================================================================================
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 March 31, 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 May 13, 1998:
Common Stock $.01 par value 12,451,206
---------------------------
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 March 31, 1998(unaudited) and
December 31, 1997..................................................2
Statements of Operations (unaudited) for the three months
ended March 31, 1998 and 1997......................................3
Statements of Cash Flows (unaudited) for the three months
ended March 31, 1998 and 1997......................................4
Notes to Financial Statements (unaudited)............................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................7
Part II - Other Information
- ---------------------------
Item 2. Changes in Securities...............................................10
Item 6. Exhibits and Reports on Form 8-K....................................10
Signature....................................................................11
<PAGE>
COMPOSITECH LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,137,829 $ 624,254
Short-term investments
Accounts receivable trade - net 58,165 44,725
Accounts receivable from joint venture 119,123 201,382
Inventories 377,921 401,922
Prepaid expenses and other 181,110 97,371
------------ ------------
Total current assets 1,874,148 1,369,654
Property and equipment at cost - net 5,150,097 5,276,672
Investment in Canadian joint venture - net of accumulated
amortization of $8,200 (1998) 5,664,240 5,631,561
Advance payments on construction-in-progress 405,209 274,253
Deferred debt expense - net of accumulated amortization of $423,231 (1998)
and $ 154,858 (1997) 190,580 458,953
Other assets and other deferred charges, net of accumulated amortization
of $9,637 (1998) and $6,846 (1997) 132,005 134,796
------------ ------------
Total assets $ 13,416,279 $ 13,145,889
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 337,857 $ 609,278
Deferred salaries - $627,943 (1998) and $1,500 (1997) to officers 856,820 192,571
Accrued interest - $141,339 (1998) and $ 916 (1997) to stockholders 152,720 26,017
Other accrued liabilities 372,518 370,707
Current maturities of long-term debt - directors/stockholders 1,595,000
------------ ------------
Total current liabilities 3,314,915 1,198,573
Non-current liabilities:
Notes payable to directors/stockholders 1,595,000
5% Convertible debentures, net of unamortized discount
of $27,891 (1998) and $67,650 (1997) 2,652,109 5,762,350
Deferred salaries - officers 551,558
Accrued interest - directors/stockholders 100,159
Capital lease obligations 38,457 49,047
Other liabilities 37,500 37,500
------------ ------------
Total non-current liabilities 2,728,066 8,095,614
Deferred licensing income 917,084
Commitments
Stockholders' equity :
Undesignated preferred stock; authorized 4,000,000 shares,
none issued and outstanding
Series A convertible preferred stock, par value $3.00 per share;
authorized shares - 714,161, issued and outstanding shares - 580,661 (1998)
and 614,161 (1997) 1,741,983 1,842,483
Common stock, par value $.01 per share; authorized shares - 25,000,000,
issued and outstanding shares - 10,577,786 (1998) and 7,767,921 (1997) 105,778 77,679
Additional paid-in capital 34,250,001 30,075,100
Deficit (29,641,548) (28,143,560)
------------ ------------
Total stockholders' equity 6,456,214 3,851,702
------------ ------------
Total liabilities and stockholders' equity $ 13,416,279 $ 13,145,889
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31
--------------------------
1998 1997
----------- -----------
Revenues:
Sales $ 86,401 $ 151,999
Licensing income 12,916
----------- -----------
Total revenues 99,317 151,999
Costs and expenses:
Manufacturing expenses 960,562 765,723
Selling, general and administrative 292,252 422,491
Research and development 40,613 23,008
----------- -----------
Total operating expenses 1,293,427 1,211,222
----------- -----------
(Loss) from operations (1,194,110) (1,059,223)
Other income (expenses):
Interest income 16,782 25,588
Interest expense
(net of interest capitalized of $4,000 (1997)) (95,479) (40,977)
Amortization of debt discount and expenses (308,132)
Loss on disposal of property and equipment (8,274)
Other income (expense) 50,346 2,218
----------- -----------
(344,757) (13,171)
(Loss) before provision for income taxes (1,538,867) (1,072,394)
----------- -----------
Net (loss) from operations before equity in
income (loss) of joint ventures (1,538,867) (1,072,394)
Equity in income (loss) of Canadian joint venture 40,879
----------- -----------
Net (loss) ($1,497,988) ($1,072,394)
=========== ===========
Net (loss) per share ($ 0.16) ($ 0.17)
=========== ===========
Shares used in computing net (loss) per share 9,474,190 6,128,161
=========== ===========
See accompanying notes.
