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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________to___________________
Commission File Number 0-20701
COMPOSITECH LTD.
(Exact Name of Registrant as specified in its charter)
Delaware 11-2710467
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Ricefield Lane, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 436-5200
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock as of August 13, 1998:
Common Stock $.01 par value 12,457,706
--------------------------- ----------
Class Number of shares
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<PAGE>
COMPOSITECH LTD.
Index
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements
Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997...............................................2
Statements of Operations (unaudited) for the three-month and
six-month periods ended June 30, 1998 and 1997......................3
Statements of Cash Flows (unaudited) for the six-month periods
ended June 30, 1998 and 1997........................................4
Notes to Financial Statements (unaudited).............................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................8
Part II - Other Information
- ---------------------------
Item 2. Changes in Securities................................................12
Item 4. Submission of Matters to a Vote of Security Holders..................13
Item 6. Exhibits and Reports on Form 8-K.....................................13
Signature.....................................................................14
<PAGE>
COMPOSITECH LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------ ------------
ASSETS ( unaudited )
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,752,185 $ 624,254
Short-term investments
Accounts receivable trade - net 31,029 44,725
Accounts receivable from joint venture 129,724 201,382
Inventories 370,497 401,922
Prepaid expenses and other 102,095 97,371
------------ ------------
Total current assets 2,385,530 1,369,654
Property and equipment at cost - net 5,015,761 5,276,672
Investment in joint venture - net of accumulated amortization of $12,750 (1998) 5,671,545 5,631,561
Advance payments on construction-in-progress 683,485 274,253
Deferred debt expense - net of accumulated amortization of $154,858 458,953
Other assets and other deferred charges, net of accumulated amortization
of $12,520 (1998) and $6,846 (1997) 137,051 134,796
------------ ------------
Total assets $ 13,893,372 $ 13,145,889
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 310,009 $ 609,278
Deferred salaries - $697,943 (1998) and $ 1,500 (1997) to officers 915,591 192,571
Accrued interest - all (1998) and $ 916 (1997) to stockholders 181,684 26,017
Other accrued liabilities 447,515 370,707
Current maturities of long-term debt - directors/stockholders 1,595,000
------------ ------------
Total current liabilities 3,449,799 1,198,573
Non-current liabilities:
Notes payable to directors/stockholders 1,595,000
5% Convertible debentures, net of unamortized discount of $67,650 5,762,350
Deferred salaries - officers 551,558
Accrued interest - directors/stockholders 100,159
Capital lease obligations 28,011 49,047
Other liabilities 37,500 37,500
------------ ------------
Total non-current liabilities 65,511 8,095,614
Deferred licensing income 877,808
7% Series B convertible preferred stock, par value $0.01; stated value $10,000
per share; authorized, issued and outstanding shares - 220, net of unamortized
discount of $62,857 2,137,143
Commitments
Stockholders' equity :
Undesignated preferred stock; authorized 3,999,780 shares, none issued and
outstanding
Series A convertible preferred stock, par value $3.00 per share;
authorized shares - 714,161, issued and outstanding shares - 567,661 (1998)
and 614,161 (1997) 1,702,983 1,842,483
Common stock, par value $.01 per share; authorized shares - 25,000,000,
issued and outstanding shares - 12,457,706 (1998) and 7,767,921 (1997) 124,577 77,679
Additional paid-in capital 36,704,990 30,075,100
Deficit (31,169,439) (28,143,560)
------------ ------------
Total stockholders' equity 7,363,111 3,851,702
------------ ------------
Total liabilities and stockholders' equity $ 13,893,372 $ 13,145,889
============ ============
</TABLE>
See accompanying notes.
2
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COMPOSITECH LTD.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 75,752 $ 143,469 $ 162,153 $ 295,468
Licensing income 18,660 31,576
------------ ------------ ------------ ------------
Total revenues 94,412 143,469 193,729 295,468
Costs and expenses:
Manufacturing expenses 1,055,002 1,389,893 2,015,564 2,155,616
Selling, general and administrative 330,762 369,498 623,014 791,989
Research and development 25,297 23,197 65,910 46,205
------------ ------------ ------------ ------------
Total operating expenses 1,411,061 1,782,588 2,704,488 2,993,810
------------ ------------ ------------ ------------
(Loss) from operations (1,316,649) (1,639,119) (2,510,759) (2,698,342)
Other income (expenses):
Interest income 14,178 13,245 30,960 38,833
Interest expense
( net of interest capitalized of $82,000 (1997)) (51,681) 22,294 (147,160) (18,683)
Amortization of debt discount and expenses (189,471) (121,202) (497,603) (121,202)
Loss on disposal of property and equipment (86) (8,360)
Other income (expense) 5,450 6,242 55,796 8,460
------------ ------------ ------------ ------------
(221,610) (79,421) (566,367) (92,592)
------------ ------------ ------------ ------------
(Loss) from operations before equity in income (loss) of joint venture (1,538,259) (1,718,540) (3,077,126) (2,790,934)
Equity in income (loss) of joint venture 10,368 51,247
------------ ------------ ------------ ------------
Net (loss) (1,527,891) (1,718,540) (3,025,879) (2,790,934)
Preferred Stock dividend accrued, including amortization of
discount on 7% Series B convertible preferred stock of $251,429 265,118 265,118
------------ ------------ ------------ ------------
(Loss) available for common stockholders ($ 1,793,009) ($ 1,718,540) ($ 3,290,997) ($ 2,790,934)
============ ============ ============ ============
Shares used in computing (loss) per common share 12,322,638 6,144,379 10,906,495 6,136,315
============ ============ ============ ============
(Loss) per common share - basic ($ 0.15) ($ 0.28) ($ 0.30) ($ 0.45)
============ ============ ============ ============
(Loss) per common share - diluted ($ 0.11) ($ 0.26) ($ 0.23) ($ 0.43)
============ ============ ============ ============
</TABLE>
See accompanying notes.
