Jackson
<PAGE>
Exhibit 4.9
January 31, 1997
Compositech Ltd.
I hereby agree to extend the due date of the following note as indicated below:
AMOUNT OF NOTE ORIGINAL DUE DATE NEW DUE DATE
$25,000 5/28/96 3/31/98
Signed: /S/ Samuel S. Gross
---------------------------------
Samuel S. Gross
<PAGE>
Exhibit 4.9
January 31, 1997
Compositech Ltd.
I hereby agree to extend the due date of the following note as indicated below:
AMOUNT OF NOTES ORIGINAL DUE DATE NEW DUE DATE
$25,000 7/19/97 3/31/98
$50,000 5/28/96 3/31/98
$25,000 IPO closing or 3/31/98
3/30/97
$50,000 IRA IPO closing or 3/31/98
3/30/97
Signed: /S/ Fred E. Klimpl
---------------------------------
Fred E. Klimpl
<PAGE>
Exhibit 4.9
January 31, 1997
Compositech Ltd.
I hereby agree to extend the due date of the following note as indicated below:
AMOUNT OF NOTES ORIGINAL DUE DATE NEW DUE DATE
$50,000 7/19/97 3/31/98
$50,000 5/28/96 3/31/98
$110,000 IPO closing or 3/31/98
3/30/97
Signed: /S/ Jonas Medney
---------------------------------
Jonas Medney
<PAGE>
<TABLE>
<CAPTION>
COMPOSITECH LTD.
(A DEVELOPMENT STAGE COMPANY)
COMPUTATION OF LOSS PER COMMON SHARE
EXHIBIT 11.1
Cumulative from
June 13, 1984
Year ended (date of inception)
December 31 through
---------------------------- December 31,
1995 1996 1996
------------ ------------ -------------------
<S> <C> <C> <C>
Weighted average shares outstanding (1) 3,956,165 5,491,737 3,287,341
============ ============ ===================
Net (loss) $ (3,352,244) $ (4,534,195) $ (20,573,767)
============ ============ ===================
Net (loss) per share) $ (0.85) $ (0.83) $ (6.26)
============ ============ ===================
<FN>
(1) Includes common stock equivalents of 404,205 shares based on the
application of SAB No. 83 on common stock equivalents that were issued
during the 12 months preceding an IPO at a price lower than the IPO
price and assumes the conversion of all preferred stock to common
stock.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Form 10-KSB for the period ended December 31, 1996 and is qualified in its
entirety by reference to such financail statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 673084
<SECURITIES> 2384700
<RECEIVABLES> 66293
<ALLOWANCES> 0
<INVENTORY> 217974
<CURRENT-ASSETS> 3408931
<PP&E> 4894786
<DEPRECIATION> 1028646
<TOTAL-ASSETS> 7447870
<CURRENT-LIABILITIES> 1797196
<BONDS> 0
0
2052483
<COMMON> 61189
<OTHER-SE> 22558933
<TOTAL-LIABILITY-AND-EQUITY> 7447870
<SALES> 327411
<TOTAL-REVENUES> 327411
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3952965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 497377
<INCOME-PRETAX> (4534195)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4534195)
<EPS-PRIMARY> (.83)
<EPS-DILUTED> 0
</TABLE>
