U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
Commission File Number 0-20701
Compositech Ltd.
(Name of small business issuer in its charter)
Delaware 11-2710467
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Ricefield Lane, Hauppauge, New York 11788
(Address of principal executive offices)
Issuer's telephone number: (516) 436-5200
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Redeemable Common Stock Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for fiscal year ended December 31, 1997: $507,403
As of March 17, 1998, there were 10,188,380 shares of the registrant's
Common Stock, $.01 par value outstanding. The aggregate market value of Common
Stock held by non-affiliates of the registrant, as of March 17, 1998 was
approximately $19,740,000.
Documents Incorporated By Reference: Portions of the issuer's Proxy Statement
for its 1998 Annual Meeting of Stockholders scheduled to be held on June 23,
1998, are incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
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PART I
Item 1. Description of Business
General
Compositech Ltd. (the "Company" or "Compositech") was founded in 1984 by Jonas
Medney and Fred Klimpl, its Chairman and President, respectively, to develop and
market innovative superior copper-clad fiberglass epoxy laminates used to make
printed circuit boards required by the electronics industry. The Company was
incorporated in the State of New York on June 13, 1984 and was merged into a
newly formed Delaware corporation on January 29, 1988. The primary innovation of
Compositech was to replace the fiberglass cloth component of the laminate with a
more modern and structurally efficient fiberglass core resulting from a uniform,
orthogonally layered construction. The Company has received grants of 26 patents
covering its products, processes and apparatus, including five in the United
States, and has submitted eight additional patent applications. The most recent
patents granted were three in Japan and one in Hong Kong. The Company was a
development stage company through 1996. Based on the level of production and
sales for 1997, the Company has concluded it was no longer in the development
stage as of January 1, 1997. Based on its own benchmark testing and evaluations
by customers and other potential users, the Company believes that it has
succeeded in developing a laminate that is superior to competitive copper-clad
fiberglass epoxy laminates.
On July 9, 1996, the Company received net proceeds of approximately $9.9 million
from its initial public offering ("IPO"). Approximately $4.3 million was used to
reduce debt substantially and pay accrued interest. The Company used the
remaining proceeds to add production modules to its existing equipment and for
working capital.
From May through August 1997, the Company issued $6,505,000 of 5% Convertible
Debentures (the "Debentures") in a private placement and received net proceeds
of approximately $5.9 million for working capital and to obtain additional
production equipment. Through March 15, 1998, $3,295,000 of debentures were
converted into 2,324,132 shares of common stock.
The Company's innovative laminates are produced using proprietary processes and
machinery, designed by the Company's engineering staff. The patents on the
laminates, processes and apparatus are supplemented with other proprietary
technology unprotected by patents and considered by the Company to be of
substantial value.
Compositech's laminate construction is structurally more efficient than
competitive copper-clad fiberglass epoxy laminates designated "FR-4", which is
the industry standard, resulting in enhanced smoothness and greater dimensional
stability. The Company believes, based on results of customers' evaluations,
that its improved products can economically replace the fiberglass woven cloth
epoxy laminates currently used in the electronics industry. According to the
Institute for Interconnecting and Packaging Electronic Circuits (the "IPC"),
this market exceeded $2.9 billion in 1996.
The Company successfully constructed, debugged and operated its first pilot
plant production equipment for laminates with a panel size of 24" x 24" in 1991.
In 1991 and 1992, Compositech recruited an initial sales staff to develop the
market potential of its product, continued refining its product and designing
its production equipment to manufacture laminates with a panel size of 36" x 48"
and initiated a sampling program targeted at major potential customers. In 1994,
the Company started up and began debugging its first production module to
manufacture 36" x 48" laminates and, in 1995 and 1996, produced laminates on
this equipment in limited quantities for the purpose of making modifications to
the production processes constituting the module and reformulating the laminates
produced by the module. In the last quarter of 1996, the Company began
installation of advanced production equipment which was completed in 1997.
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Throughout 1997, the Company continued to adjust and enhance its production
equipment and its manufacturing processes. The Company also worked on and solved
problems with incoming materials and interior environment which affected
manufacturing yields. Sales consisted of qualifying orders and small production
runs.
On October 16, 1997, the Company closed its transaction with four Quebec
institutional investors (collectively, the " Quebec Investors") to form a 50/50
joint venture for the establishment of a plant in the greater Montreal area to
manufacture Compositech's laminates. The investor group is comprised of four
institutional investors: Societe generale de financement du Quebec, Fonds de
solidarite des travailleurs du Quebec (F.T.Q.), Societe Innovatech du Grand
Montreal and Fonds regional de solidarite Ile de Montreal. The project cost is
estimated to be approximately $24.5 million with an initial capitalization by
the parties of approximately $11 million with the balance to be in debt
financing for which firm commitments have been obtained from the National Bank
of Canada and governmental agencies. The Company's approximately $5.4 million
capital investment in the joint venture was funded by the Quebec Investors
purchasing 1,066,192 shares of the Company's Common Stock. The Quebec Investors
have an option to sell their 50% interest in the joint venture to the Company
for a like number of shares and, under certain circumstances, the Company has an
option to purchase the interest for the same number of shares. The plant is
planned to start production in 1999 with an anticipated annual production
capacity of approximately 10 million square feet.
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 and, will in turn, invest $500,000 in the joint
venture, upon the achievement of certain milestones. As part of the transaction,
the joint venture acquired 587,372 shares of the Company's common stock for $1
million 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 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.
Industry Overview
Initially, most circuit boards had circuits (traces) on one or two sides. In the
last ten years, rapid technological advances in both semiconductor design and
fabrication techniques have placed significant demands on the performance of
printed circuit boards. Greater circuit density, complexity and miniaturization
have increased demand for more sophisticated printed circuit boards. In response
to this demand, multilayer printed circuit boards were developed which
incorporate multiple layers of metallic traces. The several layers of circuitry
are aligned and bonded together in a stack to form a multilayer board with both
horizontal and vertical electrical interconnections. Further circuit board
sophistication is currently being achieved by decreasing the width and
separation of the traces, drilling and plating smaller holes to connect the
internal trace layers and precisely situating the traces and pads on the board
surface to accommodate surface mount components.
These trends in the printed circuit board industry have placed increasingly
rigorous demands on the electrical, thermal, chemical and mechanical properties
of laminates. Mechanical properties must be increasingly more uniform and
tightly controlled in order to align the various layers in a multilayer printed
circuit board. Electrical properties of laminates must be highly consistent and
predictable in order to avoid circuit timing malfunctions. Thermal stability is
also critical for attaching the components and for dense, high speed systems,
because of the heat generated.
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Compositech's technology is targeted at the fiberglass laminate segment of the
laminate industry. According to the IPC, in 1996 the single- and double-sided
laminate market was approximately $1.2 billion and the multilayer/high
performance laminate market was approximately $1.7 billion, totaling $2.9
billion. In these two segments, the United States' share was approximately $790
million experiencing a growth rate of 20% for 1996.
Products
Printed Circuit Board Laminates. Printed circuit boards are the basic platforms
used to interconnect the microprocessors, integrated circuits and other
components essential to the functioning of electronic products. They consist of
a pattern of electrical circuitry resulting from etching copper foil laminated
to a composite made of insulating materials usually comprised of fiberglass and
epoxy. The laminate itself, therefore, is the copper-clad, fiberglass and epoxy
core from which printed circuit boards are produced.
Compositech's Laminates. CL200+ is the introductory Compositech laminate. This
laminate uses the same basic raw materials as conventional laminates: fiberglass
yarn, epoxy resin and copper foil. Compositech combines these materials into a
unique, more efficient laminate. Conventional laminates are made from woven
fiberglass cloth in which the yarn is twisted and crimped in the weaving
process. The resultant weave pattern is impressed into the copper foil, thereby
roughening the surface of the laminate. In the construction of Compositech's
laminates, the filaments of fiberglass are wound in orthogonal layers of flat,
continuous parallel filaments. This construction creates the enhanced smoothness
and improved dimensional stability of Compositech's laminates.
High processing temperature tolerance is necessary for soldering components to
circuit boards. CL200+ uses a proprietary epoxy resin formulation that,
according to Company tests, results in a thermal rating over 200(degree)C,
principally because of the formulation, which is generally 20(degree)C to
80(degree)C higher than other copper-clad fiberglass epoxy laminates. Certain
laminates produced from materials other than fiberglass epoxy, addressing a
small, higher cost end of the market, have thermal ratings which equal or exceed
those of the Company's introductory CL200+ laminates.
Management believes that the benefits of Compositech's laminates should enable
the printed circuit board industry to:
o Decrease costs through reducing waste in the manufacture of existing
boards because the improved dimensional stability, temperature
tolerances and enhanced smoothness increase manufacturers' yields.
o Accelerate the development of new products requiring denser circuitry
by permitting finer lines and smaller pads. A pad is a portion of a
conductive pattern which is usually, but not exclusively, used for the
connection and/or attachment of components.
Compositech's Strategy
The Company's objective is to be the leading manufacturer of copper-clad
fiberglass epoxy laminates for electronics equipment. The Company expects to
achieve this position through the effective exploitation of its patented and
proprietary products and processes.
Management has targeted the $1.7 billion multilayer laminate market sector for
its initial sales efforts to establish its laminates as the leading-edge
technology for current and future economical production of printed circuit
boards.
Management believes that the strategic value of the Company's products to its
prospective customers is to
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enable them economically to produce increasingly sophisticated circuit boards in
a shorter time cycle. This combination of benefits is a basic element of
Compositech's product technology thrust.
The Company has patented and developed a flexible manufacturing process that it
believes can be exceptionally responsive to the ever-changing product iterations
required by the rapid introduction of new designs into the electronics market.
The manufacturing capacity can be expanded incrementally in response to
increased market demand.
Management believes that the Company's technology has global potential.
According to IPC data, approximately 70% of the world laminate market is outside
of North America. The Company plans to export its products and form strategic
alliances to manufacture and market its laminates internationally.
The foregoing strategic objectives represent anticipated accomplishments
dependent on future events. As in the case of all forward looking statements,
the Company can not ensure that it will achieve these goals.
Marketing and Customers
The Company's marketing efforts are directed to establishing good working
relations with leading-edge producers of circuit boards. According to the IPC,
there are over 670 manufacturers of printed circuit boards in North America with
18 companies comprising over one-third of the market. The Company has sold its
laminates principally on a test basis to a select group of these companies
considered to be the key companies for Compositech's growth. During the past
three years, Compositech has encouraged benchmark comparisons of its laminates
with current laminates which have included qualities such as dimensional
stability, smoothness, flatness and thermal processing. In virtually all of
these evaluations, CL200+ has proven superior to current laminates. These
results have led several manufacturers to begin to use CL200+ for current
production applications in limited quantities. Recently, sales have been
affected by delays in or cancellation of customers' program for which
Compositech's laminates had been qualified. These companies, part of the 18
companies mentioned above, include AMP Incorporated ("AMP"), VIASYSTEMS
Technologies Corp., successor to Lucent Technologies, Inc. (formerly part of
AT&T Corp.), HADCO Corporation, Merix Corporation, North American Printed
Circuits (a division of TYCO International Ltd.) and Teradyne, Inc. Customers
benefit from increased production yield primarily by reducing waste caused by
circuitry misalignment.
Compositech's laminates are designed and have proven to be directly
substitutable for conventional laminates in the circuit board production process
as demonstrated by their use in production by customers. This compatibility
enables the circuit board manufacturer to substitute Compositech's laminates
without the need for additional equipment or new process technology.
The Company markets to circuit board manufacturers in the United States and
Canada with its own direct sales force recently supplemented by two independent
sales representatives. The Company's own sales force currently consists of its
President, its Vice President of Sales and a marketing associate. The Company
plans to use additional independent sales representatives and distributors to
expand sales.
Although the Company does not believe that ultimately its business will be
dependent upon a single customer, in view of limited production capacity the
Company currently is focusing its efforts on a number of select accounts. In
1997, HADCO Corporation and Merix Corporation represented 75% and 18%
respectively, of the Company's net sales. The printed circuit board industry
generally follows a "just-in-time" strategy by purchasing laminates only as they
are required for production runs. Accordingly, the Company currently does not
have a significant backlog of sales commitments as the orders are matched to the
Company's present production capacity. The Company expects the backlog to
increase in relation to its planned production expansion.