3
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COMPOSITECH LTD.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) ($3,025,879) ($2,790,934)
Adjustments to reconcile net (loss) to net cash and
cash equivalents used in operating activities:
Depreciation and amortization, including capital leases 349,432 195,224
Loss on disposal of property and equipment 8,360 121,202
Amortization of debt discount and expenses 526,603
Equity in net income of joint venture (51,247)
Changes in operating assets and liabilities:
Accounts receivable trade - net 13,696 42,368
Accounts receivable from joint venture 71,658
Inventories 31,425 (141,926)
Prepaid expenses and other (4,724) (15,203)
Other assets and other deferred charges (94,314)
Accounts payable (299,269) 188,354
Deferred salaries 171,462
Accrued interest 55,508 6,666
Deferred licensing income 877,808
Other accrued liabilities 63,498 133,850
----------- -----------
Net cash and cash equivalents (used) in operating activities (1,211,669) (2,354,713)
Cash Flows from Investing Activities
Purchase of property and equipment - net (78,457) (1,305,096)
Advance payments on construction-in-progress (409,232) 89,212
Investment in joint venture (1,487)
Patent costs deferred (7,929) (94,536)
Short term investments - maturities 2,384,700
----------- -----------
Net cash and cash equivalents provided by (used in) investing activities (497,105) 1,074,280
Cash Flows from Financing Activities
Net proceeds from issuance of common stock 958,120
Net proceeds from notes payable
Net proceeds from issuance of 5% convertible debentures 2,022,231
Net proceeds from issuance of 7% Series B convertible preferred stock 1,900,000
Payment received on notes receivable
Payment of capital lease obligations (21,415) (4,141)
Payment of notes payable
----------- -----------
Net cash and cash equivalents provided by financing activities 2,836,705 2,018,090
----------- -----------
Increase in cash and cash equivalents 1,127,931 737,657
Cash and cash equivalents at beginning of period 624,254 673,084
----------- -----------
Cash and cash equivalents at end of period $ 1,752,185 $ 1,410,741
=========== ===========
Supplemental disclosures of cash flow information
Noncash financing activities:
Capital lease obligations for property and equipment acquisitions $ 91,336
===========
Preferred Stock dividend accrued, including amortization of discount
on 7% Series B convertible preferred stock of $251,429 $ 265,118
===========
Cash paid for:
Interest $ 92,390 $ 94,018
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
COMPOSITECH LTD.
Notes to Financial Statements
(Unaudited)
June 30, 1998
Note 1 - Basis of Presentation and Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Annual Report on
Form 10-KSB for the year ended December 31, 1997 of Compositech Ltd. (the
"Company"). In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998.
On February 9, 1998, the Company entered into a joint venture agreement and
patent, information and trademark agreement with a Taiwanese investor group led
by Fidelity Venture Capital Corp. of Taiwan ("Fidelity") to establish a joint
venture to manufacture the Company's laminates in Taiwan ("Taiwanese joint
venture"). The Company received $1 million as a license down payment and it will
receive additional up-front license payments of $1 million and, will in turn,
invest approximately $500,000 in the joint venture, upon the achievement of
certain milestones. As part of the transaction, the Company received
approximately $950,000, net of expenses, in a private placement from the joint
venture, and issued 610,868 shares of the Company's common stock, par value
$0.01 (the "Common Stock"), including commissions and will issue a like amount
of shares to the joint venture for $960,000, net of expenses, within 30 days
following approval of the joint venture license by the science park where it is
proposed to be located. The Company will receive an approximate 10% interest in
the joint venture and royalty payments based on sales. A related letter of
intent with Fidelity provides for entering into a contract with the Company for
it to supply the joint venture with the requisite manufacturing equipment.
Licensing income of $18,660 in the three months ended June 30, 1998 and $31,576
in the six months ended June 30, 1998 relates to the Taiwanese joint venture.
On May 29, 1998, the Company issued 220 shares of 7% Series B convertible
preferred stock, par value $0.01 (the "Series B Preferred Stock") at $10,000 per
share in a private placement, raising gross proceeds of $2.2 million. The net
proceeds of approximately $1.9 million will be used for working capital and
equipment.
