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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 November 16, 1998:
Common Stock $.01 par value 12,682,706
--------------------------- ----------
Class Number of shares
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<PAGE>
COMPOSITECH LTD.
Index
<TABLE>
<CAPTION>
Part I - Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 ................. 2
Statements of Operations (unaudited) for the three-month and nine-month
periods ended September 30, 1998 and 1997 ............................................... 3
Statements of Cash Flows (unaudited) for the nine-month periods
ended September 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 6. Exhibits and Reports on Form 8-K .......................................................... 12
Signature .......................................................................................... 13
</TABLE>
<PAGE>
COMPOSITECH LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30 December 31
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 373,700 $ 624,254
Accounts receivable trade - net 52,232 44,725
Accounts receivable from joint venture 97,618 201,382
Inventories 329,053 401,922
Prepaid expenses and other 144,571 97,371
------------ ------------
Total current assets 997,174 1,369,654
Property and equipment at cost - net 5,760,504 5,276,672
Investment in joint ventures - net of accumulated amortization of $17,250 (1998) 6,156,732 5,631,561
Advance payments on construction-in-progress 16,753 274,253
Deferred debt expense - net of accumulated amortization of $154,858 458,953
Other assets and other deferred charges, net of accumulated amortization
of $15,602 (1998) and $6,846 (1997) 142,331 134,796
------------ ------------
Total assets $ 13,073,494 $ 13,145,889
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 447,131 $ 609,278
Deferred salaries - $766,020 (1998) and $ 1,500 (1997) to officers 973,593 192,571
Accrued interest - all (1998) and $ 916 (1997) to stockholders 217,536 26,017
Other accrued liabilities 441,658 370,707
------------ ------------
Total current liabilities 2,079,918 1,198,573
Non-current liabilities:
Notes payable to directors/stockholders 1,595,000 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 21,034 49,047
Other liabilities 37,500 37,500
------------ ------------
Total non-current liabilities 1,653,534 8,095,614
Deferred licensing income 813,581
Advance payments on sales of common stock 500,000
7% Series B convertible preferred stock, par value $0.01; stated value $10,000 per share;
authorized, issued and outstanding shares - 220 2,200,000
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 36,602,778 30,075,100
Deficit (32,603,877) (28,143,560)
------------ ------------
Total stockholders' equity 5,826,461 3,851,702
------------ ------------
Total liabilities and stockholders' equity $ 13,073,494 $ 13,145,889
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 136,830 $ 115,999 $ 298,983 $ 411,467
Licensing income 16,280 47,856
------------ ------------ ------------ ------------
Total revenues 153,110 115,999 346,839 411,467
Costs and expenses:
Manufacturing expenses 1,318,667 1,485,353 3,334,231 3,640,969
Selling, general and administrative 310,323 384,451 933,337 1,176,440
Research and development 41,146 12,765 107,056 58,970
------------ ------------ ------------ ------------
Total operating expenses 1,670,136 1,882,569 4,374,624 4,876,379
------------ ------------ ------------ ------------
(Loss) from operations (1,517,026) (1,766,570) (4,027,785) (4,464,912)
Other income (expenses):
Interest income 16,972 35,397 47,932 74,230
Interest expense
(net of interest capitalized of $66,000
(1998) and $82,000 (1997) ) 21,909 (89,291) (125,251) (107,974)
Amortization of debt discount and expenses (911,263) (497,603) (1,032,465)
Loss on disposal of property and equipment (9,613) (8,360) (9,613)
Other income (expense) 20,020 (3,308) 75,816 5,152
------------ ------------ ------------ ------------
58,901 (978,078) (507,466) (1,070,670)
------------ ------------ ------------ ------------
(Loss)from operations before equity in income
(loss) of joint venture (1,458,125) (2,744,648) (4,535,251) (5,535,582)
Equity in income of joint venture 23,687 74,934
------------ ------------ ------------ ------------
Net (loss) (1,434,438) (2,744,648) (4,460,317) (5,535,582)
Preferred Stock dividends accrued, including
amortization of discount on 7% Series B convertible
preferred stock of $62,857 and $314,286, respectively 102,212 367,330
------------ ------------ ------------ ------------
(Loss) available for common stockholders ($ 1,536,650) ($ 2,744,648) ($ 4,827,647) ($ 5,535,582)
============ ============ ============ ============
Shares used in computing (loss) per common share 12,741,533 6,465,141 10,916,633 6,462,406