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Competition
The laminate business is highly competitive. The Company has many
competitors of varying sizes and financial resources located in the United
States, Western Europe and the Far East. Competition in the laminate market is
based upon factors such as product quality, performance, technological
capability, responsiveness to customers, delivery, service and price. The
Company believes there are more than 40 competitors worldwide, with more than
ten in the United States. The Company believes that its major domestic and
international competitors are ADI/Isola, AlliedSignal Laminate Systems (a
subsidiary of AlliedSignal, Inc.), Arlon Inc., General Electric Company, Hitachi
Chemical Co. Inc., Matsushita Electric Industrial Co., Nan Ya Plastics Corp.,
Nelco International Corp. (a subsidiary of Park Electrochemical Corp.), Polyclad
Laminates, Inc. (a subsidiary of Cookson Group), Sumitomo Bakelite Co. Ltd., and
Toshiba Chemical Corp. The Company's competitors consist of companies that are
usually divisions or subsidiaries of some of the world's leading electronics and
manufacturing concerns and have significantly greater financial resources than
the Company.
The Company believes its patented and proprietary technology will enable it
to become an effective competitor by offering customers products with a higher
value. The unique physical characteristics of the Company's products should, in
the Company's opinion, allow it to penetrate the market and increase sales.
However, there is no assurance that the Company's products will prove to be
economically competitive or that the Company will continue to develop
technologically competitive products in the future.
Manufacturing
The Company occupies a leased building at 120 Ricefield Lane, Hauppauge,
New York, which includes its corporate offices, laboratory, machine shop,
engineering offices and manufacturing operations. The building is large enough
to allow the Company's production line to be expanded to meet near-term needs.
The technologically advanced products manufactured by the Company require clean
environments to ensure high yields. Clean rooms are utilized by the Company in
certain areas of the production line to control contamination from small
particles.
Compositech's manufacturing process is unique and patented. The
manufacturing equipment has been designed by the Company's engineering staff.
Much of the equipment incorporates proprietary designs including hardware and
software. Management believes that the Company's manufacturing process
eliminates many manufacturing steps compared to the conventional manufacturing
process, including weaving the fiberglass cloth.
The Company's manufacturing process enables the Company to control the
consistency of mechanical, thermal and electrical properties of laminates in
various thicknesses. In addition, the Company's process eliminates the use of
solvents as an integral part of the manufacturing process although it uses small
amounts of solvents for the sole purpose of cleaning some of its equipment.
Compositech's CL200+ laminate is comprised of copper, fiberglass and epoxy.
Other combinations of materials usable in this process include aramid fibers,
quartz fibers, carbon fibers, cyanate ester resins, polyimide resins and other
conductive metal foils.
The expansion of the Company's production facilities in 1997 and increments
planned for 1998 increase its annual capacity significantly. This expansion is
the first production-scale expansion undertaken by the Company, and consequently
no assurances can be made that the Company's production facilities will meet the
Company's production targets in a timely way or that the resultant product will
meet the high commercial standard needed for successful market penetration.
Furthermore, the expanded production facilities may not be able to provide
adequate efficiency and yield.
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Materials and Sources of Supplies
The principal materials used in the manufacture of the Company's laminates
are copper foil, fiberglass yarn and specially formulated resins and chemicals.
The Company's policy is to identify and concentrate on a limited number of
chosen suppliers. The Company's major suppliers are Circuit Foil USA, Inc. for
copper foil; Owens Corning for fiberglass yarn; John C. Dolph Company for
resins; and Lonza Inc. for certain chemicals. The Company attempts to develop
and maintain close working relationships with those chosen suppliers who comply
with the Company's stringent technical requirements and specifications. The
Company has identified alternative sources of supply for each of the required
materials. However, there exists a limited number of qualified suppliers of
these materials, and although the Company considers its relationships with its
suppliers to be satisfactory, a disruption of the supply of material from one or
more of the Company's principal suppliers could adversely affect its business.
Substitutes for some of these materials are not readily available, and an
inability to obtain essential materials, if prolonged, could materially
adversely affect the business of the Company.
In 1995, some raw material shortages were reported to the Company by
certain of its suppliers and in 1997, the Company encountered high levels of
defects in incoming copper foil. Although the Company is not experiencing any
such shortages or high levels of defects currently, no assurance can be made
that it can obtain adequate quality supplies necessary for its planned
expansion.
Patents and Proprietary Information
The Company continues to build a patent estate to protect its technology.
Twenty-six patents have been granted in the United States and internationally.
The U.S. patents granted expire from 2007 to 2012. The foreign patents generally
have expiration dates from 2004 to 2009. Eight patent applications in the U.S.
and internationally are currently pending. These patents and applications cover
the unique laminate product and the process and equipment used for producing the
laminates. The patents also cover a precision multilayer process and a circuit
transfer process. Additional inventions have been disclosed to the Company's
patent attorneys and may be the subject of future patent applications.
In addition, the Company has developed extensive proprietary information
considered to be of substantial value. The Company has no patents for this
proprietary information. The Company believes that, although such information,
techniques and expertise are subject to misappropriation or obsolescence,
development of improved methods, processes and techniques by the Company will
continue on an ongoing basis.
In June 1990, HT Troplast AG ("HT"), a former manufacturer of laminates for
printed circuit boards and an indirect subsidiary of the Veba Group, a German
industrial group, invested $6 million in the Company and agreed to provide
technical and marketing assistance at no cost for a 25% equity share in the
Company and the exclusive right to produce and market Compositech's laminates in
Europe, the countries of the former Soviet Union and Turkey. To date, HT has
provided assistance with product quality standardization, customer evaluations,
laboratory testing, engineering, patent advice, research, manufacturing cost
comparisons, Asian prospective licensee contacts and production management. In
accordance with the corporate strategy of its parent company, HT discontinued
its manufacturing operations for epoxy and fiberglass laminates in 1994 and for
all laminates in 1995, but it continues to make technical and marketing
assistance available to the Company. Pursuant to existing agreements with HT,
the Company has the obligation to sell in the above described territories only
through HT and HT continues to retain Board representation.
In February 1993, AMP and AKZO Electronics B.V. ("AMP/AKZO"), which at the
time were operating a joint venture, loaned the Company $2.8 million under
nonrecourse notes collateralized by two
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licenses. The Company used these funds in its development program for production
equipment for 36" x 48" laminates. In May 1994, the above-mentioned licenses
were canceled, and AMP/AKZO provided an additional $2 million and converted the
$2.8 million note plus approximately $213,000 in interest into a payment to
Compositech for immunity from prosecution under the Company's product patent in
order to permit the manufacture of laminates using their own process which was
under development. The immunity agreement does not cover the Company's patented
process or apparatus.
The Company expended approximately $77,000 and $153,000 for research and
development during the years ended December 31, 1997 and 1996, respectively,
reflecting the shift in emphasis to manufacturing activities.
Environmental Matters
Unlike other laminate manufacturing operations, Compositech does not use
solvents as an integral part of its manufacturing process. However, the Company
uses copper and chemicals in its manufacturing process and limited amounts of
solvents for the sole purpose of cleaning some of its equipment and is subject
to a variety of applicable environmental laws. The Company believes that its
facilities comply in all material respects with applicable federal, state and
local environmental laws and believes that costs arising from compliance with
existing environmental laws will not have a material adverse effect on the
Company's operations. However, environmental laws could become more stringent
over time, imposing greater compliance costs and increasing risks and penalties
associated with a violation.
Employees
The Company has 75 full-time employees. None of the employees is subject to
collective bargaining agreements. Management considers its labor relations to be
satisfactory and believes that there is an adequate pool of labor available to
satisfy foreseeable hiring needs.
Important Factors Regarding Future Results
Information provided by the Company, including information contained in
this Annual Report, or by its spokespersons from time to time may contain
forward-looking statements concerning projected financial performance, market
and industry segment growth, product development and commercialization or other
aspects of future operations. Such statements, made pursuant to the safe harbor
established by recent securities legislation, are based on the assumptions and
expectations of the Company's management at the time such statements are made.
The Company cautions investors that its performance (and, therefore, any
forward-looking statement) is subject to risks and uncertainties. Various
important factors, including but not limited to the following, may cause the
Company's future results to differ materially from those projected in any
forward-looking statement.
Development Stage Company Until December 31, 1996; Ability to Continue as Going
Concern; Uncertainty of Future Financial Results
The Company was a development stage company through December 31, 1996 and
has had limited revenues from the sale of laminates, has incurred significant
losses and has had substantial negative cash flow since its inception. As of
December 31, 1997, the Company had an accumulated deficit of $27,971,370. 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 will require additional funding to cover operating expenses and
expenditures for additional production equipment until revenues from operations
are sufficient for these purposes. The Company expects that significant
operating losses will continue for a substantial part, or all, of 1998. 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
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sufficient revenues to achieve profitable operations.
Need for Additional Financing
The Company's available funds, without giving effect to alternative sources
of revenue, is not sufficient to raise the Company's production level to
profitability or provide sufficient working capital for expansion of sales. The
Company will need additional funding for operations in 1998 and additional
funding is being sought. 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 additional funding will
be sufficient and available or, if it is available, that it will be available on
acceptable terms. If additional funds are raised through the issuance of equity
securities or securities convertible into equities, the percentage ownership of
then current stockholders of the Company will be reduced and such securities may
have rights, preferences or privileges senior to those of the holders of Common
Stock. If adequate funds are not available to satisfy either short-term or
long-term capital requirements, the Company may be required to limit its
operations significantly.
Liens on Assets and Patents
Notes payable to stockholders of $100,000 and notes payable to
stockholders/directors/officers in the amount of $675,000 due January 2, 1999
(as extended) are collateralized by a second lien on U.S. Patents and Patent
Applications. Notes payable to stockholders/directors/officers in the amount of
$745,000 due January 2, 1999 (as extended) are collateralized by a first lien on
the Company's patents, patent applications and certain production equipment. In
connection with the issuance of 5% Convertible Debentures (the "Debentures"),
the Company granted security interests as follows: Debentures currently
outstanding in the amount of $500,000 are collateralized by certain existing
production equipment (two vacuum molding presses and one winding machine) and
Debentures currently outstanding in the amount of $2,740,000 are partially
collaterialized by a vacuum molding press and capital equipment being bought
with the proceeds of the Debentures. If there is a default under the Debentures
or the notes, the Company could lose all or most of its patents and equipment
thus requiring it to negotiate new and disadvantageous terms or causing it to
cease operations.
Competition
The laminate manufacturing business is highly competitive. The Company's
competitors include major corporations, such as General Electric Company and
AlliedSignal Inc., which have substantial financial, marketing and technical
resources. In 1994, the Company granted patent immunity on its product patents
to AMP and Akzo Electronics Products NV, which, at the time, were operating a
joint venture which was developing a new process to make linear laminates. The
Company may need to raise substantial additional resources to compete
effectively. There is no assurance that the Company will be able to compete
successfully in the future.
Management of Growth
The Company intends to expand significantly its overall level of
operations. Any such expansion, however, is expected to strain the Company's
management, technical, financial and other resources. To manage growth
effectively, the Company must add manufacturing capacity and additional
personnel while maintaining a high level of quality and achieving good
manufacturing efficiency and while expanding, training and managing its employee
base. The Company's failure to add capacity and manage growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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Reliance Upon Key Personnel
The Company believes that its success will depend to a significant extent
upon the efforts of its senior management, including Jonas Medney, its Chairman
and Chief Executive Officer, and Fred E. Klimpl, its President and Chief
Marketing Officer, who together invented its technology and founded the Company.
The Company maintains and is the beneficiary of $2 million key person life
insurance policies on each of Messrs. Medney and Klimpl. The loss or
unavailability of either Mr. Medney or Mr. Klimpl or other senior management
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Single Manufacturing Facility
The Company's current laminate manufacturing operations are centralized in
one building in Hauppauge, New York, although the joint venture in Montreal
plans to build an additional larger plant in Montreal and the joint venture in
Taiwan plans to build a third plant. See Item 1. "Description of Business -
General". Because currently the Company does not operate multiple facilities in
different geographic areas, the ability to service large orders may be affected.
Further, a disruption of the Company's manufacturing operations resulting from
sustained process abnormalities, human error, government intervention or a
natural disaster such as fire, earthquake or flood could cause the Company to
cease or limit its manufacturing operations and consequently have a material
adverse effect on the Company's business, financial condition and results of
operations.
Uncertainty of Production Quality and Production Costs; Process Disruption
The Company has had limited experience in producing laminates on its
production-scale modules. The Company recently added production modules to
achieve higher quantity levels and economies of scale. This expansion is the
first production-scale expansion undertaken by the Company, and consequently no
assurances can be made that the Company's production facilities will meet the
Company's production targets in a timely way or that the resultant product will
meet the high commercial standard needed for successful market penetration.