Holders of the Series B Preferred Stock are entitled to dividends on a
cumulative basis, payable quarterly in cash or Common Stock at the option of the
Company, except under certain specified conditions which require the payment of
dividends in cash. In the event of any voluntary or involuntary liquidation of
the Company, holders of the Series B Preferred Stock shall be
5
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entitled to receive the stated value of $10,000 per share plus all due but
unpaid dividends before any distribution or payments are made to holders of the
Company's Series A Convertible Preferred Stock, $3.00 par value (the "Series A
Preferred Stock"), or Common Stock. The holders of the Series B Preferred Stock
do not have voting rights except in certain limited circumstances in which their
rights, powers or preferences could be adversely affected.
Each share of the Series B Preferred Stock is convertible at the option of
the holder into shares of the Company's Common Stock from July 8, 1998 through
May 29, 2000, at which time any remaining shares will be automatically converted
into Common Stock. The conversion price for each share of the Series B Preferred
Stock is the lesser of $3.00 and 87 1/2% of the average five lowest daily trade
prices of the Company's Common Stock during the 20 trading days preceding the
conversion date, subject to a floor price of $1.50 per share, subject to
decrease in certain circumstances. The Certificate of Designations of the Series
B Preferred Stock provides for redemption in cash at the Company's option at any
time and mandatory redemption at the holder's option under certain circumstances
relating to, among others, the maintenance of listing of shares of the Company's
Common Stock on a major exchange. The redemption price would be generally
equivalent to the amount obtained if the Series B Preferred Stock was converted
into Common Stock at the then existing conversion price.
In addition to a cash commission, the Company issued warrants to purchase
125,000 shares of its Common Stock at $2.50 per share exercisable until May 29,
2003 as a finder's fee in connection with the foregoing transaction. The Company
has estimated that the value of the warrants is not material.
Based on a SEC pronouncement, a portion of the proceeds of the issue
representing the discounted conversion feature as measured by the difference
between the fair market value of the Common Stock on the dates the Series B
Preferred Stock was sold and the earliest discounted conversion price has been
allocated to additional paid-in-capital. The discount resulting from the
allocation of proceeds has been recorded as an additional dividend of $314,286
which is being amortized over the period from issuance to July 9, 1998, the date
on which the Series B Preferred Stock first became convertible. Management
believes that the proceeds received from the Series B Preferred Stock and the
discount offered on conversion of the Series B Preferred Stock is a fair
representation of the net proceeds the Company would otherwise expect to receive
from an equity offering of a like number of shares after consideration of all
associated commissions, costs and expenses.
Reclassifications Certain reclassifications have been made to the financial
statements for the three months and six months ended June 30, 1997 to conform to
presentations for the three months and six months ended June 30, 1998.
6
<PAGE>
Note 2 - Common Stock Issuances and Stock Options
In the six months ended June 30, 1998, the Company granted to selected
officers, directors, key employees and consultants options to purchase 630,500
shares of Common Stock at prices ranging from $1.375 per share to $2.00 per
share, the market value of the Common Stock at the date of grant.
In the six months ended June 30, 1998, 46,500 shares of the Series A
Preferred Stock were converted at the existing conversion rate into 23,250
shares of Common Stock, resulting in a decrease in Series A Preferred Stock of
$139,500, an increase in Common Stock of $233 and an increase in additional
paid-in capital of $139,267.
During April 1998, the remaining balance of $2,680,000 face amount of 5%
Convertible Debentures were converted into 1,873,420 shares of Common Stock,
resulting in increases in Common Stock of $18,734 and additional paid-in capital
of $2,661,266.
Note 3 - Subsequent Events
During July 1998, the Company received $500,000 from the Taiwanese joint
venture as an advance on the purchase of Common Stock and reinvested
substantially all the proceeds as part of its investment in the joint venture.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
could differ materially from those projected in the forward-looking statements
as a result of a number of important factors. For a discussion of important
factors that could affect the Company's results, in addition to the discussions
below, please refer to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997 and its Registration Statement on Form S-3 declared
effective by the Securities and Exchange Commission on July 8, 1998 and the risk
factors listed therein.
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 and designed, assembled and
in 1995 started up an initial production module to produce 36" x 48" laminates.
In 1997, the Company completed the installation of advanced production equipment
bought with the proceeds of the Company's Initial Public Offering in July 1996.
This initial production-scale expansion signified the end of the Company's
development stage.
During 1997, the Company produced and sold its laminates in limited
quantities for qualification and use in production by its customers and
completed installation of production modules to achieve higher quantity levels
and economies of scale. Throughout 1997 and continuing into 1998, the Company
worked on adjusting and enhancing its production equipment and its manufacturing
processes. The Company also worked on and continues to work on solving problems
with incoming raw materials and interior environment, which affect manufacturing
yields. The Company also added manufacturing management and initially expanded
its workforce to meet anticipated increases in sales levels. Starting at the end
of 1997, however, the workforce was scaled back when the anticipated increase in
sales did not occur in accordance with management's expectations. This continued
until May of 1998, when the workforce was increased to meet the requirements of
expected larger orders. The Company recorded bookings of approximately $82,000
in June 1998, most of which was shipped in July 1998, bookings of approximately
$68,000 in July 1998 and had a backlog of approximately $65,000 at the end of
July 1998.
The production-scale expansion described above is the first 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 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. 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.