============ ============ ============ ============
(Loss) per common share - basic ($0.12) ($0.42) ($0.44) ($0.86)
============ ============ ============ ============
(Loss) per common share - diluted ($0.11) ($0.27) ($0.36) ($0.69)
============ ============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------------------------
1998 1997
----------- -----------
Cash Flows from Operating Activities
<S> <C> <C>
Net (loss) ($4,460,317) ($5,535,582)
Adjustments to reconcile net (loss) to net cash and
cash equivalents used in operating activities:
Depreciation and amortization, including capital leases 524,900 325,104
Loss on disposal of property and equipment 8,360 9,613
Amortization of debt discount and expenses 497,603 1,032,465
Equity in net income of joint venture (74,934)
Changes in operating assets and liabilities:
Accounts receivable trade - net (7,507) 55,012
Accounts receivable from joint venture 103,764
Inventories 72,869 (229,604)
Prepaid expenses and other (47,200) (200,034)
Other assets and other deferred charges (8,362) (95,180)
Accounts payable (162,147) (87,053)
Deferred salaries 229,464
Accrued interest 91,360 31,007
Deferred licensing income 813,581
Other accrued liabilities 22,183 168,260
----------- -----------
Net cash and cash equivalents (used) in operating activities (2,396,383) (4,525,992)
Cash Flows from Investing Activities
Purchase of property and equipment - net (991,086) (1,638,450)
Advance payments on construction-in-progress 257,500 (122,541)
Investment in joint ventures (467,487)
Patent costs deferred (7,929) (111,383)
Short term investments - maturities 2,384,700
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Net cash and cash equivalents provided by (used in) investing activities (1,209,002) 512,326
Cash Flows from Financing Activities
Net proceeds from issuance of common stock 958,120 47,520
Net proceeds from issuance of 5% convertible debentures 29,000 5,891,189
Net proceeds from issuance of 7% Series B convertible preferred stock 1,900,000
Advance payment on stock issuance 500,000
Payment of capital lease obligations (32,289) (24,169)
----------- -----------
Net cash and cash equivalents provided by financing activities 3,354,831 5,914,540
----------- -----------
Increase (decrease) in cash and cash equivalents (250,554) 1,900,874
Cash and cash equivalents at beginning of period 624,254 673,084
----------- -----------
Cash and cash equivalents at end of period $ 373,700 $ 2,573,958
=========== ===========
Supplemental disclosures of cash flow information
Noncash financing activities:
Capital lease obligations for property and equipment acquisitions $ 91,336
===========
Preferred Stock dividends accrued, including amortization of discount
on 7% Series B convertible preferred stock of $314,286 $ 367,330
===========
Cash paid for:
Interest $ 100,628 $ 164,324
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
COMPOSITECH LTD.
Notes to Financial Statements
(Unaudited)
September 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 nine-month period ended September 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. The Company received
$1 million as a license down payment and it will receive additional up-front
license payments of $1 million 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 is to 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 a governmental authority. The Company received an
advance payment of $500,000 from the joint venture towards the second half of
the stock purchase and reinvested substantially all the proceeds as part of its
investment in the joint venture. The Company is awaiting receipt of the
remaining balance of approximately $460,000, net of expenses, which is related
to the approval of the joint venture license. 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 $16,280 in the three months ended
September 30, 1998 and $47,856 in the nine months ended September 30, 1998
relates to the 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 are being used for working capital and
equipment.
5
<PAGE>
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 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 was amortized over the period from issuance to July 8, 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 nine months ended September 30, 1997 to conform to
presentations for the three months and nine months ended September 30, 1998.
6
<PAGE>
Note 2 - Common Stock Issuances and Stock Options
In the nine months ended September 30, 1998, the Company granted to
selected officers, directors, key employees and consultants options to purchase
814,100 shares of Common Stock at prices ranging from $1.1875 to $2.00 per
share, the market value of the Common Stock at the date of grant.