Furthermore, the expanded production facilities may not be able to provide
adequate efficiencies and produce high yields. In addition, the costs of
production may not be as low as management expects, in which case the Company
may not achieve profitable operations. The Company's business involves highly
complex manufacturing processes which are subject to disruption. Process
disruptions have occurred, resulting in delays in product shipments. Process
disruptions were due to machine breakdowns, lack of adequate interior
atmospheric control of temperature and humidity, electric utility power
failures, problems of breaking in an expanded workforce, contamination generated
during installation of equipment and development of processes, and defective
incoming copper foil. There can be no assurance that disruptions will not occur
in the future. The loss of revenue and earnings to the Company from such a
disruption could have a materially adverse effect on its results of operations.
Significant Customers
Due to limited productive capacity, the Company has been focusing its
efforts on a few select accounts. During 1997, HADCO Corporation and Merix
Corporation accounted for 75% and 18%, respectively, of sales. Loss of these
customers could have a material adverse effect on the Company's business.
Technological Change
The Company's laminates are used in the electronic printed circuit board
industry which could encounter competition from new technologies in the future
and reduce the number of circuit boards required in electronic equipment or
render existing interconnect technology less competitive or obsolete.
10
<PAGE>
Availability of Materials; Price Fluctuations of Raw Materials; Dependence Upon
Third-Party Supplier
Raw materials used by the Company to produce laminates are purchased by the
Company and in certain circumstances the Company bears the risk of price
fluctuations. In addition, shortages of and defects in certain types of
materials have occurred in the past and may occur in the future. During 1997 the
Company experienced defects in incoming copper foil used to make laminates. The
Company has obtained an alternate source of supply and also has explored
solutions with the previous supplier. Future shortages, defects or price
fluctuations in raw materials could have a material adverse effect on the
Company's business, financial condition and results of operations. Owens
Corning, a major fiberglass manufacturer, has developed and continues to develop
products to meet the Company's processing and product requirements. Should this
manufacturer not continue supplying the Company's quality and quantity needs,
the Company would have to secure another supplier. Such event could have a
material adverse effect on the Company's ability to supply customers and could
reduce expected sales and increase the costs of manufacture. No assurances can
be given that an alternative supplier could meet the Company's quality and
quantity needs on satisfactory terms.
Patents and Intellectual Property Protection
The Company believes that its patent estate and its know-how are important
for the protection of its technology. No assurance can be given that any patents
issued to the Company will not be challenged, invalidated or circumvented or
that such patents will provide substantial protection with respect to the
Company's product, process or competitive position. In addition, certain
proprietary information which is considered to be of substantial value is not
covered by patents and, along with the Company's other intellectual property, is
subject to misappropriation or obsolescence. In addition, the Company has
granted certain immunities on its product patents to potential competitors of
the Company, AMP and Akzo Electronics Products NV. The Company, under a license,
has granted HT Troplast AG ("HT"), a principal stockholder of the Company, the
exclusive right to produce and market Compositech's laminates in Europe, the
countries of the former Soviet Union and Turkey. HT has exited the laminate
business and no longer pursues an active role therein. However, the license
remains in effect and can only be assigned to entities in which HT's ultimate
parent company, Veba AG, has directly or indirectly an over 50% interest.
Pursuant to the agreement, the Company has the obligation to sell only through
HT in such territories.
Environmental Compliance
The Company uses copper and chemicals in its manufacturing process and
limited amounts of solvents for the sole purpose of cleaning its equipment.
Although the Company believes that its facility complies in all material
respects with existing environmental laws and regulations, there can be no
assurance that violations will not occur. In the event of any future violations
of environmental law and regulations, the Company could be held liable for
damages and for the cost of remedial actions. In addition, environmental laws
could become more stringent over time, imposing greater compliance costs and
increasing risks and penalties associated with a violation.
Control by Existing Stockholders
As at December 31, 1997, officers, directors and certain other significant
stockholders of the Company owned approximately 52.8% of the Company's Common
Stock and voting preferred stock, including stock options and warrants
exercisable within 60 days. It is expected that these stockholders will continue
to control the management and policies of the Company, including, without
limitation, the power to elect and remove a majority of directors of the Company
and the power to approve any action requiring common stockholder approval. In
addition, some of these officers, directors and other stockholders, in
11
<PAGE>
connection with certain outstanding loans, have a security interest in the
Company's manufacturing equipment and all of the Company's patents and patent
applications or in the Company's U.S. patents and patent applications.
Quotation of Securities on The Nasdaq SmallCap MarketSM; Possible Loss of
Quotation of Securities
The Common Stock and Redeemable Common Stock Warrants (collectively the
"Securities") are quoted on The Nasdaq SmallCap MarketSM. There can be no
assurance that the Company will continue to meet the maintenance criteria for
continued listing of the Securities on The Nasdaq SmallCap MarketSM. The minimum
listing requirements for The Nasdaq SmallCap MarketSM include, among other
criteria, (i) net tangible assets of at least $2.0 million, or market
capitalization of $35 million, or net income of $500,000 (in the latest fiscal
year or two of the last three fiscal years), and (ii) a minimum bid price per
share of $1.00, a market value of the public float of $1.0 million, 300 round
lot shareholders and two market makers. Furthermore, The Nasdaq SmallCap
MarketSM listing and maintenance criteria may become more stringent over time
and thus more difficult for the Company to meet. Failure to meet the maintenance
criteria may result in the discontinuance of the inclusion of the Securities in
The Nasdaq SmallCap MarketSM. In such event, trading, if any, in the Securities
may continue to be conducted in non-Nasdaq over-the-counter markets and
investors may find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Securities. The Common Stock would then be
subject to the risk that it could become characterized as low-priced or "penny
stock," which characterization could severely affect market liquidity.
Penny Stock Regulation
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks generally are equity securities with a price
of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the Nasdaq system, provided that current price
and volume information with respect to transactions in such securities is
provided by the exchange or system). The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
the penny stock rules generally require that prior to a transaction in a penny
stock the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for a
stock that becomes subject to the penny stock rules. If the Common Stock becomes
subject to the penny stock rules, investors may find it more difficult to sell
their Common Stock.
Certain Restrictive Charter and Bylaw Provisions
The Company's Certificate of Incorporation and Bylaws empower the Board of
Directors, without approval of the stockholders, to issue shares of preferred
stock and to fix the rights and preferences thereof, and to prohibit
stockholders of the Company from calling a special meeting unless requested by
at least a majority of the outstanding voting shares. The certificate does not
provide for cumulative voting for election of directors. In addition, the Bylaws
of the Company provide that while the removal of a director or the entire board
of directors, with or without cause, may be accomplished by the holders of the
majority of shares entitled to vote, any director designated by HT may only so
be removed for cause. These provisions could have the effect of deterring
unsolicited takeovers or other business combinations or delaying or preventing
changes in control or management of the Company, including transactions in which
stockholders
12
<PAGE>
might otherwise receive a premium for the securities over then-current market
prices. In addition, these provisions may limit the ability of stockholders to
approve transactions that they may deem to be in their best interests.
Item 2. Description of Property
The Company occupies approximately 33,000 square feet of leased office
space and manufacturing facilities in Hauppauge, New York. The lease for such
space has a five-year term expiring August 31, 2000, with an annual rent of
$156,000 until August 31, 1998 and $168,000 for each of the two years
thereafter, and with a renewal option for an additional five years.
Item 3. Legal Proceedings
No legal proceedings are currently pending against the Company.
Item 4. Submission of Matters to a Vote Of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year.
Item 4A. Directors, Executive Officers, Promoters and Control Persons
The following table lists the Company's current directors and executive
officers.
<TABLE>
<CAPTION>
Name Age Position(s) With the Company
---- --- ----------------------------
<S> <C> <C>
Jonas Medney 69 Director, Chairman
Fred E. Klimpl 63 Director, President and Secretary
Samuel S. Gross 71 Director, Executive Vice President and Treasurer
Willard T. Jackson(1)(2) 70 Director
Pierre Laflamme 51 Director
Robert W. Middleton(2) 59 Director
Heinz-Gerd Reinkemeyer(1) 60 Director
James W. Taylor(1)(2) 79 Director
</TABLE>
- ----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
The following table lists other management personnel:
<TABLE>
<CAPTION>
Name Age Position(s) With the Company
---- --- ----------------------------
<S> <C> <C>
Richard E. DePoto 40 Vice President, Manufacturing Operations
Richard Lucier 64 Vice President, Sales
Ralph W. Segalowitz 39 Vice President, Engineering
Kenneth J. Thompson 40 Controller
Lucille Mavrokefalos 45 Director of Administration and Assistant Secretary
</TABLE>
13
<PAGE>
Management and Directors
Jonas Medney, Director, Chairman and Chief Executive Officer, has over 40
years of experience in the composites industry and has more than 50 patents. Mr.
Medney has been a director and Chairman of the Company since its inception in
1984. He co-founded Lamtex Industries, a public company which was a pioneer in
filament-wound composites, which was acquired by Koppers Company in 1963. He
co-founded Fiberglass Resources Corporation, a manufacturer of filament wound
epoxy pipes and conduits, with Mr. Klimpl. This company was acquired by Koch
Industries in 1983. Mr. Medney is a graduate of the Massachusetts Institute of
Technology (B.S. Mechanical Engineering).
Fred E. Klimpl, Director, President and Secretary, has over 35 years of
experience in the composites industry and has over 25 patents. Mr. Klimpl has
been a director, President and Secretary of the Company since its inception in
1984. He was co-inventor and a key manager in the development and marketing of
the fiberglass underground gasoline tank program for Owens-Corning Fiberglas
Corp. He was subsequently responsible for the start-up and marketing of a
fiberglass pipe business for Ciba-Geigy Corporation. Mr. Klimpl is a graduate of
Lowell University (B.S. Textile Engineering) and Stevens Institute of Technology
(M.S. Industrial Management).
Samuel S. Gross, Director, Executive Vice President, Treasurer, Assistant
Secretary and Chief Financial Officer, is a certified public accountant and has
been Executive Vice President and Treasurer of the Company since 1990. He had
been a consultant to the Company and a director since 1987. He was previously a
partner at Ernst & Young LLP where he was responsible for the Fiberglass
Resources Corporation account. Mr. Gross was affiliated with Ernst & Young LLP
and its predecessors for 39 years. He is a director and Secretary/Treasurer of
the National Mental Health Association, Chairman of the Board of Directors of
the Mental Health Association in New York State, Inc., and a director and former
president of Long Island Transportation Management, Inc. Mr. Gross is a graduate
of City College of New York (B.B.A.).
Richard E. DePoto, Vice President, Manufacturing Operations, has been with
the Company since 1997. From 1981 to 1997 he was with AMP Circuits and its
predecessor companies at its Riverhead printed circuit board manufacturing
plant. He held various engineering positions and most recently Director of
Manufacturing and Manufacturing Engineering. He is a graduate of the State
University of New York at Stony Brook (B.S. Engineering/Chemistry).
Richard Lucier, Vice President, Sales, has been with the Company since
1992. He was Corporate Accounts Manager with Polyclad Laminates, Inc. (Cookson
Group) from 1989 to 1992 and Senior Vice President with Fortin-Westinghouse from
1980 to 1989. Prior to that time, he was employed at Honeywell, Raytheon and
GTE. He is a graduate of Northeastern University (B.S. Mechanical Engineering).
Ralph W. Segalowitz, Vice President, Engineering, has been with the Company
since 1990. From 1985 to 1990, he was with Robotic Vision Systems Inc., where
his final position was as a project manager responsible for automated
manufacturing systems. From 1981 to 1985, he was a product engineer with
Databit, Inc., a manufacturer of data transmission equipment. He is a graduate
of the State University of New York at Stony Brook (B.S. Mechanical Engineering
and M.S. in Industrial Management).
Kenneth J. Thompson, Controller , has been with the Company since 1996.
From 1995 to 1996 he was Controller of Cameron Engineering, P.C. From 1991 to
1995 he was with Loveshaw Corporation, most recently as Vice President, Finance.
He is a graduate of Adelphi University (B.B.A. Accounting).
Lucille Mavrokefalos, Director of Administration and Assistant Secretary
has been with Company in various positions since 1988.
14
<PAGE>
Board of Directors. The Board of Directors consists of Messrs. Medney,
Klimpl and Gross and five outside directors: Willard T. Jackson, Pierre
Laflamme, Robert W. Middleton, Heinz-Gerd Reinkemeyer and James W. Taylor.
Willard T. Jackson, private investor, retired in 1988 as a partner of
Brundage, Story and Rose, a New York investment counseling firm in which he
became a partner in 1969. He has been a director since January 1988. Mr. Jackson
is a graduate of Middlebury College (A.B.) and Columbia University (M.B.A.). He
is a trustee emeritus of Middlebury College.