3
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) ($1,497,988) ($1,072,394)
Adjustments to reconcile net (loss) to net cash and
cash equivalents used in operating activities:
Depreciation and amortization, including capital leases 176,495 62,565
Loss on disposal of property and equipment 8,274
Amortization of debt discount and expenses 308,132
Equity in net income of Canadian joint venture (40,879)
Changes in operating assets and liabilities:
Accounts receivable trade - net (13,440) 41,815
Accounts receivable from Canadian joint venture 82,259
Inventories 24,001 (49,418)
Prepaid expenses and other (83,739) (2,468)
Other assets and other deferred charges (633)
Accounts payable (271,421) (125,800)
Deferred salaries 112,691
Accrued interest 26,544 37,516
Deferred licensing income 917,084
Other accrued liabilities 2,175 (21,813)
----------- -----------
Net cash and cash equivalents (used)
in operating activities (249,812) (1,130,630)
Cash Flows from Investing Activities
Purchase of property and equipment - net (47,203) (726,800)
Advance payments on construction-in-progress (130,956) 87,512
Short term investments - maturities 2,384,700
----------- -----------
Net cash and cash equivalents provided by (used in)
investing activities (178,159) 1,745,412
Cash Flows from Financing Activities
Net proceeds from issuance of common stock 952,500
Payment of capital lease obligations (10,954)
----------- -----------
Net cash and cash equivalents provided by financing
activities 941,546
----------- -----------
Increase in cash and cash equivalents 513,575 614,782
Cash and cash equivalents at beginning of period 624,254 673,084
----------- -----------
Cash and cash equivalents at end of period $ 1,137,829 $ 1,287,866
=========== ===========
Supplemental disclosures of cash flow information
Noncash financing activities:
Capital lease obligations for property and equipment acquisitions $ 91,336
===========
Cash paid for:
Interest $ 68,934 $ 4,201
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
COMPOSITECH LTD.
Notes to Financial Statements
(Unaudited)
March 31, 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 three-month period ended March 31, 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 $500,000 in the joint venture, upon the achievement of certain
milestones. As part of the transaction, the Company received $960,000, net of
expenses, in a private placement from the joint venture, and issued 610,868
shares of Common Stock, including commissions and will issue a like amount of
shares to the joint venture for another $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 $12,916 in the three months ended March 31, 1998
relates to the Taiwanese joint venture.
Reclassifications
Certain reclassifications have been made to the financial statements for
the three months ended March 31, 1997 to conform to presentations for the three
months ended March 31, 1998.
5
<PAGE>
Note 2 - Common Stock Issuances and Stock Options
During January 1998, the Company granted to selected officers and key
employees options to purchase 243,000 shares of common stock at $1.375 per
share, the market value at the date of the grant. During February 1998, the
Company granted to selected directors and key employees options to purchase
17,000 shares of common stock at $2.00 per share, the market value at the date
of the grant.
In the three months ended March 31, 1998, 33,500 shares of the Series A
convertible preferred stock were converted at the existing conversion rate into
16,750 shares of common stock, resulting in a decrease in Series A convertible
preferred stock of $100,500, an increase in common stock of $168 and an increase
in additional paid-in capital of $100,332.
During the three months ended March 31, 1998, $3,150,000 face amount of
Debentures were converted into 2,182,247 shares of common stock, resulting in
increases in common stock of $21,822 and additional paid-in capital of
$3,120,678, net of expenses.
Note 3 - Subsequent Events
During April 1998, the remaining balance of $2,680,000 face amount of
Debentures were converted into 1,873,420 shares of common stock, resulting in
increases of common stock of $18,734 and additional paid-in capital of
$2,661,266.
6
<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 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of a number
of important factors. For a discussion of important factors that could affect
the Company's results, 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
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, designed and assembled an
initial production module to produce 36" x 48" laminates.
In 1997, the Company had been producing and selling 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. 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 production-scale expansion 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 decreased to $86,401 for the three months ended March
31, 1998 from $151,999 for the three months ended March 31,1997. The decrease is
the result of the continued delay in or cancellation of customers' programs for
which Compositech's laminates were qualified.
Licensing income, net of expenses, for the three months ended March 31,
1998 totaled $12,916, relating to the Taiwanese joint venture. There was no
licensing income in the three months ended March 31, 1997.
7
<PAGE>
Research and development expenses increased to $40,613 for the three months
ended March 31, 1998 from $23,008 for the three months ended March 31, 1997,
reflecting the company's development efforts on new products. Manufacturing
expenses increased to $960,562 for the three month period ended March 31, 1998
from $765,723 for the three months ended March 31, 1997, reflecting the higher
levels of expenditures related to new product development and process
enhancements during the first quarter of 1998 as well as the addition of
manufacturing management personnel and related expenses to meet anticipated
increases in production levels.
Selling, general and administrative expenses decreased to $292,252 for the
three months ended March 31, 1998 from $422,491 for the three months ended March
31, 1997. Decreases in legal and professional fees and patent/trademark expenses
were partially offset by costs incurred in relation to the recruitment efforts
for a new chief executive officer. During the first quarter of 1998,
approximately $113,000 of selling, general and administrative expenses were
charged to the Canadian joint venture, in accordance with the joint venture
agreements.
Interest expense (net of interest capitalized) increased to $95,479 for the
three months ended March 31, 1998 from $40,977 for the three months ended March
31, 1997. The increase in the three-month period is related to the borrowing
cost of the 5% convertible debentures, which was not present in the first
quarter of 1997. Amortization of debt discount and expenses totaled $308,132 for
the three months ended March 31, 1998, reflecting the amortization of costs
associated with the 5% convertible debentures, including accelerated
amortization of $263,257 as a result of debenture conversions during the three
months ended March 31, 1998. Other income increased to $50,346 for the three
months ended March 31, 1998 from $2,218 for the three months ended March 31,
1997, reflecting the receipt of a property tax refund applicable to prior fiscal
periods as well as adjustments of prior period professional fee charges.