8
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Results of Operations
Sales of laminates decreased to $75,752 for the three months ended June 30,
1998 from $143,469 for the three months ended June 30,1997 and to $162,153 for
the six months ended June 30, 1998 from $295,468 for the six months ended June
30, 1997. Sales in the first quarter of 1998 were $86,401. The decreases are the
result of the continued delay in or cancellation of customers' programs for
which Compositech's laminates were qualified or were in the process of being
qualified. Sales for July 1998 were approximately $66,000 and there was a
backlog of approximately $65,000 at the end of July 1998.
Licensing income, relating to the Taiwanese joint venture, net of expenses,
for the three months ended March 31, 1998 totaled $18,660 and for the six months
ended June 30, 1998 totaled $31,576. There was no licensing income in the three
months and six months ended June 30, 1997.
Research and development expenses increased to $25,297 for the three months
ended June 30, 1998 from $23,197 for the three months ended June 30, 1997 and to
$65,910 for the six months ended June 30, 1998 from $46,205 for the six months
ended June 30, 1997, reflecting the Company's development efforts on new
processes. Manufacturing expenses decreased to $1,055,002 for the three month
period ended June 30, 1998 from $1,389,893 for the three months ended June 30,
1997 and to $2,015,564 for the six months ended June 30, 1998 from $2,155,616
for the six months ended June 30, 1997, reflecting the reduced level of
manufacturing and sales activity in the second quarter of 1998 as compared to
the same period last year, partially offset by higher levels of expenditures
related to product development, process adjustments and enhancements and
problems with incoming raw materials and interior environment.
Selling, general and administrative expenses decreased to $330,762 for the
three months ended June 30, 1998 from $369,498 for the three months ended June
30, 1997 and to $623,014 for the six months ended June 30, 1998 from $791,989
for the six months ended June 30, 1997. Decreases in legal and professional fees
and patent/trademark expenses were partially offset by increased advertising and
promotion expenses and costs incurred in relation to the recruitment of the
Company's new president and chief executive officer. During the first half of
1998, approximately $214,000 of selling, general and administrative expenses
were charged to the Company's Canadian joint venture, in accordance with the
joint venture agreements, pursuant to which the Company and its joint venture
partners are planning to establish a plant in the greater Montreal area to
manufacture the Company's laminates.
Interest expense (net of interest capitalized) increased to $51,681 for the
three months ended June 30, 1998 from ($22,294) for the three months ended June
30, 1997 and to $147,160 for the six months ended June 30, 1998 from $18,683 for
the six months ended June 30, 1997. The increased expense is related to the
borrowing cost of the 5% convertible debentures, which did not begin until May
1997 as well as a reduction in the amount of capitalized interest, since the
Company has completed its initial production expansion phase. Amortization of
debt discount and expenses increased to $189,471 for the three months ended June
30, 1998 from $121,202 for the three months ended June 30, 1997 and to $497,603
for the six months ended June 30, 1998 from $121,202 for the six months ended
June 30, 1997, reflecting the amortization of costs associated with the 5%
convertible debentures, including accelerated amortization as a result of
debenture conversions that concluded during the second quarter of 1998. Other
income
9
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decreased to $5,450 for the three months ended June 30, 1998 from $6,242 for the
three months ended June 30, 1997 and increased to $55,796 for the six months
ended June 30, 1998 from $8,460 for the six months ended June 30, 1997. The
increase in the six month period reflects the receipt of a property tax refund
applicable to prior periods as well as adjustments of prior period professional
fees.
The equity in the profit of the Canadian joint venture during the first
half of 1998, totaling $51,247, represents the Company's 50% share of the net
profit of the joint venture which was formed in October 1997. The profit
resulted from interest income recorded by the joint venture on its short term
investments in excess of administrative and marketing costs incurred.
The foregoing resulted in the Company having a net loss of $1,527,891 for
the three months ended June 30, 1998 compared with $1,718,540 for the three
months ended June 30, 1997 and $3,025,879 for the six month period ended June
30, 1998 compared with $2,790,934 for the six month period ended June 30, 1997.
The decreased loss in the three month period ended June 30 was primarily
attributable to the decreased level of manufacturing expenses related to the
decrease in sales revenue which exceeded the increases in interest expense and
amortization of debt discount. The increased loss in the six month period ended
June 30 was attributable primarily to the amortization of debt discount and
expenses relative to the Debentures, a non-cash item, and the decrease in sales
revenues and related expenses.
Liquidity and Capital Resources
The Company has incurred significant losses and has substantial negative
cash flow since its inception. The Company's independent auditors have included
an explanatory paragraph in their report covering the December 31, 1997
financial statements, which expresses substantial doubt about the Company's
ability to continue as a going concern. The Company expects significant
operating losses to continue in 1998. As of June 30, 1998, the Company had
approximately $1,752,000 of available cash resources. In January and February
1998, in connection with the Taiwanese joint venture, the Company received net
proceeds aggregating approximately $1.9 million from the receipt of a license
fee down payment and the issuance of stock and anticipates receiving an
additional $1,190,000 in the third quarter of 1998, net of expenses, from
license fees and stock issuances. In July 1998, the Company invested
approximately $466,000 in the Taiwanese joint venture, in accordance with the
terms of the joint venture agreements. In May of 1998, the Company concluded its
sale of Series B Preferred Stock, realizing approximately $1,900,000, after
expenses.