Pierre Laflamme was elected a director in October 1997. He has been Vice
President Development, High Technology at Societe generale de financement du
Quebec since May 1997. From 1985 to May 1997, he was with the Solidarity Fund in
Montreal, Canada, most recently as Senior Vice President, Economic Development
and Strategic Investments. From 1994 to 1996, he was on loan as Deputy Minister
at Executive Council of the Province of Quebec. He is a graduate of the
Universite de Sherbrooke (B.A.) and the Universite de Montreal (B.A.
Architecture). Mr. Laflamme is the designee of the Quebec Investors to the Board
pursuant to terms of agreements in connection with the joint venture in the
greater Montreal area.
Robert W. Middleton was elected as a director in March 1996 and has acted
as an investment banker to the Company in its prior financings and with respect
to the IPO. He has been Managing Director-Corporate Finance of Trautman Kramer &
Company, Inc., an investment banking firm, since 1993. From 1985 to October
1993, Mr. Middleton was, successively, Director of Corporate Finance of Barclay
Investments, Inc., and a Vice President at C.L. King & Associates, Inc. Prior to
that time, he was associated with Fahnestock & Company from 1983 to 1985 and was
a general partner from 1984-1985. From 1974 to 1983, Mr. Middleton held various
positions with Burgess & Leith, Inc., including Senior Vice President and
Director, while serving as Manager of the New York office. He attended Princeton
University. Mr. Middleton is the designee of Trautman Kramer & Company, Inc. to
the Board pursuant to the terms of a financing agreement.
Heinz-Gerd Reinkemeyer has been a director since 1990. He had been Director
of the Industrial Plastics Division of HT, a German manufacturer and subsidiary
of the Rutgers Group, which is an affiliate of the Veba Group. Currently, he is
a consultant for the Rutgers Group. Mr. Reinkemeyer has a degree in mechanical
engineering and from 1961 he had been with Dynamit Nobel, a manufacturer of
laminates, until it was acquired by HT in 1988. Mr. Reinkemeyer is the designee
of HT to the Board.
James W. Taylor has been a director since 1987. He has been President of
Reuter Manufacturing Inc. since 1992. He is a certified management consultant.
He was a director from 1967 to 1973 and President from 1970 to 1973 of the
international management consulting firm, Booz Allen & Hamilton. Mr. Taylor was
President and a director of Bradford Trust from 1973 to 1975. He has served as a
director of Insilco Corporation, Times Fiber Communications, Inc., The
Enterprise Companies, Techalloy, Inc., Amphenol Inc. and Knogo Corporation. He
is a life trustee of Carnegie Mellon University. He was a trustee of Beaver
College and was a vice president and director of the Association of Consulting
Management Engineers and of the Institute of Management Consultants. He holds a
B.S. from Carnegie Mellon University.
15
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
In July 1996, the Company completed an initial public offering ("IPO") of
2,415,000 shares of Common Stock and 2,415,000 Redeemable Common Stock Warrants
(the "Redeemable Warrants"). Prior to the IPO, there was no public market for
the Company's Common Stock. The Company's Common Stock and Redeemable Warrants
are traded on the Nasdaq SmallCapSM Market under the symbols "CTEK" and "CTEKW",
respectively.
The following sets forth the range of the high and low bid prices for the
Common Stock, as reported on the Nasdaq SmallCap Market.
1996
----
High Low
---- ---
Third quarter 8 1/8 5 1/2
Fourth quarter 6 1/2 5 1/4
1997
----
High Low
---- ---
First quarter 6 3/8 4 2/3
Second quarter 5 3/8 4 1/4
Third quarter 7 4 3/8
Fourth quarter 4 1/2 1 1/2
There were approximately 110 holders of record of shares of Common Stock as
of March 13, 1998.
The Company has never paid cash dividends on its Common Stock. The Company
does not intend to pay cash dividends on its Common Stock in the foreseeable
future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company was founded in 1984 to develop copper-clad fiberglass epoxy
laminates used to manufacture printed circuit boards required by the electronics
industry. As part of its development program, the Company developed processes
and machinery to manufacture its unique laminates, designed and assembled
prototype equipment to produce 24" x 24" laminates, designed and assembled an
initial production module to produce 36" x 48" laminates, designed, assembled
and started additional production modules obtained with part of the proceeds of
its IPO in 1996 in order to achieve commercial levels of production.
During 1996 and 1997, the Company has been producing and selling its
laminates in limited quantities for qualification and use in production by its
customers. In 1997, the Company 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
16
<PAGE>
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. Process
disruptions have occurred, resulting in delays in product shipments. Process
disruptions were due to machine breakdowns, lack of adequate interior
atmospheric control of temperature and humidity, electric utility power
failures, problems of breaking in an expanded workforce, contamination generated
during installation of equipment and development of processes and defective
incoming copper foil for which the Company has obtained an alternate source of
supply. 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.
In October 1997, the Company entered into a 50/50 joint venture with Quebec
Investors for the establishment of a plant in the greater Montreal area to
manufacture Compositech's laminates. The plant is planned to start production in
1999. See "Item 1 - General". The Company's investment in the joint venture was
funded by the Quebec Investors purchasing 1,066,192 shares of the Company's
Common Stock.
In February 1998, the Company entered into joint venture and license
agreements with a Taiwanese investor group to manufacture Compositech's
laminates in Taiwan. See "Item 1 - General". The Company would have an
approximate 10% interest in the joint venture and receive license fees and
royalties. The plant is planned to start production in 1999.
Through December 31, 1996, the Company had been in the development stage
because it had not generated significant revenues from its planned principal
operations. Based on the level of production and sales in 1997, the Company has
concluded that it is no longer in the development stage, as of January 1, 1997.
Results of Operations - Years Ended December 31, 1997 and 1996
Sales of laminates increased to $507,403 in 1997 from $327,411 in 1996. The
increase resulted from additional orders of laminates by customers, but was
limited by the production constraints referred to above and by delays in or
cancellation of customers' programs for which Compositech's laminates were
qualified.
Research and development expense decreased to $76,720 in 1997 from $152,870
in 1996. The decrease was in line with the Company's increased emphasis on
achieving commercial production levels and a reduction in activities associated
with research and development.
Manufacturing expenses increased to $4,953,123 for 1997 from $2,525,619 in
1996, reflecting the higher levels of production during 1997, affected by the
process disruptions referred to above and the addition and training of
manufacturing personnel to meet anticipated increases in sales levels which did
not occur according to management's expectations. The increased expense also
related to development and refinement of the Company's processes and products.
Selling, general and administrative expenses increased to $1,519,763 in
1997 from $ 1,274,476 in 1996. Legal and other expenses related to being a
public company increased $132,000 in 1997 as compared to 1996. Other increases
were approximately $216,000 in personnel costs and $32,000 in insurance related
to increases in commercial activities. Administrative expenses related to the
establishment of the Company's joint venture in Canada decreased by $54,000 in
1997 as compared to 1996. During 1997, $107,000 of selling, general and
administrative expenses were charged to the
17
<PAGE>
Canadian joint venture, in accordance with the joint venture agreements.
Interest income decreased to $96,201 in 1997 from $154,027 in 1996,
reflecting a decrease in the average monthly balances of the Company's cash and
short term investment account balances. Interest expense (net of interest
capitalized) decreased to $229,385 for 1997 from $497,377 in 1996. The decrease
was due to the repayment of a large portion of the Company's debt with the
proceeds of the Company's IPO in July 1996, partially offset by the interest
expense on the Company's convertible debentures issued in 1997. Amortization of
debt discount and deferred private placement fees and expenses increased to
$1,326,218 for 1997 from $227,657 for 1996. The amortization of the deferred
financing cost included therein (see Note 4 to the financial statements) was
$1,147,940 for the fiscal year ended December 31, 1997.
In 1996, the Company made a provision of $348,309 for production equipment
that ceased operations in 1996 or early 1997.
The equity in the loss of joint venture in 1997 of $63,722 represents the
Company's 50% share of the loss of the joint venture which was formed in October
1997.
The foregoing resulted in the Company having a net loss of $7,569,793 for
1997 as compared with $4,534,195 for 1996. Increases in sales revenue and
decreases in interest expense were more than offset by increases in
manufacturing, selling, general and administrative expenses, and the
amortization of debt discount applicable to the convertible debentures.
Liquidity and Capital Resources
Prior to its IPO from which it received $9.9 million in net proceeds and
used $4.3 million to reduce debt, the Company had financed its operations
through private placements of debt and equity securities and from income from a
patent immunity agreement. Some of this financing had come from officers and
directors of the Company. In May through August 1997, the Company received
approximately $5.9 million of net proceeds from the issuance of Debentures,
which was used for working capital and the purchase of equipment.
The Company had been a development stage company through December 31, 1996
and has had limited revenues from the sale of laminates, has incurred
significant losses and has 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 December 31, 1997, the Company had approximately $624,000 of available
cash resources. In January and February 1998, in connection with a joint venture
in Taiwan, 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 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. 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
18
<PAGE>
sufficient revenues to achieve profitable operations. The foregoing is based on
important assumptions regarding a number of factors and future events, some of
which are beyond the Company's control including risks and uncertainties
described in Item 1. "Description of Business - Important Factors Regarding
Future Results". There can be no assurance that management has identified and
made appropriate assumptions regarding all factors that may affect the Company's
business in the future.
On October 16, 1997, the Company closed its previously announced
transaction with four Quebec institutional investors to form a 50/50 joint
venture for the establishment of a plant in the greater Montreal area to
manufacture Compositech's laminates. See Item 1. "Description of Business". The
plant is planned to start production late in 1998 or early 1999 with an
anticipated annual production capacity of approximately 10 million square feet.
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.
1997 Compared with 1996
Net cash and temporary investments used in operating activities increased
to $5,925,165 for 1997 from $3,462,491 for 1996. The principal reason for the
difference was the increased level of activity in 1997, increases in the levels
of raw material and finished goods inventories, a temporary increase in prepaid
expenses related to reimbursable expenses billed to the Company's Canadian joint
venture, partially mitigated by increases in accrued liabilities including
interest expense, the effect of the amortization of debt financing costs and the
equity in the loss of the joint venture for 1997.
Net cash and cash equivalents used in investing activities for capital
expenditures and advance payments for equipment decreased to $ 1,953,782 in 1997
from $2,603,677 for 1996. 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 begun
in 1996. The $5,695,283 investment in joint venture is comprised of the
$5,426,917 purchase of the Company's 50% equity interest in the joint venture
plus approximately $268,000 in commissions and legal costs associated with the
closing of the transaction. In 1997, $2,384,700 was provided by investing
activities representing the redemption of short term U.S. securities for current
working capital needs.
Cash flows from financing activities increased to $11,261,144 for 1997 from
$8,198,104 for 1996. The principal financing activities in the 1997 period were
the sale of the Company's common stock to the Canadian joint venture partners
totaling $5,351,763 net of expenses, net proceeds from the issuance of the 5%
convertible debentures of $5,891,189 and net proceeds from the exercise of
outstanding common stock warrants in the amount of $47,420.
Item 7. Financial Statements
The required Financial Statements and the notes thereto are contained in a
separate section of this report beginning with the page following the signature
page.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No disagreements exist between the Company and Ernst & Young LLP on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure.
19
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information called for by Item 9 with respect to Executive Officers of
the issuer appears as Item 4A under Part I of this Report.
Other information required by this item is included in the Company's
definitive Proxy Statement to be filed in connection with the Company's Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
Item 10. Executive Compensation
The information required by this item is included in the Company's
definitive Proxy Statement to be filed in connection with the Company's Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included in the Company's
definitive Proxy Statement to be filed in connection with the Company's Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions
The information required by this item is included in the Company's
definitive Proxy Statement to be filed in connection with the Company's Annual
Meeting of Stockholders, and such information is incorporated herein by
reference.