The equity in the profit of the Canadian joint venture during the first
quarter of 1998, totaling $40,879, 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 $1,497,988 for
the three months ended March 31, 1998 compared with $1,072,394 for the three
months ended March 31, 1997. The increased loss 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.
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 March 31, 1998, the Company had
approximately $1,138,000 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 $900,000 in the second quarter of 1998, net of
8
<PAGE>
expenses. However, the Company will require additional funding to cover current
operations and expenditures of approximately $500,000 for additional production
equipment until revenues from operations are sufficient for these purposes.
Current operations require approximately $400,000 a month based on current
levels of production and sales. 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. The Company plans to obtain $5 million or more from
these sources. 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.
Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997
Net cash and cash equivalents used in operating activities decreased to
$249,812 for the three months ended March 31, 1998 from $1,130,630 for the three
months ended March 31, 1997. The licensing fees received in cash from the Taiwan
joint venture totaling $930,000, net of expenses, was the primary source of
funds provided by operating activities for the three months ended March 31,
1998, with $917,084 deferred to future periods for financial reporting purposes.
Increases in deferred salaries and accrued interest for this same period were
offset by a decrease in accounts payable.
Net cash and cash equivalents used in investing activity for the three
months ended March 31, 1998 amounted to $178,159, compared with net cash and
cash equivalents provided by investing activities of $1,745,412 for the three
months ended March 31, 1997. Capital expenditures for equipment and advance
payments for equipment decreased to $178,159 for the three months ended March
31, 1998, compared with $639,288 for the three months ended March 31, 1997. The
decrease is attributable to the decreased rate of acquisition of additional
production modules that constituted a significant portion of the expansion
program and the upgrading of existing equipment that concluded in the second
half of 1997. Maturities of short term U.S. Government securities during the
three months ended March 31, 1997 accounted for $2,384,700 of funds provided by
investing activities.
Cash flows from financing activities increased to $941,546 for the three
months ended March 31, 1998. The sale of stock to the Taiwanese joint venture,
net of expenses, accounted for $952,500 of funds provided by financing
activities, reduced by the payment of capital lease obligations of $10,954.
There were no cash flows from financing activities during the first quarter of
1997.
9
<PAGE>
Part II - Other Information
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities.
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"). As part of the transaction, the Taiwanese joint venture acquired
587,372 shares ( the "Shares" ) of the Company's common stock for $1 million in
a private placement and agreed to buy a like amount of shares for another $1
million within 30 days following approval of the joint venture license by the
science park where it is proposed to be located. The sale of the Shares 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
None
All other items required in Part II have been filed previously or are not
applicable for the quarter ended March 31, 1998.
10
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPOSITECH LTD.
Dated: May 15, 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)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from form
10-QSB for the quarter ended March 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,137,829
<SECURITIES> 0
<RECEIVABLES> 58,165
<ALLOWANCES> 0
<INVENTORY> 377,921
<CURRENT-ASSETS> 1,874,148
<PP&E> 6,798,343
<DEPRECIATION> 1,648,246
<TOTAL-ASSETS> 13,416,279
<CURRENT-LIABILITIES> 3,392,411 <F1>
<BONDS> 2,652,109
0
1,741,983
<COMMON> 105,778
<OTHER-SE> 34,250,001
<TOTAL-LIABILITY-AND-EQUITY> 13,416,279
<SALES> 86,401
<TOTAL-REVENUES> 99,317
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,293,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 403,611 <F2>
<INCOME-PRETAX> (1,497,988)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,497,988)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> 0
<FN>
(1) Current liabilities include current maturities of long-term
debt-stockholders of which $1,495,000 due January 2, 1999, as amended, is
due to officers or directors
(2) Interest Expense includes $308,132 of Amortization of Debt Discount and
Expenses, a non-cash item
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from form
10-QSB for the quarter ended March 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,287,866
<SECURITIES> 0
<RECEIVABLES> 24,478
<ALLOWANCES> 0
<INVENTORY> 261,392
<CURRENT-ASSETS> 1,643,084
<PP&E> 5,718,922
<DEPRECIATION> 1,091,211
<TOTAL-ASSETS> 6,356,715
<CURRENT-LIABILITIES> 3,208,211 <F1>
<BONDS> 0
0
1,932,483
<COMMON> 61,389
<OTHER-SE> 22,678,733
<TOTAL-LIABILITY-AND-EQUITY> 6,356,715
<SALES> 151,999
<TOTAL-REVENUES> 151,999
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,211,222
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,977
<INCOME-PRETAX> (1,072,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,072,394)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> 0
<FN>
(1) Current liabilites include current maturities of long-term
dobt-stockholders of which $1,495,000 due March 31, 1998, as amended, is
due to officers or directors.
</FN>
</TABLE>