However, the Company will require additional funding to cover current
operations, which require approximately $400,000 a month based on current levels
of production and sales, until revenues from operations are sufficient. In
addition, the Series B Preferred Stock is subject to mandatory redemption at the
holder's option under certain circumstances relating to, among others, the
maintenance of listing of shares of the Company's Common Stock on a major
exchange (currently Nasdaq SmallCap). Such additional funding may be raised
through sources including license fees, sales of equipment in connection with
licensing operations, joint ventures or other collaborative relationships, as
well as equity or debt financing. There can be no assurance that funding will be
sufficient and available or, if it is available, that it will be available on
acceptable terms. If adequate funds are not available to satisfy either
short-term or long-term capital requirements, the Company may be required to
limit its operations significantly. There can
10
<PAGE>
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. 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.
Included in current maturities of long-term debt is $1,595,000 due to
directors/stockholders. The Company intents to renegotiate the due date of these
loans.
Based on a preliminary review of Year 2000 issues, the Company believes
that the impact will not be material to the Company's business, operations or
financial condition. The Company is also assessing how it could be affected by
the failure of third parties (e.g. vendors and customers) to mitigate their own
Year 2000 issues.
Six Months Ended June 30, 1998 Compared with Six Months Ended June 30, 1997
Net cash and cash equivalents used in operating activities decreased to
$1,211,669 for the six months ended June 30, 1998 from $2,354,713 for the six
months ended June 30, 1997. The licensing fees received from the Taiwan joint
venture were the primary source of funds provided by operating activities for
the six months ended June 30, 1998, with $877,808 deferred to future periods for
financial reporting purposes. Decreases in accounts receivable and inventory as
well as increases in deferred salaries, accrued interest and accrued liabilities
for this same period were partially offset by a decrease in accounts payable.
Net cash and cash equivalents used in investing activity for the six months
ended June 30, 1998 amounted to $497,105, compared with net cash and cash
equivalents provided by investing activities of $1,074,280 for the six months
ended June 30, 1997. Capital expenditures for equipment and advance payments for
equipment decreased to $487,689 for the six months ended June 30, 1998, from
$1,215,084 for the six months ended June 30, 1997. The decrease is attributable
to the reduced rate of purchases of production equipment that constituted a
significant portion of the production expansion program that concluded in the
second half of 1997. Maturities of short term U.S. Government securities during
the six months ended June 30, 1997 accounted for $2,384,700 of funds provided by
investing activities.
Cash flows from financing activities increased to $2,836,705 for the six
months ended June 30, 1998 from $2,018,090 for the six months ended June 30,
1997. The significant sources of funds provided by financing activities during
the first half of 1998 were the sale of stock to the Taiwanese joint venture,
totaling $952,500, net of expenses, and the sale of the Series B Preferred Stock
which provided $1,900,000, net of expenses. The six months ended June 30, 1997
included $2,022,231 of funds provided by the sale of the 5% Convertible
Debentures.
11
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Part II - Other Information
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities.
--------------------------------------------
On May 29, 1998, the Company issued 220 shares of Series B Preferred Stock
in a private placement to an accredited investor, raising gross proceeds of $2.2
million. The net proceeds of approximately $1.9 million will be used for working
capital and equipment. Holders of the Series B Preferred Stock are entitled to
dividends on a cumulative basis, payable quarterly in cash or Common Stock at
the option of the Company except under certain specified conditions which
require the payment of dividends in cash. In the event of any voluntary or
involuntary liquidation of the Company, holders of the Series B Preferred Stock
shall be entitled to receive the stated value of $10,000 per share plus all due
but unpaid dividends before any distribution or payments are made to holders of
the Company's Series A Preferred Stock or Common Stock. The holders of the
Series B Preferred Stock do not have voting rights except in certain limited
circumstances in which their rights, powers or preferences could be adversely
affected.
Each share of the Series B Preferred Stock is convertible at the option of
the holder into shares of the Company's Common Stock from July 8, 1998 through
May 29, 2000, at which time any remaining shares will be automatically converted
into Common Stock. The conversion price for each share of the Series B Preferred
Stock is the lesser of $3.00 and 87 1/2% of the average five lowest daily trade
prices of the Company's Common Stock during the 20 trading days preceding the
conversion date, subject to a floor price of $1.50 per share, subject to
decrease in certain circumstances. The Certificate of Designations of the Series
B Preferred Stock provides for redemption in cash at the Company's option at any
time and mandatory redemption at the holder's option under certain circumstances
relating to, among others, the maintenance of listing of the Company's Common
Stock on a major exchange. The redemption price would be generally equivalent to
the amount obtained if the Series B Preferred Stock was converted into Common
Stock at the then existing conversion price. The sale of the Series B Preferred
Stock was exempt from registration under the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof, as a transaction not involving a public
offering.