20
<PAGE>
Item 13. Exhibits, Lists and Reports on Form 8K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Note
Number Exhibit Number
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company. (3)
3.3 By-Laws, As Amended, of the Company. (2)
4.1 Specimen Common Stock Certificate. (2)
4.2 Specimen Warrant Certificate. (2)
4.3 Representative's Unit Purchase Option dated as of July 9, 1996. (2)
4.4 Warrant Agreement dated as of July 9, 1996 between the Company and Continental Stock Transfer &
Trust Company. (2)
4.5 Form of 10% Secured Note. (2)
4.5.1 Security Agreement dated August 3, 1995 among the Company and certain secured parties. (2)
4.6 Form of Secured Note. (2)
4.6.1 Security and Intercreditor Agreement dated as of October 30, 1992 among the Company and certain
secured parties covering listed patent collateral. (2)
4.7 Notes issued by the Company between May 28, 1992 and February 16, 1993 in the aggregate amount of
$550,000 payable to Willard Jackson. (2)
4.8 Agreements between the Company and certain officers, directors
and stockholder/creditors to defer maturity of Secured Notes, 10%
Secured Notes, and certain other notes. (2)
4.9 Agreements between the Company and certain officers, directors
and stockholder/creditors to defer maturity of Secured Notes, 10%
Secured Notes, and certain other notes. (3)
10.1 Lease Agreement dated August 29, 1990 between the Company and Ricefield Number Six. (2)
10.1.1 First Amendment of Lease dated June 30, 1995 between the Company and Ricefield Number Six. (2)
10.2 Patent Immunity Agreement dated March 15, 1994, among the Company and AKZO Electronic Products B.V.
and AMP Incorporated. (2)
10.3 Stock Purchase Agreement dated as of June 22, 1990, between the Company and HT Troplast AG. (2)
10.3.1 Amendment No. 1 to Stock Purchase Agreement dated June 22, 1990 between the Company and HT Troplast
AG (Amendment No. 1 dated January 10, 1996). (2)
10.4 Technical Cooperation Agreement between the Company and HT Troplast AG dated as of June 22, 1990. (2)
10.5 License Agreement between the Company and HT Troplast AG dated as of June 22, 1990. (2)
10.5.1 Amendment to the License Agreement dated May 18, 1994 between the Company and HT Troplast AG. (2)
10.6 Consent to the transfer of rights of Huls Troisdorf AG in respect of the Company to Mora
Beteiligungs AG (now HT Troplast AG) dated February 4, 1994. (2)
10.6.1 Acknowledgment of assumption of obligations of Huls Troisdorf AG in respect of the Company by
HT Troplast AG dated August 19, 1994. (2)
10.7 Form of Warrants issued on May 28, 1992. (2)
10.8 Form of Warrants issued on November 16, 1993. (2)
10.9 Form of Subscription Agreement for Series A Convertible Preferred Stock issued in 1994. (2)
10.10 Form of Warrants issued or amended between August 3, 1995 and March 12, 1996. (2)
10.11 Common Stock Purchase Agreement between the Company and Win Win Venture Capital Corporation dated
as of April 1, 1996. (2)
10.12 Agreements to defer salary between the Company and certain employees of the Company. (2)
10.13 Form of 18-month lock-up agreement. (2)
10.14 Form of 24-month lock-up agreement. (2)
*10.15 Nonqualified Stock Option Plan dated April 12, 1988. (2)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Exhibit Note
Number Exhibit Number
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*10.16 Stock Award Plan. (2)
*10.16.1 Compositech Ltd. Amended and Restated Stock Award Plan. (4)
*10.17 Employment Agreement dated as of January 1, 1996 between the Company and Samuel S. Gross. (2)
*10.18 Employment Agreement dated as of January 1, 1996 between the Company and Fred E. Klimpl. (2)
*10.19 Employment Agreement dated as of January 1, 1996 between the Company and Jonas Medney. (2)
*10.20 Common Stock Purchase Agreement between the Company and Win Win Venture Capital Corporation dated
as of June 26, 1996. (2)
10.21 Form of Securities Purchase Agreement between the Company and certain investors. (5)
10.22 Form of 5% Convertible Debenture between the Company and certain investors. (5)
10.23 Form of Registration Rights Agreement between the Company and certain investors. (5)
10.24 Form of Security Agreement between the Company and certain investors. (5)
10.25 Form of License Security Agreement between the Company and certain investors. (5)
10.26 Technology Licensing Agreement dated October 16, 1997, by and between the Company and Lamines CTEK (6)
Inc.
10.27 Subscription Agreement dated October 16, 1997, by and among: Societe Innovatech du Grand Montreal, (6)
Industries Devma Inc. (a subsidiary of Societe generale de financement du Quebec), Fonds de
solidarite des travailleurs du Quebec (F.T.Q.), Fonds regional de solidarite Ile de Montreal and
the Company.
10.28 Registration Rights Agreement dated October 16, 1997, by and among: Societe Innovatech du Grand (6)
Montreal, Industries Devma Inc., Fonds de solidarite des travailleurs du Quebec (F.T.Q.), Fonds
regional de solidarite Ile de Montreal and the Company.
10.29 Subscription Agreement dated October 16, 1997, by and between the Company and Lamines CTEK Inc. (6)
10.30 Shareholders Agreement dated October 16, 1997, among the Shareholders of Lamines CTEK Inc. (6)
10.31 Stock Exchange Agreement dated October 16, 1997, by and among: Societe Innovatech du Grand Montreal, (6)
Industries Devma Inc., Fonds de solidarite des travailleurs du Quebec (F.T.Q.), Fonds regional de
solidarite Ile de Montreal and the Company.
10.32 Sales Agency and Marketing Agreement dated October 16, 1997, by and between Lamines CTEK Inc. and (6)
the Company.
10.33 Agreement with respect to electing a nominee of the Quebec Investors to the Board of Directors of (6)
Compositech Ltd. dated October 16, 1997, by and among: Societe Innovatech du Grand Montreal,
Industries Devma Inc., Fonds de solidarite des travailleurs du Quebec (F.T.Q.), Fonds regional de
solidarite Ile de Montreal and the Company and certain of its principal shareholders.
10.34 Agreement to Form a Joint Venture by and between the Company and Fidelity Venture Capital Corp. and (1)
Fidelity Investors, dated February 9, 1998.
10.35 Patent, Information and Trademark Agreement by and between the Company and Compositech Taiwan (or (1)
Compositech Technologies, Inc.). Portions of the Exhibit have been omitted pursuant to a request
for confidential treatment.
10.35.1 Patent, Information and Trademark Agreement - Amendment No. 1 by and between the Company and (1)
Compositech Taiwan (or Compositech Technologies, Inc.).
10.36 Purchase Agreement by and between the Company and Compositech Taiwan (or Compositech Technologies, (1)
Inc.).
23.1 Consent of Ernst & Young LLP (1)
</TABLE>
22
<PAGE>
- ----------
* Management contract, compensatory plan or arrangement.
(1) Filed herewith.
(2) Incorporated by reference to a previously filed Exhibit to the
Company's Registration Statement on Form SB-2, Reg. No. 333-3564-NY.
(3) Incorporated by reference to a previously filed Exhibit to the
Company's Form 10-KSB for the year ended December 31, 1996.
(4) Incorporated by reference to a previously filed Exhibit to the
Company's Form 10-QSB for the quarterly period ended June 30, 1997.
(5) Incorporated by reference to a previously filed Exhibit to the
Company's Registration Statement on Form S-3, Reg. No. 333-32241-NY filed
on July 28, 1997.
(6) Incorporated by reference to a previously filed Exhibit to the
Company's Form 8-K dated October 27, 1997.
(b) Form 8-K Reports:
<TABLE>
<CAPTION>
Financial Statements
Date of Report Item Reported Filed
- ------------------------- ------------------------------------------------ ----------------------
<S> <C> <C>
October 27, 1997 Item 5 - Other Events No
(Announcing consummation of joint venture for
establishing manufacturing plant in greater
Montreal area.)
December 2, 1997 Item 5 - Other Events No
(Announcing consummation of joint venture for
establishing manufacturing plant in greater
Montreal area and presentation of pro forma
balance sheet as at September 30, 1997.)
</TABLE>
23
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMPOSITECH LTD.
Date: March 31, 1998 By: /s/ Jonas Medney
------------------------------------
Jonas Medney
Chairman and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
/s/ Jonas Medney March 31, 1998
- ------------------------------------------
Jonas Medney
Chairman of the Board; Director
(Principal Executive Officer)
/s/ Fred E. Klimpl March 31, 1998
- ------------------------------------------
Fred E. Klimpl
President, Secretary and Director
/s/ Samuel S. Gross March 31, 1998
- ------------------------------------------
Samuel S. Gross
Executive Vice President, Treasurer,
Assistant Secretary and Director
(Principal Financial and Accounting Officer)
/s/ Willard T. Jackson March 31, 1998
- ------------------------------------------
Willard T. Jackson, Director
/s/ Pierre Laflamme March 31, 1998
------------------------------------------
Pierre Laflamme, Director
/s/ Heinz-Gerd Reinkemeyer March 31, 1998
------------------------------------------
Heinz-Gerd Reinkemeyer, Director
/s/ James W. Taylor March 31, 1998
- ------------------------------------------
James W. Taylor, Director
/s/ Robert W. Middleton March 31, 1998
- ------------------------------------------
Robert W. Middleton, Director
24
<PAGE>
Index to Financial Statements
Pages
-----
Report of Independent Auditors................................................F2
Balance Sheets as of December 31, 1997 and 1996...............................F3
Statements of Operations for the years ended
December 31, 1997 and 1996...................................................F4
Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1996............................................F5
Statements of Cash Flows for the years ended
December 31, 1997 and 1996...................................................F6
Notes to Financial Statements.................................................F7
F1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Compositech Ltd.
We have audited the accompanying balance sheets of Compositech Ltd. (the
"Company") as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Compositech Ltd. at December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's existing
working capital is insufficient to cover continuing operating expenses and
expenditures for additional production equipment. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Ernst & Young LLP
Melville, New York
February 13, 1998
F2
<PAGE>
COMPOSITECH LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 December 31
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $624,254 $673,084
Short-term investments 2,384,700
Accounts receivable trade - net 44,725 66,293
Accounts receivable from joint venture 201,382
Inventories 401,922 217,974
Prepaid expenses and other 97,371 66,880
------------ ------------
Total current assets 1,369,654 3,408,931
Property and equipment at cost - net 5,276,672 3,866,140
Investment in joint venture 5,631,561
Advance payments on construction-in-progress 274,253 114,712
Deferred debt expense - net of accumulated amortization of $154,858 458,953
Other assets and other deferred charges, net of accumulated amortization of $ 6,847 (1997) 134,796 58,087
------------ ------------
Total assets $13,145,889 $7,447,870
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $609,278 $691,763
Deferred salaries - $ 1,500 (1997) and $ 539,904 (1996) - officers 192,571 715,728
Accrued interest - $ 916 (1997) and all (1996) - stockholders 26,017 61,816
Other accrued liabilities 370,707 227,889
Current maturities of long-term debt - stockholders 100,000
------------ ------------
Total current liabilities 1,198,573 1,797,196
Non-current liabilities:
Notes payable to directors/stockholders 1,595,000 1,495,000
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 49,047 19,336
Other 37,500 37,500
------------ ------------
Total non-current liabilities 8,095,614 1,551,836
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 - 614,161 (1997) and 684,161 (1996) 1,842,483 2,052,483
Common stock, par value $.01 per share; authorized shares - 25,000,000,
issued and outstanding shares - 7,767,921 (1997) and 6,118,939 (1996) 77,679 61,189
Additional paid-in capital 30,075,100 22,558,933
Deficit (28,143,560) (20,573,767)
------------ ------------
Total stockholders' equity 3,851,702 4,098,838
------------ ------------
Total liabilities and stockholders' equity $13,145,889 $7,447,870
============ ============
</TABLE>
See accompanying notes.
F3
<PAGE>
COMPOSITECH LTD.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
December 31
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Sales $507,403 $327,411
----------- -----------
Total revenues 507,403 327,411
----------- -----------
Costs and expenses:
Manufacturing expenses 4,953,123 2,525,619
Selling, general and administrative 1,519,763 1,274,476
Research and development 76,720 152,870
----------- -----------
Total operating expenses 6,549,606 3,952,965
----------- -----------
(Loss) from operations (6,042,203) (3,625,554)
Other income (expenses):
Interest income 96,201 154,027
Interest expense
(net of interest capitalized of $107,000 (1997) and $27,000 (1996)) (229,385) (497,377)
Amortization of debt discount and deferred private placement fees and expenses (1,326,218) (227,657)
Loss on disposal of property and equipment (9,613) (348,309)
Other 5,147 10,675
----------- -----------
(1,463,868) (908,641)
----------- -----------
Net (loss) before equity in loss of joint venture (7,506,071) (4,534,195)
Equity in loss of joint venture (63,722)
----------- -----------
Net (loss) ($7,569,793) ($4,534,195)
=========== ===========
Net (loss) per common share - basic and diluted ($1.18) ($0.98)
=========== ===========
Shares used in computing net (loss) per share 6,389,750 4,629,255
=========== ===========
</TABLE>
See accompanying notes.