In the nine months ended September 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
In October 1998, the Company obtained extensions of the due dates to
January 2, 2000 of the $1,595,000 of notes payable to directors/stockholders.
On November 13, 1998, the Company sold 100,000 shares of Common Stock in a
private placement, realizing $103,500, net of expenses. In connection with the
private placement, the Company issued warrants to purchase 75,000 shares of
Common Stock at $1.125 per share, the market price on the date of closing,
exercisable until November 13, 2000. The Company is negotiating for additional
financing.
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 has developed and is rapidly moving to commercialization of its
unique nonwoven copper-clad fiberglass reinforced epoxy laminates used to
manufacture printed circuit boards required by the electronics industry. As part
of its development program, the Company patented the laminate, the process used
to manufacture the laminate and the equipment to produce the laminates. The
first prototype equipment was designed and assembled to produce 24" x 24"
laminates. In 1995, initial production scale prototype equipment to produce 36"
x 48" laminates was completed. In 1997, the Company completed the installation
of advanced 36" x 48" production equipment purchased with the proceeds of the
Company's Initial Public Offering in July 1996.
During 1997 and early 1998, the Company produced and sold its laminates in
limited quantities through a highly focused sales effort to gain production
experience and product performance data. This highly focused sales effort left
the Company vulnerable to order volatility. Throughout 1997 and early 1998, the
Company worked on adjusting and enhancing its production equipment and its
manufacturing processes. Production ramp up issues, coupled with order
volatility, led to a much slower than expected expansion in production capacity.
The Company continues to work on and is making progress on solving issues with
incoming raw materials which affect finished goods' yields and production
efficiencies.
In June 1998, the Company elected Christopher F. Johnson as president and
chief executive officer. The Company has significantly increased its sales
activities through the use of sales representatives and delivered sample
quantities to 22 qualified new customer opportunities in the third quarter. The
Company's sales focus is clearly on the high layer count, high density,
multilayer and backplane market segments. The Company's internal focus, which
had been appropriately on technology development in the past, has been
reoriented to customer satisfaction as the Company ramps up production to meet
customer demand. Previously purchased equipment is being installed and will be
operational in the fourth quarter. A major initiative to reach a long term
supply agreement with a significant printed wiring board fabricator is
progressing and additional supply agreements are being pursued. The Company is
also pursuing discussions with potential industrial partners to accelerate the
commercialization of the Company's products worldwide.
8
<PAGE>
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.
Results of Operations
Sales of laminates increased to $136,830 for the three months ended
September 30, 1998 from $115,999 for the three months ended September 30, 1997
and decreased to $298,983 for the nine months ended September 30, 1998 from
$411,467 for the nine months ended September 30, 1997. The increase in the
three-month period was principally due to large additional orders from a major
customer as part of their program of production testing and customer
qualification of Compositech laminates. The decrease in the nine-month period is
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.
Licensing income, relating to the Taiwanese joint venture, net of expenses,
for the three months ended September 30, 1998 totaled $16,280 and for the nine
months ended September 30, 1998 totaled $47,856. There was no licensing income
in 1997.
Research and development expenses increased to $41,146 for the three months
ended September 30, 1998 from $12,765 for the three months ended September 30,
1997 and to $107,056 for the nine months ended September 30, 1998 from $58,970
for the nine months ended September 30, 1997, reflecting the Company's
development efforts on new processes. Manufacturing expenses decreased to
$1,318,667 for the three months ended September 30, 1998 from $1,485,353 for the
three months ended September 30, 1997 and to $3,334,231 for the nine months
ended September 30, 1998 from $3,640,969 for the nine months ended September 30,
1997, reflecting the reduced level of direct manufacturing costs in the third
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 the costs of upgrading the supervisory
workforce.
Selling, general and administrative expenses decreased to $310,323 for the
three months ended September 30, 1998 from $384,451 for the three months ended
September 30, 1997 and to $933,337 for the nine months ended September 30, 1998
from $1,176,440 for the nine months ended September 30, 1997. Decreases in legal
and professional fees and patent/trademark expenses were 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 second quarter of 1998. During the first nine months of 1998, approximately
$297,000 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
9
<PAGE>
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) decreased to ($21,909) for
the three months ended September 30, 1998 from $89,291 for the three months
ended September 30, 1997 and increased to $125,251 for the nine months ended
September 30, 1998 from $107,974 for the nine months ended September 30, 1997.