12
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1998 Annual Meeting of Stockholders was held on June 23,
1998. The following actions were taken:
1. Eight directors were elected to serve for one-year terms on the Company's
Board of Directors, by the following votes:
For Withheld
---------------- ----------------
Jonas Medney 12,052,432 78,233
Fred E. Klimpl 12,052,432 78,233
Samuel S. Gross 12,052,432 78,233
Pierre Laflamme 12,051,132 79,533
Willard T. Jackson 12,052,432 78,233
Robert W. Middleton 12,049,882 80,783
Heinz-Gerd Reinkemeyer 12,052,432 78,233
James W. Taylor 12,052,432 78,233
2. The selection of Ernst & Young LLP as auditors for the Company for the year
1998 was ratified by a vote of 12,004,632 shares in favor and 34,833 shares
opposed. A total of 91,200 shares abstained from voting.
3. The amendment of Compositech's Amended and Restated Stock Award Plan to
increase by 500,000 shares the number of shares of Common Stock authorized for
issuance thereunder, was approved by a vote of 11,683,514 shares in favor and
282,930 shares opposed. A total of 164,221 shares abstained from voting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
10.10 Compositech Ltd. Amended and Restated
Stock Award Plan
11 Loss per Common Share
(b) Reports on Form 8-K
Financial
Date of Report Item Reported Statements Filed
-------------- ------------- ----------------
May 29, 1998 Item 5 - Other Events No
(Announcing sale of 7%
Series B Convertible
Preferred Stock)
All other items required in Part II have been filed previously or are not
applicable for the quarter ended June 30, 1998.
13
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COMPOSITECH LTD.
Dated: August 13, 1998 /s/ Samuel S. Gross
------------------------------------------
Executive Vice President and Treasurer
(Principal Accounting Officer and officer
duly authorized to sign this report on
behalf of the registrant)
14
Exhibit 10.10
COMPOSITECH LTD.
AMENDED AND RESTATED STOCK AWARD PLAN
1. Purpose
The purpose of this Stock Award Plan (the "Plan") is to provide to selected
officers, directors, employees and consultants and other non-employee
individuals providing or expected to provide valuable services contributing to
the growth and success of Compositech Ltd. (the "Company"), an opportunity to
obtain or increase a proprietary interest in the Company, or to benefit from the
appreciation in the value of the Company's Common Stock, par value $0.01 per
share (the "Common Stock"), as an incentive to such persons to continue and to
increase their efforts to benefit the Company and to continue their relationship
with the Company.
2. Administration
The Plan shall be administered by, and all decisions and determinations
concerning the Plan shall be made solely by, the Award Committee or any
successor committee (the "Committee") appointed by the Board of Directors of the
Company (the "Board"). The Committee shall consist of no less than three
"non-employee directors," as such term is defined in Rule 16b-3(b)(3) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Committee
may establish, modify or rescind any rules or regulations for the conduct of its
business and the administration of the Plan, in any case, not inconsistent with
the express provisions of the Plan, the By-laws or the Restated Certificate of
Incorporation of the Company or any resolutions of the Board. Any decision of
the Committee in the administration of the Plan, shall be final, conclusive and
binding on all persons. Any action of the Committee shall be taken by a vote or
written consent of a majority of its members except that the members of the
Committee may authorize any one or more of their number to execute and deliver
documents on behalf of the Committee. No member of the Committee shall be liable
for any action taken, or determination made, in good faith.
3. Eligibility and Participation
Officers, directors and employees of the Company shall be eligible for
selection to participate in the Plan. Non-employee individuals, providing or
expected to provide valuable services to the Company, as the Committee may
determine, also shall be eligible for selection to participate in the Plan.
Notwithstanding the foregoing, only persons employed by the Company (or any
subsidiary thereof) shall be eligible to receive options intended to meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
("Incentive Stock Options" or "ISOs"), hereunder.
4. Awards under the Plan
(a) "Awards" under the Plan shall mean and include any one or a combination
of ISOs, nonqualified stock options ("NQSOs," and together with ISOs, "Options")
and shares of Common Stock subject to restrictions ("Restricted Stock"). Awards
shall be represented by, or issued pursuant to, agreements in such form as the
Committee may from time to time approve, which agreements need not contain
uniform terms and conditions but shall comply with and be subject to all the
terms, conditions and restrictions of the Plan ("Award Agreements"). The
Committee shall have the authority to accelerate the vesting periods for all
Options granted by the Committee under the Plan.
1
<PAGE>
(b) Subject to adjustment as provided in paragraph 7 below, there may be
issued under the Plan pursuant to Awards an aggregate of not more than One
Million Six Hundred Seventy-Five Thousand (1,675,000) shares of Common Stock;
provided, however, that if an Option shall expire or terminate without having
been exercised in full, or if any shares of Restricted Stock shall be forfeited
by a recipient thereof, any unissued shares of Common Stock which were covered
by that Award may be added to the shares otherwise available for Awards to be
granted pursuant to the Plan. The Company hereby reserves One Million Six
Hundred Seventy-Five Thousand (1,675,000) shares of Common Stock for issuance
under the Plan.