F4
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Series A Convertible Convertible
Preferred Stock Preferred Stock
----------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 714,161 $2,142,483 433,500 $ 2,167,500
Issuance of common stock through private placements, net of related
costs of $136,941 and 8,000 shares of common stock
Issance of common stock through an initial public offering, net of
related costs of $2,154,929
Issuance of unit purchase options as a result of the initial public offering
Conversion of Convertible Preferred Stock to common stock
as a result of the initial public offering (433,500) (2,167,500)
Conversion of Series A Convertible Preferred Stock to common stock (30,000) (90,000)
Net (loss) for the year ended December 31, 1996
----------------------------------------------------
Balance at December 31, 1996 684,161 2,052,483 -- --
Conversion of Series A Convertible Preferred Stock to common stock (70,000) (210,000)
Discount on issuance of 5% Convertible Debentures
Issuance of warrants as compensation for 5% Convertible Debenture financing
Exercise of warrants
Issuance of common stock through a private placement, net of
related costs of $75,154
Issuance of common stock upon conversion of 5% Convertible Debentures
Services received from stockholder
Net (loss) for the year ended December 31, 1997
----------------------------------------------------
Balance at December 31, 1997 614,161 $1,842,483 -- --
====================================================
<CAPTION>
Common Stock Additional
------------------------------- Paid-in
Shares Amount Capital
----------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 3,014,189 $ 30,142 $ 8,924,140
Issuance of common stock through private placements, net of related
costs of $136,941 and 8,000 shares of common stock 458,000 4,580 1,483,479
Issance of common stock through an initial public offering, net of
related costs of $2,154,929 2,415,000 24,150 9,895,921
Issuance of unit purchase options as a result of the initial public offering 210
Conversion of Convertible Preferred Stock to common stock
as a result of the initial public offering 216,750 2,167 2,165,333
Conversion of Series A Convertible Preferred Stock to common stock 15,000 150 89,850
Net (loss) for the year ended December 31, 1996
----------------------------------------------------
Balance at December 31, 1996 6,118,939 61,189 22,558,933
Conversion of Series A Convertible Preferred Stock to common stock 35,000 350 209,650
Discount on issuance of 5% Convertible Debentures 1,147,940
Issuance of warrants as compensation for 5% Convertible Debenture financing 91,070
Exercise of warrants 16,500 165 47,355
Issuance of common stock through a private placement, net of
related costs of $75,154 1,066,192 10,662 5,341,101
Issuance of common stock upon conversion of 5% Convertible Debentures 531,290 5,313 669,687
Services received from stockholder 9,364
Net (loss) for the year ended December 31, 1997
----------------------------------------------------
Balance at December 31, 1997 7,767,921 $ 77,679 $30,075,100
====================================================
<CAPTION>
Total
Stockholders'
Equity
Deficit (Deficiency)
----------------------------------
<S> <C> <C>
Balance at December 31, 1995 $ (16,039,572) $ (2,775,307)
Issuance of common stock through private placements, net of related
costs of $136,941 and 8,000 shares of common stock 1,488,059
Issance of common stock through an initial public offering, net of
related costs of $2,154,929 9,920,071
Issuance of unit purchase options as a result of the initial public offering 210
Conversion of Convertible Preferred Stock to common stock
as a result of the initial public offering
Conversion of Series A Convertible Preferred Stock to common stock
Net (loss) for the year ended December 31, 1996 (4,534,195) (4,534,195)
----------------------------------
Balance at December 31, 1996 (20,573,767) 4,098,838
Conversion of Series A Convertible Preferred Stock to common stock
Discount on issuance of 5% Convertible Debentures 1,147,940
Issuance of warrants as compensation for 5% Convertible Debenture financing 91,070
Exercise of warrants 47,520
Issuance of common stock through a private placement, net of
related costs of $75,154 5,351,763
Issuance of common stock upon conversion of 5% Convertible Debentures 675,000
Services received from stockholder 9,364
Net (loss) for the year ended December 31, 1997 (7,569,793) (7,569,793)
----------------------------------
Balance at December 31, 1997 ($ 28,143,560) $ 3,851,702
==================================
</TABLE>
See accompanying notes.
F5
<PAGE>
COMPOSITECH LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) ($7,569,793) ($4,534,195)
Adjustments to reconcile net (loss) to net cash and
cash equivalents used in operating activities:
Depreciation and amortization, including capital leases 472,279 324,288
Loss on disposal of property and equipment 9,613 348,309
Amortization of debt discount and deferred private placement fees and expenses 1,326,218 380,734
Equity in net loss of joint venture 63,722
Stockholder services credited to additional paid-in-capital 9,364
Changes in operating assets and liabilities:
Accounts receivable trade - net 21,568 (40,427)
Accounts receivable from joint venture (164,494) (36,888)
Inventories (183,948) (84,672)
Prepaid expenses and other (30,491) 58,095
Other assets and other deferred charges (35,806)
Accounts payable (82,485) 473,687
Deferred salaries 28,401 (149,920)
Accrued interest 64,360 (126,223)
Other accrued liabilities 110,521 (39,473)
------------ ------------
Net cash and cash equivalents (used) in operating activities (5,925,165) (3,462,491)
Cash Flows from Investing Activities
Purchase of property and equipment - net (1,794,241) (2,488,965)
Advance payments on construction-in-progress (159,541) (114,712)
Investment in joint venture (5,695,283)
Patent costs deferred (120,444)
Short term investments :
Purchases (5,305,789)
Maturities 2,384,700 2,921,089
------------ ------------
Net cash and cash equivalents (used in) investing activities (5,384,809) (4,988,377)
Cash Flows from Financing Activities
Net proceeds from issuance of common stock 5,351,763 11,459,410
Net proceeds from notes payable 145,687
Net proceeds received from issuance of convertible debentures 5,891,189
Net proceeds from exercise of warrants 47,520
Payment received on notes receivable 750,000
Payment of capital lease obligations (29,328) (19,493)
Payment of notes payable (4,137,500)
------------ ------------
Net cash and cash equivalents provided by financing activities 11,261,144 8,198,104
------------ ------------
(Decrease) in cash and cash equivalents (48,830) (252,764)
Cash and cash equivalents at beginning of period 673,084 925,848
------------ ------------
Cash and cash equivalents at end of period $624,254 $673,084
============ ============
Supplemental disclosures of cash flow information
Noncash financing activities:
Capital lease obligations for property and equipment acquisitions $91,336
============
Cash paid for:
Interest $272,025 $477,240
============ ============
</TABLE>
See accompanying notes.
F6
<PAGE>
COMPOSITECH LTD.
Notes to Financial Statements
December 31, 1997
1. Organization and Basis of Presentation, and Significant Accounting Policies
Organization and Basis of Presentation
Compositech Ltd. (the "Company") was incorporated in the State of New York on
June 13, 1984. The Company was merged into a newly formed Delaware corporation
on January 29, 1988. The Company manufactures laminates for printed circuit
boards and designs the equipment used to manufacture the laminates.
Through December 31, 1996, the Company's activities were accounted for as those
of a "Development Stage Enterprise." Based on the level of production and sales
in 1997, the Company has concluded that it is no longer in the development stage
as of January 1, 1997, as reflected in the financial statement presentation.
The Company requires additional funding from financing or other sources to cover
operating expenses and planned expenditures for additional production equipment
until sufficient revenues are generated to cover such expenses. Management has
plans to obtain additional funding (see Note 12). The foregoing conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The board of directors authorized and the stockholders approved a one-for-two
reverse split of the outstanding common stock effective June 26, 1996. Effect
has been given to this reverse split as if it occurred on the date of inception
of the Company. All common share, option and warrant data has been restated to
reflect the reverse split.
Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash in banks and highly liquid
investments with maturities of three months or less.
Investments
The Company determines the appropriate classification of securities at the time
of acquisition and reevaluates such designation as of each balance sheet date.
At December 31, 1996, all of the Company's investments, consisting of short-term
U.S. Government securities, with original maturities of more than 90 days were
classified as held to maturity and valued at amortized cost. There were no such
investments as of December 31, 1997.
F7
<PAGE>
Inventories
Inventories include raw materials, finished goods and inventories of spare
parts. Raw materials and finished goods inventories are stated at the lower of
cost or market based on the first-in, first-out method. Inventories of spare
parts are stated at the lower of cost or market based on specific item cost.
December 31
----------------------
1997 1996
--------- ---------
Raw Materials $ 225,000 $ 101,000
Finished Goods 123,000 20,000
Spare Parts 53,922 96,974
--------- ---------
Total $ 401,922 $ 217,974
========= =========
Patents
The Company has obtained patents in the United States and internationally and
has filed additional patent applications. Such patent rights are of significant
importance to the Company to protect products, processes and equipment
developed. Costs incurred in connection with patents are being deferred and are
amortized over the life of the patents beginning upon issue. Costs related to
unsuccessful patent applications will be expensed.
Depreciation and Amortization
Equipment, furniture and fixtures are being depreciated on the straight-line
method over the estimated useful lives of the related assets which range from
five to ten years. Leasehold improvements are being amortized over the lesser of
their useful lives or the remaining term of the lease.
(Loss) Per Share
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 128, Earnings per Share. Statement
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements. Loss per share is based on the
weighted average number of shares of common stock outstanding. The conversion of
the Series A convertible preferred stock, the 5% Convertible Debentures and
outstanding options and warrants into common stock has not been assumed in the
calculation of diluted loss per share, as such conversion would be
anti-dilutive.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the financial statements and accompanying notes. Actual results could
differ from these estimates.
F8
<PAGE>
Reclassification
Certain prior year amounts have been reclassified or adjusted to conform to
current year financial statement presentation.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The Company will adopt this
statement for 1998.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable, companies would
be required to restate prior period information upon adoption. The Company will
adopt this statement for 1998.
2. Property and Equipment
December 31
-----------------------
1997 1996
---------- ----------
Production equipment $5,195,823 $1,951,173
Laboratory equipment 160,535 138,702
Furniture, fixtures and equipment 422,735 353,624
Leasehold improvements 431,037 243,544
Construction-in-progress 343,665 2,086,973
Equipment under capital leases 212,106 120,770
---------- ----------
6,765,901 4,894,786
Less accumulated depreciation and amortization 1,489,229 1,028,646
========== ==========
$5,276,672 $3,866,140
========== ==========
3. Investment in Joint Venture
On October 16, 1997, the Company formed a 50/50 joint venture with four Quebec
institutional investors (collectively, the "Quebec Investors") for the
establishment of a plant in the greater Montreal area to manufacture
Compositech's laminates. The Quebec Investors are: Societe generale de
financement du Quebec, Fonds de solidarite des travailleurs du Quebec (F.T.Q.),
Societe Innovatech du Grand Montreal and Fonds regional de solidarite Ile de
Montreal. The project cost is estimated to be approximately $24.5 million with
an initial capitalization by the parties of approximately $11 million with the
balance to be in debt financing for which firm commitments have been obtained
from the National Bank of Canada and governmental agencies.
F9
<PAGE>
The Company's $5,426,917 capital investment in the joint venture was funded by
the Quebec Investors purchasing 1,066,192 shares of the Company's common stock
at $5.09 per share, resulting in an increase in common stock of $10,662 and an
increase in additional paid-in capital of $5,341,101, net of expenses. The
Quebec Investors have an option to sell their 50% interest in the joint venture
to the Company for a like number of shares and, under certain circumstances, the
Company has an option to purchase the interest for the same number of shares.
The plant is planned to start production in 1999.
The investment in joint venture includes $268,366 in commission and legal costs,
incurred by the Company in connection with the negotiation and preparation of
the various joint venture agreements. The Company has also recorded a loss in
the amount of $63,722, representing 50% of the joint venture's net loss for the
fiscal year ended December 31, 1997, as a reduction in its investment account.
During 1997, $107,000 of selling, general and administrative expenses were
charged to the Canadian joint venture, in accordance with the joint venture
agreements. As of December 31, 1997 (unaudited), the total assets and total
liabilities of the joint venture were approximately $10,980,000 and $254,000,
respectively.