The third quarter of 1998 reflects an adjustment of $66,000 for capitalized
interest on construction-in-progress. The increased expense for the nine month
period 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, as the Company has completed its initial production expansion phase.
Amortization of debt discount and expenses totaled $911,263 for the three months
ended September 30, 1997 and decreased to $497,603 for the nine months ended
September 30, 1998 from $1,032,465 for the nine months ended September 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 was
$20,020 for the three months ended September 30, 1998 as compared to an expense
of $3,308 for the three months ended September 30, 1997 and increased to $75,816
for the nine months ended September 30, 1998 from $5,152 for the nine months
ended September 30, 1997. The increases reflect the receipt of refunds related
to property taxes and sales taxes 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 nine
months ended September 30, 1998, totaling $74,934 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 $1,434,438 for
the three months ended September 30, 1998 compared with $2,744,648 for the three
months ended September 30, 1997 and $4,460,317 for the nine months ended
September 30, 1998 compared with $5,535,582 for the nine months ended September
30, 1997. The decreased loss in the three-month and nine-month periods was
primarily attributable to the decreased level of direct manufacturing costs, the
reduction in selling and general and administrative expenses and the reduction
in the amortization of debt discount and expenses relative to the Debentures, a
non-cash item.
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 September 30, 1998, the Company had
approximately $373,700 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 $693,000, net of expenses, in the fourth quarter of 1998 from
10
<PAGE>
license fees and a stock issuance. Following the receipt of an advance payment
from the joint venture for sales of the Company's Common Stock to the joint
venture, in July 1998, the Company invested approximately $466,000 in the 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). On November 13, 1998, the Company sold
100,000 shares of Common Stock in a private placement, realizing $103,500, net
of expenses. The Company is negotiating for additional funding. 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 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.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000 ("Year 2000"). Processing errors due to
software failure arising from calculations using the Year 2000 date are
recognized as a risk. The Company is currently assessing the risk, with respect
to the availability and integrity of its financial systems and the reliability
of its financial systems and the reliability of its operating systems, and is in
the process of communicating with third parties (e.g. vendors and customers)
with whom it conducts business to assess whether they are or will be Year 2000
compliant.
The Company's information technology systems consists of a series of
personal computers, linked via a network, which process data using purchased
software programs produced and maintained by large software vendors. The Company
believes its exposure to any material Year 2000 problems is relatively small
because its financial and operating systems have been produced and maintained by
large software vendors which are Year 2000 compliant. However, there can be no
assurance that the Company's systems or systems of other companies on which the
Company's operations rely will be converted on a timely basis and will not have
a material effect on the Company. The cost of the Company's Year 2000
initiatives has not been or is not expected to be material to the Company's
results of operations or financial position.
11
<PAGE>
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
Net cash and cash equivalents used in operating activities decreased to
$2,396,383 for the nine months ended September 30, 1998 from $4,525,992 for the
nine months ended September 30, 1997. The licensing fees received from the
Taiwan joint venture were the primary source of funds provided by operating
activities for the nine months ended September 30, 1998, with $813,581 deferred
to future periods for financial reporting purposes. Decreases in accounts
receivable from joint venture and in inventories 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 nine
months ended September 30, 1998 amounted to $1,209,002, compared with net cash
and cash equivalents provided by investing activities of $512,326 for the nine
months ended September 30, 1997. Capital expenditures for equipment and advance
payments for equipment decreased to $733,586 for the nine months ended September
30, 1998, from $1,760.991 for the nine months ended September 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 nine months ended September 30, 1997 accounted
for $2,384,700 of the funds provided by investing activities.
Cash flows from financing activities decreased to $3,354,831 for the nine
months ended September 30, 1998 from $5,914,540 for the nine months ended
September 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 nine months
ended September 30, 1997 included $5,891,189 of funds provided by the sale of
the 5% Convertible Debentures.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
11 Loss per Common Share
27 Financial Data Schedules ( Edgar version only )
(b) Reports on Form 8-K
None
All other items required in Part II have been filed previously or are not
applicable for the quarter ended September 30, 1998.