(c) A participant who has been awarded an Option hereunder (an "Optionee")
(and any person succeeding to the Optionee's rights pursuant hereto) shall not
have any rights as a stockholder with respect to any shares of Common Stock
issuable pursuant to any Option until the date of the issuance of a stock
certificate to the Optionee for the shares. Except as provided in paragraph 7
below, no adjustment shall be made for dividends, distributions or other rights
(whether ordinary or extraordinary, and whether in cash, securities or other
property) for which the record date is prior to the date a stock certificate is
issued. A participant who has been awarded Restricted Stock hereunder shall,
except for the restrictions on transfer, be the owner of such Restricted Stock
and shall have all the rights of a stockholder.
5. Options
Each Option granted under the Plan shall comply with the following terms
and conditions:
(a) An Option exercise price shall be determined by the Committee in its
sole discretion, but in the case of an ISO, such exercise price shall be not
less than the Fair Market Value, as hereinafter defined, of the Common Stock on
the date of grant.
(b) The term of an Option shall be determined by the Committee, but in no
event shall any ISO be exercisable more than ten years after the date on which
it was granted.
(c) An Option shall not be transferable by the Optionee otherwise than by
will or the applicable laws of descent and distribution and shall be exercisable
during the Optionee's lifetime only by the Optionee.
(d) An Option shall not be exercisable:
(i) prior to six months from the date it is granted;
(ii) unless payment in full is made for the shares of Common Stock
being acquired thereunder at the time of exercise (A) in United States
dollars by cash or check, (B) by tendering to the Company shares of Common
Stock owned by the person exercising the Option and having a Fair Market
Value equal to the cash price applicable to the Option, (C) by a
combination of United States dollars and shares of Common Stock as
aforesaid, or (D) with the prior approval of the Committee, by tendering to
the Company a promissory note on which such person exercising the Option is
personally liable and which is in a form satisfactory to the Committee; and
(iii) unless the person exercising the Option fulfills the eligibility
requirements in paragraph 3 above at all times during the period beginning
with the date of grant of the Option and ending on the date of such
exercise, except that each Award Agreement with respect to an Option may
specify the
2
<PAGE>
conditions and circumstances under which an unexercised Option may or may
not be exercised in the event that the relationship between the Company and
the Optionee is terminated prior to the expiration date of the Option.
(e) An outstanding, unexercised and unexpired Option shall become
exercisable in full in the event of a "change in control" of the Company and the
Committee may in its discretion provide that in such event such outstanding,
unexercised and unexpired Options may be surrendered for cash in the amount by
which the fair market value of the Company's Common Stock subject to such
Options immediately prior to the "change in control" as determined by the
Committee exceeds the exercise price of such Common Stock at such time. The
Committee also has the discretion to provide that Options will continue to be
exercisable following the change in control for the consideration that would
have been receivable at the time of the change in control if the options had
been exercised immediately prior thereto. A "change in control" means generally
(i) the merger or consolidation of the Company as a result of which the Company
is not the surviving entity, (ii) the sale of all or substantially all of the
assets of the Company, (iii) the acquisition by another person of 80% or more of
the then outstanding shares of Common Stock or (iv) the recapitalization,
reorganization, dissolution or liquidation of the Company.
For purposes hereof "Fair Market Value" shall mean the fair market value
per share of the Company's Common Stock as determined by the Committee in good
faith; provided, however, that if the Company's Common Stock is listed or
admitted to trading on a securities exchange registered under the Exchange Act,
or as a national market security on the National Association of Securities
Dealers, Inc., Automated Quotations System ("NASDAQ") or any similar system then
in use, the Fair Market Value per share shall be the average of the reported
high and low sales price on the date in question (or if there was no reported
sale on such date, on the last preceding date on which any reported sale
occurred) on the principal securities exchange or system on which such share is
listed or admitted to trading, or if a share is not listed or admitted to
trading on any such exchange and is not listed as national market security on
NASDAQ but is quoted on NASDAQ or any similar system then in use, the Fair
Market Value per share shall be the average of the closing high bid and low
asked quotations on such system for such share on the date in question.
6. Restricted Stock
An Award of Restricted Stock hereunder shall entitle the holder thereof to
receive shares of Common Stock which shall be forfeited if the relationship
between the Company and such holder terminates during the Restricted Period, as
defined below, for any reason other than those set forth in the related Award
Agreement. For purposes hereof, "Restricted Period" shall mean that period as
determined by the Committee during which the shares of Restricted Stock awarded
to a participant may be forfeited. The Committee may at any time provide that a
Restricted Period shall terminate upon the attainment of any performance
objective established by the Committee. Upon termination of the Restricted
Period, the shares of Restricted Stock shall be delivered to the recipient free
and clear of all such restrictions.
7. Dilution and Other Adjustment
In the event of any change in the outstanding shares of Common Stock of the
Company by reason of any stock split, stock dividend, recapitalization, merger,
consolidation, reorganization, combination or exchange of shares or other
similar event, the number or kind of shares issued, or that may be issued under
the Plan pursuant to paragraph 4 above shall be automatically adjusted to give
effect to the occurrence of such event (and, in the case of an Option, the
number or kind of shares subject to, or the Option price per share under, any
outstanding Option shall be automatically adjusted) so that the
3
<PAGE>
proportionate interest of the participant shall be maintained as before the
occurrence of such event. Any adjustment in outstanding Options pursuant to this
paragraph 7 shall be made without change in the total Option exercise price
applicable to the unexercised portion of such Options and with a corresponding
adjustment in the Option exercise price per share. No fractional shares of
Common Stock shall be issued pursuant to any adjustment referred to herein, and
any fractions resulting from any such adjustment shall be eliminated in each
case by rounding downward to the nearest whole share. Any adjustment made
pursuant to this paragraph 7 shall be conclusive and binding for all purposes of
the Plan.