4. Long-Term Debt
<TABLE>
<CAPTION>
December 31
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Notes payable to stockholders due
January 2, 1999, as amended,
interest payable semi-annually
at prime rate plus 1 1/2% (10% at December 31,
1997 and 9.5% at December 31, 1996;
$775,000 collateralized by a second lien on U.S.
patents and patent applications.) $850,000 $850,000
10% Secured Notes, to stockholders, due
January 2, 1999, as amended, interest
payable annually, collateralized by patents,
patent applications and certain
production equipment. 745,000 745,000
5% Convertible Debentures, due May 31, 2000,
interest payable quarterly, net of $67,650 of
unamortized debt discount, collateralized
by certain production equipment. 5,762,350
---------- ----------
7,357,350 1,595,000
Less current maturities 100,000
========== ==========
$7,357,350 $1,495,000
========== ==========
</TABLE>
From May 28 through August 5, 1997, the Company issued $6,505,000 of 5%
convertible debentures (the "Debentures") in a private placement for which the
Company received net proceeds of approximately $5,900,000 after the payment of
commissions and expenses. The Debentures were issued to provide funds to obtain
additional production equipment and for
F10
<PAGE>
working capital. Interest is payable quarterly. The Debentures are due May 31,
2000 and are partially collateralized either by the equipment to be obtained
with the proceeds or certain existing production equipment. The Debentures are
convertible into shares of Common Stock commencing August 26, 1997 at the lesser
of (i) $6.00 per share or (ii) (a) from August 26, 1997 to November 24, 1997,
85% and (b) from November 25, 1997 to maturity, 80% of the closing bid price of
the Common Stock as reported on The Nasdaq SmallCap MarketSM for the five
trading days prior to the date of conversion. The Company may repurchase any of
the individual Debentures at a 25% premium if the closing bid price of the
Common Stock is less than $4.00 for any two days out of a five day trading
period. Trautman Kramer & Company Inc., the placement agent, received warrants
to buy 182,140 shares of the Company's Common Stock, at $6.00 per share, as
partial compensation in connection with the sale of Debentures. The value of the
warrants have been estimated at $91,070 and credited to additional paid-in
capital. The debt discount resulting from the warrants and the related
commissions and expenses is being amortized over the life of the debentures.
Based on a recent SEC pronouncement, due to the difference between the fair
market value of the Common Stock on the dates the Debentures were sold and the
earliest discounted conversion price, the Company recognized deferred financing
costs of $1,147,940 which was amortized over the periods from issuance to August
26, 1997, the date on which the Debentures first became convertible. Management
believes that the proceeds received from the Debentures and the discount offered
on conversion of the debt 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.
During November and December 1997, $675,000 face amount of Debentures were
converted into 531,290 shares of common stock, resulting in increases in common
stock of $5,313 and additional paid-in capital of $669,687.
Interest and debt expense includes interest of $127,212 (1997) and $165,478
(1996) applicable to stockholders.
5. Stockholders' Equity
As part of the sale of stock in 1990 to HT Troplast AG (successor to Huls
Troisdorf AG - "HT"), a German company formerly manufacturing laminates for
printed circuit boards, the Company is receiving contributions of know-how and
technical assistance services. The technical and marketing assistance services
provided by HT in 1997 have been valued by management at $9,364 and included in
expenses and credited to paid-in capital. Future services will be valued and
recorded when received.
The shares of the Series A convertible preferred stock are convertible at any
time at the option of the stockholder into shares of common stock at the rate
(subject to antidilution adjustment) of one-half share of common stock for each
share of Series A convertible preferred stock. Each share will automatically be
converted into shares of common stock (at the then applicable conversion rate)
upon the consummation of an underwritten public offering covering the sale of
common stock with aggregate net proceeds of not less than $10,000,000 with a
price per share equal to or greater than $9.00 per share.
F11
<PAGE>
The common stock and Series A convertible preferred stock vote as one class,
with each share of common stock being entitled to one vote. Each holder of the
Series A convertible preferred stock is entitled to the number of votes equal to
the number of shares of common stock into which a share of the preferred stock
could have been converted as of the record date for voting.
In the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Company, the holders of the Series A convertible preferred stock shall
be entitled to receive up to $3.00 per share, as adjusted, before any payments
are made to the holders of common stock. Each one-half share of common stock
would then be entitled to receive $3.00, as adjusted, from the remaining assets
of the Company. Any remaining assets will be distributed to the holders of all
shares of stock on a pro rata basis.
On July 9, 1996, the Company completed an initial public offering ("IPO") for
the sale of 2,415,000 units at $5.00 each, aggregating $12,075,000, resulting in
net proceeds of $9,920,071 after discounts, commissions and expenses. Each unit
consisted of one share of common stock and one redeemable common stock warrant.
6. Warrants and Options
Warrants and Unit Purchase Option
In connection with sale of notes and the guarantee agreement in 1992 and
February 1993, the Company issued warrants to purchase 65,500 shares of common
stock at $7.50 per share, as adjusted. The warrants are exercisable until May
28, 1999, as amended.
In connection with the sale of notes in November 1993, the Company issued
warrants to purchase 249,000 shares of common stock at $7.50 per share. Warrants
to purchase 225,000 shares are exercisable to May 16, 2000 and warrants to
purchase 24,000 shares are exercisable until November 16, 1998.
In connection with the extension of the maturity date of notes payable to
stockholders on May 28, 1994, the Company issued warrants to purchase 157,500
shares of common stock at $7.50 per share. The warrants are exercisable until
May 28, 1999.
In connection with the sale or refinancing of notes in 1995 and 1996, the
Company issued warrants to purchase 810,476 shares of common stock at $3.00 per
share (computed at the lesser of $3.60 per share or 60% of the $5.00 per share
IPO price). The warrants are exercisable at dates ranging from August 3, 2000 to
February 15, 2001.
In February 1996, in connection with a private placement of notes through
Trautman Kramer & Company, Inc., the placement agent, the Company issued to them
warrants to purchase 76,993 shares of common stock at $3.96 a share.
The warrants are exercisable until February 15, 2001.
As part of its IPO, the Company sold units which included Redeemable Common
Stock Warrants to purchase 2,415,000 shares of common stock at $6.25 per share
(subject to antidilutive provisions) through July 3, 2001. The warrants may be
redeemed by the Company at $.01 per warrant upon a minimum of 30 days prior
written notice to the holders thereof if the closing bid quotation of the common
stock has been at least 150% of the then exercise price of the warrants
F12
<PAGE>
on each of the 20 consecutive trading days ending on a day not more than three
days prior to the date of the notice of redemption.
As part of its IPO, the Company sold to the underwriters for $.001 per unit,
Unit Purchase Options to purchase 210,000 units at an exercise price of $7.50
per unit exercisable July 9, 1998 through July 9, 2001. The terms of the units
were substantially identical to the units sold in the IPO and consist of one
share of common stock and a warrant to purchase one share of common stock at an
exercise price of $7.8125 per share. The foregoing prices are subject to
antidilution provisions.
In May 1997, Trautman Kramer & Company Inc., the placement agent, received
warrants to buy 182,140 shares of the Company's Common Stock, at $6.00 per
share, as partial compensation in connection with the sale of the Debentures.
The warrants are exercisable until May 28, 2002.
In connection with the extension of the maturity date of notes payable to
stockholders on September 30, 1997, the Company issued warrants to purchase
30,000 shares of common stock at $5.86 per share. The fair value of such
warrants is nominal. The warrants are exercisable until September 30, 2002.
In October 1997, the Company issued warrants to buy 29,470 shares of the
Company's Common Stock, at $5.09 per share, as partial compensation for the
finder's fee in connection with the signing of the Canadian joint venture
agreement. The fair value of such warrants is nominal. The warrants are
exercisable until October 16, 2001.
In December 1997, in connection with resolving a dispute, the Company issued
warrants to buy 36,000 shares of common stock at $3.00 per share. The fair value
of such warrants is nominal. The warrants are exercisable until August 3, 2000.
In September 1997, warrants to purchase 16,500 shares of the Company's common
stock were exercised at an exercise price of $3.00 per share, resulting in an
increase in common stock of $165 and an increase in additional paid-in capital
of $ 47,355, net of expenses.
Stock Option Plan
Under the Company's 1988 non-qualified stock option plan, 150,000 shares of
common stock may be issued to selected key employees and non-employees,
including directors, providing services to the Company. Under the Company's 1994
Stock Award Plan as amended, 1,175,000 shares of common stock may be issued as
Incentive Stock Options, non-qualified options or restricted stock to selected
key employees or to non-employees, including directors, providing services to
the Company. All options granted have ten year terms and vest and become fully
exercisable between six months and three years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation", requires use of option
valuation models that were not developed for use in valuing employee stock
options.
F13
<PAGE>
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by SFAS
123, which also requires that the information be determined as if the Company
has accounted for its employee stock options granted subsequent to December 31,
1994 under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997 and 1996:
risk-free interest rates of 5.52% and 6.278%, respectively; dividend yields of
0%; volatility factors of the expected market price of the Company's common
stock of .795 and .50, respectively; and a weighted-average expected life of the
option of 6 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The Company's pro forma information for 1997 and 1996 are as follows:
1997 1996
----------- -----------
Pro Forma Net (Loss) ($7,953,996) ($4,903,063)
Pro Forma (Loss) Per Share
Basic ($1.27) ($1.07)
Because SFAS is applicable only to options granted subsequent to December 31,
1994, its pro forma effect will not be fully reflected until 1998.
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ----------------------------
Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price
============================= ============================
<S> <C> <C> <C> <C>
Outstanding-beginning of year 600,600 $4.08 474,600 $3.59
Granted 205,810 4.60 135,000 5.75
Forfeited 35,920 5.26 9,000 3.03
----------------------------- ----------------------------
Outstanding - end of year 770,490 $4.16 600,600 $4.08
============================= ============================
Exercisable - end of year 491,528 3.94 387,700 $3.75
Weighted average fair value of
options granted during the year $3.32 $3.20
</TABLE>
F14
<PAGE>
A summary of options outstanding as of December 31, 1997 follows:
Weighted Average
Remaining
Options Options Contractual Life
Exercise Price Outstanding Exercisable (Years)
-------------- ----------- ----------- -----------------
$2.375 61,390 -- 9.93
2.500 299,633 266,672 8.00
4.375 3,000 -- 9.34
4.750 12,000 -- 9.28
5.000 124,800 124,800 4.93
5.750 230,167 60,556 8.92
7.500 39,500 39,500 0.28
------- ------- ----
770,490 491,528 7.56
======= ======= ====
Included in the total outstanding as of December 31, 1997 are 409,800 options
for directors.
The Company has reserved 9,512,169 shares of common stock for conversions of
preferred stock and convertible debentures and issuances for stock options,
warrants and stock exchange agreements.
7. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, the liability method is used
in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
At December 31, 1997, the Company has net operating loss carryforwards ("NOL")
of approximately $25,600,000 for Federal income tax purposes, expiring at 2003
through 2012. In addition, the Company has research and development credits,
targeted job credits and alternative minimum tax credits of approximately
$1,120,000 which generally expire through 2012, to offset future taxes. The
Internal Revenue Code ("IRC") includes provisions which significantly limit
potential use of net operating losses and tax credits in situations where there
is a change in ownership, as defined, of more than 50% during a three-year
period. Accordingly, if a change in ownership occurs, the ultimate benefit
realized from these carryovers may be significantly reduced in total, and the
amount that may be utilized in any given year may be significantly limited. The
limitation is computed based upon the fair market value of the Company at the
time of the ownership change multiplied by the Federal long-term tax-exempt
borrowing rate. The common stock issuance in the IPO combined with the other
stock issuances completed by the Company during the three years ended December
31, 1996 have initiated a change in ownership as defined
F15
<PAGE>
in the IRC. Accordingly, the Company is currently subject to an annual
limitation of approximately $1,170,000 on $17 million of its NOL carryforward.
Additionally, because there is a limit on the time during which NOL
carryforwards and tax credits may be applied against future taxable income, the
Company may not be able to take full advantage of these attributes when the
Company generates taxable income.
As the Company has had cumulative losses and there is no assurance of future
taxable income, a valuation allowance has been established to offset deferred
tax assets. The components of the Company's net deferred tax for the years ended
December 31 are as follows:
December 31
---------------------------
1997 1996
----------- -----------
Deferred tax assets:
Deferred salaries $ 253,000 $ 243,000
Net operating loss carryforwards 8,688,000 6,426,000
Research and development and other credits 1,121,000 940,000
----------- -----------
Total deferred tax assets 10,062,000 7,609,000
Less: Valuation allowance (9,642,000) (7,367,000)
----------- -----------
Net deferred tax assets 420,000 242,000
Deferred tax liability:
Tax over book depreciation (420,000) (242,000)
----------- -----------
Net deferred tax $ -- $ --
=========== ===========
fs8. Commitments
Operating Leases
At December 31, 1997, future minimum annual rentals for leases with initial or
remaining terms in excess of one year are as follows:
1998 $193,000
1999 183,000
2000 121,000
2001 5,000
========
$502,000
The Company leases its plant under a net lease expiring August 31, 2000. The
lease is renewable for an additional five years and requires that the Company
pay real estate taxes as additional rent.
Rent expense was approximately $235,000 in 1997 and $236,000 in 1996. The
foregoing amounts include $79,000 and $80,000, respectively, of real estate
taxes paid as additional rent.