12
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
COMPOSITECH LTD.
Dated: November 16, 1998 /s/ Samuel S. Gross
--------------------------------------------
Executive Vice President and Treasurer
(Principal Accounting Officer and officer
duly authorized to sign this report on behalf
of the registrant)
13
COMPOSITECH LTD.
COMPUTATION OF LOSS PER COMMON SHARE
Exhibit 11
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BASIC
Shares used in computing (loss) per share 12,741,533 6,465,141 10,916,633 6,462,406
Net (loss) ($ 1,434,438) ($ 2,744,648) ($ 4,460,317) ($ 5,535,582)
Preferred Stock dividend, including amortization of
discount on 7% Series B Convertible Preferred Stock of $314,286 102,212 367,330
------------ ------------ ------------ ------------
(Loss) available for common stockholders ($ 1,536,650) ($ 2,744,648) ($ 4,827,647) ($ 5,535,582)
============ ============ ============ ============
(Loss) per common share ($ 0.12) ($ 0.42) ($ 0.44) ($ 0.86)
============ ============ ============ ============
DILUTED
Shares used in computing (loss) per share (1) 12,741,533 6,465,141 10,916,633 6,462,406
(Loss) available for common stockholders ($ 1,536,650) ($ 2,744,648) ($ 4,827,647) ($ 5,535,582)
ADD: Dividend on 7% convertible preferred stock 102,212 367,330
Interest expense on 5% convertible debentures 63,518 60,558 72,586
Amortization of debt discount and expenses - 5%
convertible debentures 911,263 497,603 1,032,465
------------ ------------ ------------ ------------
Total ($ 1,434,438) ($ 1,769,867) ($ 3,902,156) ($ 4,430,531)
============ ============ ============ ============
(Loss) per common share ($ 0.11) ($ 0.27) ($ 0.36) ($ 0.69)
============ ============ ============ ============
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form
10-QSB for the period ended September 30, 1998 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 373,700
<SECURITIES> 0
<RECEIVABLES> 52,232
<ALLOWANCES> 0
<INVENTORY> 329,053
<CURRENT-ASSETS> 997,174
<PP&E> 7,742,119
<DEPRECIATION> 1,981,615
<TOTAL-ASSETS> 13,073,494
<CURRENT-LIABILITIES> 2,079,918
<BONDS> 0
2,200,000<F1>
1,702,983
<COMMON> 124,577
<OTHER-SE> 36,602,778
<TOTAL-LIABILITY-AND-EQUITY> 13,073,494
<SALES> 298,983
<TOTAL-REVENUES> 346,839
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,374,624
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 622,854<F2>
<INCOME-PRETAX> (4,460,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,460,317)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.36)
<FN>
<F1> Represents balance of Series B 7% Convertible Preferred Stock [Tag #21]
<F2> Interest expense includes $497,603 of amortization of debt discount and
expenses, a non-cash item [Tag # 32]
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form
10-QSB for the period ended September 30, 1997 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,573,958
<SECURITIES> 0
<RECEIVABLES> 11,281
<ALLOWANCES> 0
<INVENTORY> 441,578
<CURRENT-ASSETS> 3,293,731
<PP&E> 6,616,110
<DEPRECIATION> 1,344,730
<TOTAL-ASSETS> 9,627,534
<CURRENT-LIABILITIES> 1,837,741<F1>
<BONDS> 6,421,525<F2>
0
1,842,483
<COMMON> 61,704
<OTHER-SE> 23,882,758
<TOTAL-LIABILITY-AND-EQUITY> 9,627,534
<SALES> 411,467
<TOTAL-REVENUES> 411,467
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,876,379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,140,439<F3>
<INCOME-PRETAX> (5,535,582)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,535,582)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> (0.69)
<FN>
<F1> Current liabilities include current maturities of long-term
debt-stockholders of which $1,495,000 was due March 31, 1998, as amended is
due to officers or directors [Tag # 19]
<F2> Represents balance of 5% Convertible Debentures, net of unamortized
discount of $83,475
<F3> Interest expense includes $1,032,465 of amortization of debt discount and
expenses, a non-cash item [Tag # 32]
</FN>
</TABLE>