8. Miscellaneous
(a) No person shall have any claim or right to be granted an Award under
the Plan. Neither the Plan nor any action taken hereunder shall be construed as
giving any person any right to be retained in any way in the service of the
Company.
(b) No shares of Common Stock shall be issued hereunder unless counsel for
the Company shall be satisfied, that such issuance will be in compliance with
applicable federal, state and other securities laws.
(c) It shall be a condition to the obligation of the Company to issue
shares of Common Stock upon exercise of an Option, or deliver shares upon
termination of a Restricted Period, as the case may be, that the participant (or
any beneficiary or person entitled to act under paragraph 9 below) pay to the
Company, upon its demand, any taxes required to be withheld.
(d) The expenses of the Plan shall be borne by the Company.
(e) By accepting any Award or other benefit under the Plan, each
participant and each person claiming under or through him shall be conclusively
deemed to have indicated his acceptance and ratification of, and consent to, any
action taken under the Plan by the Company or the Committee.
9. Total Disability or Death
(a) Except as otherwise provided in the Award Agreement, if an employee
Optionee terminates employment with the Company as the result, in the sole
judgment of the Committee, of his becoming totally disabled, the Optionee shall
be entitled to exercise any Option to the extent his right to exercise such
Option had accrued at the date of termination of employment and had not
previously been exercised, for a period of three months after such termination,
subject, in any case, to all other provisions of the Plan.
(b) Except as otherwise provided in the Award Agreement, if the employee
Optionee should die either (i) while employed by the Company, or (ii) during any
period in which the Optionee may exercise the Option following termination of
employment, then the person or persons to whom the Optionee's rights under the
Option shall pass by will or by the applicable laws of descent and distribution
(including, without limitation, the executors, administrators or other personal
representatives of the Optionee or his or her estate) shall be entitled to
exercise the Option to the extent his right to exercise such Option had accrued
at the date of termination of employment and had not previously been exercised,
for a period of twelve months from the date of such death, subject, in any case,
to all other provisions of the Plan.
4
<PAGE>
10. Amendment or Termination
The Plan may be terminated at any time or amended at any time or from time
to time by the Committee as the Committee shall deem advisable; provided,
however, that except as provided in paragraph 7 above, the Committee may not,
without further approval by the stockholders of the Company, increase the
maximum number of shares of Common Stock as to which Options may be granted, or
awarded as Restricted Stock, under the Plan, materially increase the benefits
accruing to participants under the Plan or change the class of persons eligible
to receive Awards under the Plan. No amendment or termination of the Plan shall
materially and adversely affect any right of any participant with respect to any
Award theretofore granted without such participant's written consent. No ISO may
be granted after the tenth anniversary of the effective date of the Plan.
11. Effectiveness
The Plan shall not be effective and no Award granted hereunder shall have
effect unless and until the Plan has been approved and adopted by a majority in
voting power of the stockholders of the Company.
Amended June 23, 1998
5
COMPOSITECH LTD.
COMPUTATION OF LOSS PER COMMON SHARE
Exhibit 11
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC
- -----
Shares used in computing (loss) per share 12,322,638 6,144,379 10,906,495 6,136,315
Net (loss) ($ 1,527,891) ($ 1,718,540) ($ 3,025,879) ($ 2,790,934)
Preferred Stock dividend, including amortization
of discount on 7% Series B Convertible Preferred Stock of $251,429 265,118 265,118
------------ ------------ ------------ ------------
(Loss) available for common stockholders ($ 1,793,009) ($ 1,718,540) ($ 3,290,997) ($ 2,790,934)
============ ============ ============ ============
(Loss) per common share ($ 0.15) ($ 0.28) ($ 0.30) ($ 0.45)
============ ============ ============ ============
DILUTED
- -------
Shares used in computing (loss) per share(1) 12,322,638 6,144,379 10,906,495 6,136,315
(Loss) available for common stockholders ($ 1,793,009) ($ 1,718,540) ($ 3,290,997) ($ 2,790,934)
ADD : Dividend on 7% convertible preferred stock 265,118 265,118
Interest expense on 5% convertible debentures 7,337 9,068 60,558 9,068
Amortization of debt discount and
expenses - 5% convertible debentures 189,471 121,202 497,603 121,202
------------ ------------ ------------ ------------
Total ($ 1,331,083) ($ 1,588,270) ($ 2,467,718) ($ 2,660,664)
============ ============ ============ ============
(Loss) per common share ($ 0.11) ($ 0.26) ($ 0.23) ($ 0.43)
============ ============ ============ ============
</TABLE>
(1) Conversions of the 5% convertible debentures and the 7% convertible
preferred stock is not assumed in the computation because its effect is
antidilutive.