F16
<PAGE>
Capital Leases
Future minimum lease payments under capital leases for equipment with a net book
value of approximately $124,000, included in property and equipment for the
years ending December 31, are as follows:
1998 56,360
1999 47,264
2000 6,309
-------
Total payments 109,933
Less: Amount representing interest 15,884
-------
Present value of minimum lease payments $94,049
=======
Employment Contracts
The Company has employment agreements with three officers/directors providing
for employment through 1998 and for one divisional officer providing for
employment through 2000 for aggregate salaries of $430,000 per annum, severance
pay if terminated of one times their annual salary (aggregate $430,000) and
severance pay if they terminate due to a change in control, as defined, of two
times their annual salaries (aggregate $860,000).
Equipment Purchases
At December 31, 1997, the Company had commitments for the purchase of production
equipment of approximately $500,000.
9. Officers' Life Insurance
The Company is the owner and beneficiary of insurance policies of $2,000,000
each on the lives of two of its officers for an aggregate of $4,000,000.
10. Dependence on a Major Supplier
Owens Corning, a major fiberglass manufacturer, has developed and continues to
develop products to meet the Company's processing and product requirements.
Should this manufacturer not continue supplying the Company's quality and
quantity needs, the Company would have to secure another supplier. Such event
could have a material adverse effect on the Company's ability to supply
customers and could reduce expected sales and increase the costs of manufacture.
No assurances can be given that an alternative supplier could meet the Company's
quality and quantity needs on satisfactory terms.
11. Significant Customers
Customers who individually represent 10% or more of net sales for the respective
years are as follows:
Years Ended December 31
-----------------------
1997 1996
-------- -------
HADCO Corporation 74.8% 50.8%
Merix Corporation 17.6% 46.4%
F17
<PAGE>
12. Financing and Subsequent Events
Subsequent to December 31, 1997, $2,590,000 face amount of Debentures were
converted into 1,773,106 shares of common stock, resulting in increases of
common stock of $17,731 and additional paid-in capital of $2,572,269.
Subsequent to December 31, 1997, the Company issued stock options to employees
to purchase 243,000 shares of common stock at $1.375 per share, the market price
of the stock on the date of the grant.
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 and, will in turn, invest $500,000 in the joint
venture, upon the achievement of certain milestones. As part of the transaction,
the joint venture acquired 587,372 shares of the Company's common stock for $1
million 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 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.
In addition to the funds mentioned in the preceding paragraph, the Company plans
to obtain additional funding of $5 million or more from 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.
F18
Exhibit 10.34
AGREEMENT TO FORM A JOINT VENTURE
BY AND BETWEEN COMPOSITECH LTD.
AND
FIDELITY VENTURE CAPITAL CORP. AND FIDELITY INVESTORS
Agreement effective February 9, 1998 by and between COMPOSITECH LTD.
(hereinafter referred to as "CTL"), having a place of business at 120 Ricefield
Lane, Hauppauge, New York 11788-2008, U.S.A.; and Fidelity Venture Capital Corp.
and Fidelity's Investors (hereinafter referred to as "Fidelity") having a place
of business at 5th Fl., No. 143, Sec.2, Min-Sheng East Road, Taipei, Taiwan,
Republic of China ("R.O.C.").
WHEREAS, CTL and Fidelity have expressed interest in forming a joint venture in
R.O.C. for the purpose of the establishment in R.O.C. of a factory to produce
copper-clad laminates using the patented CTL process and equipment (the
"Equipment"); and
WHEREAS, the parties wish to record their agreement to form a company to be
established for such purposes;
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree
as follows:
ARTICLE I
FORMATION
1.1 General. CTL and Fidelity (hereafter referred to collectively as the
"Partners") hereby agree to form jointly a limited liability company pursuant to
the laws of R.O.C. (hereafter referred to as the "Company"). The Company shall
carry out its activities in accordance with R.O.C. law, this Agreement and its
Articles of incorporation and By-Laws. The Company shall commence its operations
from the date of its official registration as a legal entity
within R.O.C.
1.2 Offices. The initial principal office of the Company shall be at 5th fl.,
No. 143, Sec. 2, Min-Sheng East Road, Taipei, R.O.C. The name of the Company in
Chinese, ________________________________and in English, Compositech Taiwan, or
Composite Technologies, Inc. The Company shall be authorized to open such other
offices within and outside of R.O.C. as its management, consistent with the
By-Laws of the Company, shall decide.
1.3 Share Capital. The Share Capital of the Company shall consist of 64,000,000
common shares fully paid. The value of each share shall be NT$10. All capital
investment must be made in NT$ or in technology.
1.4 Ownership Interests. In exchange for the capital contributions or
contributions in kind to the Company, as set out in the foregoing paragraph, the
Partners shall receive common stock reflecting, on a fully diluted basis, the
percentages below:
1
<PAGE>
i. 10.5% by CTL of which 8.0% is Technical shares and 2.5% is to be
obtained as an investment by CTL in Compositech Taiwan for the sum of
US$500,000 (NT$16 million). The investment is to be made within 30
days of the approval of the license of the Joint Venture by the
Hsin-Chiu Science Base Industrial Park and shall be based upon the
total capitalization equity of US$20 million (NT$ 640 million) of
Compositech Taiwan.
ii. 2.0% by Fidelity Venture Capital and its affiliates as founder
shares in the Joint Venture.
iii. 87.5% owned by Fidelity's Investors.
The cash capital contribution of the Partner (s), other than CTL's 2.5% cash
capital contribution, to the Joint Venture shall equal 97.5% of the cash capital
requirement of the Joint Venture.
1.5 Investment in CTL by Joint Venture. Investment in CTL by the Joint Venture
in the sum of US$2.0 million worth of CTL common shares of stock shall be priced
at the weighted average closing price for the 30 day period prior to the signing
of this Joint Venture Agreement as follows:
i. US$1.0 million at the signing of this Joint Venture Agreement which
shall take place on or before February 15, 1998.
ii. US$1.0 million within 30 days of the approval of the license of
the Joint Venture by Hsin-Chiu Science Base Industrial Park.
1.6 Long Term Debt. All long term debt shall be provided by one or more
financial institutions.
1.7 Modification of Capital Structure. Any decision to increase, decrease or
otherwise modify the terms of the share capital of the Company shall be made by
the Board Directors of the Company and shall be approved by the shareholder's
meeting of the Company.
1.8 Authorized Funds and Reserves. The Company shall maintain such funds and
reserve accounts as may be prescribed from time to time by R.O.C. law and and
the Company's lenders.
1.9 Duration of Joint Venture. The Joint Venture shall remain in force until the
Partners agree to sell or liquidate their assets. In the event of bankruptcy,
dissolution, insolvency or other form of liquidation, the Partners shall
negotiate in good faith to establish a fair market value for the Joint Venture
and to arrange for its disposition for the benefit of their shareholders.
1.10 Non-Transferability of Interests. Neither Partner shall sell, pledge and
otherwise transfer any right to his interest in the Company to any third party
2
<PAGE>
without the consent of the other Partner, which consent shall not be
unreasonably withheld.
1. 11 Mutual Responsibilities. Pending the start of operations of the Company,
the Partners shall divide among themselves the following responsibilities:
Fidelity shall take primary responsibility for:
(a) obtain all necessary R.O.C. government approvals for the formation and
operation of the Company and the execution by the Company of the various
agreements relating to this transaction;
(b) provide the building in which to house the manufacturing and administrative
operations, and preparing the same for all utilities, including electrical, air,
water, fuel, sewerage and others from outside the plant to the locations on the
plant floor where such utilities are to be hooked up to the Equipment to be
purchased from CTL; and
(c) arrange for any necessary financing.
CTL shall take primary responsibility for:
(a) delivering the technical information relating to the Equipment necessary for
Fidelity to plan the plant building and to arrange necessary hook-ups; and
(b) coordinating the supplying, installing (with the assistance of Fidelity) and
commissioning of the Equipment and transfer of related technical know-how.
ARTICLE II
PURPOSES
2.1 Business Purposes. The Company shall have as its main business purposes:
(a) the production and marketing of copper-clad laminates bearing the trademark
CL 200+;
(b) the research and development of copper-clad laminates including general
production methods and applications, consistent with the Company's maintenance
of a strong competitive position within the R.O.C.;
(c) such other and incidental business as the Partners shall unanimously
determine are related to the foregoing business; and
(d) the regular earning of profits and the distribution of such profits to the
Partners.
(e) the Joint Venture shall have the option to participate in future joint
ventures in the Asia-Pacific region inclucing countries such as Japan, China
(including
3
<PAGE>
Hong Kong), Korea and Singapore subject to the approval of the leading joint
venture party in these countries.
2.2 Powers of the Company. The Company shall have the right, in its own name,
to:
(a) enter into agreements;
(b) purchase, own, sell or lease real and personal property, as well as
intangible rights;
(c) borrow funds in convertible and domestic currency:
(d) be a plaintiff and defendant in judicial or arbitration forums within or
outside of R.O.C.;
(e) conduct such export operations as its Partners deem necessary or appropriate
for its economic activities, including through one or more of its Partners; and
(f) employ and discharge domestic and foreign employees.
ARTICLE III
DIVIDENDS
3.1 Dividends. Dividends shall be paid to the Partners, according to their share
of the Company, from the net earnings of the Company and in accordance with the
direction of the Board of Directors and with the approval of shareholder's
meeting.
ARTICLE IV
GOVERNANCE: MAINTENANCE OF RECORDS
4.1 Governing Bodies. The Company shall have as permanent governing bodies a
Board of Directors, Executive Committee of the Board of Directors and an Audit
Committee. The rules governing the election of members to these bodies, and the
convening and conduct of their meetings, shall be set forth in the By-Laws of
the Company.
CTL shall be entitled to nominate at least one voting member to the Board of
Directors and each committee thereof, which nomination(s) is hereby confirmed
and accepted by Fidelity.
4.2 Maintenance of Financial Records. The Company shall maintain its books in
such a manner as is required by R.O.C. law for tax and accounting purposes, as
well as by the providers of any equity or debt financing for the Company. In
addition, the Company shall prepare on a quarterly basis income and cash flow
statements and balance sheets, in accordance with generally accepted
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accounting principles of the United States. Either Partner (including through
their professional advisors) shall have the right, at any time, to review all
the books and records of the Company.
4.3 Reporting. The Company shall prepare and provide each of the Partners with a
written report (in English and Chinese languages) on the operations and finances
of the Company's activities each quarter.
ARTICLE V
CONFIDENTIALITY
5.1 Confidentiality. Each of the Partners will strictly maintain the
confidentiality of the technical, financial, commercial and other information
received from the other Partner and from the Company, allowing officers and/or
employees access to any such information only on a need-to-know basis and only
if such persons are under written and binding confidentiality obligations
satisfactory to both parties. Fidelity agrees to be bound by Article IX of the
Patent, Information and Trademark Agreement (Exhibit A) (the "Patent Agreement")
as if a party thereto and as if the "Licensee", as defined therein.
ARTICLE VI
DISPUTE RESOLUTIONS
6.1 Arbitration. In the event of any dispute between the parties relating to
this Agreement, including its scope or validity, they shall first try to resolve
the matter through good faith negotiation and, if a resolution cannot be
achieved in that manner, then it shall be submitted to binding arbitration in
Geneva, Switzerland (or such other place as the parties may agree to) under the
applicable rules of the American Arbitration Association. The arbitration shall
be by a single arbitrator selected in accordance with the procedures of the
American Arbitration Association but who shall be technically grounded and whose
experience and training shall enable him or her to readily comprehend the
technical aspects of the issues to be decided. At the request of either party,
the arbitrator may permit discovery of documents and things as provided in the
Federal Rules of Civil Procedure of the United States. The costs of the
arbitration shall be shared equally by both parties but the arbitrator shall
award costs, including the amount paid to the arbitrator but excluding
attorney's fees, to the prevailing party.
6.2 Arbitrator's Award. The arbitrator's award may be enforced in any court of
competent jurisdiction, and the parties hereby submit themselves to the
jurisdiction of the federal or state court within the State of New York for that
purpose.
6.3. Emergency Relief. Notwithstanding the provisions of Sections 6.1 and 6.2,
in the event either party requires emergency relief to protect the value or
confidentiality of its Information (as defined in the Patent Agreement), it may
seek the same in any federal or state court sitting in the State of New York,
and both parties agree to and hereby submit to the jurisdiction of any such
court for
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that purpose and agree further that service of process to initiate such action
may be made (and shall be sufficient if so made) by certified or registered
mail, with return receipt.
ARTICLE VII
MISCELLANEOUS
7.1 Limited Liability. Neither of the Partners shall liable to the other
Partner, the Company or to any third party for any obligation of such other
Partners or Company.
7.2 Other Business. Either Partner may engage in business with the Company,
provided it does so with the consent of the other Partner.
7.3 Waiver of Compliance. The failure of any party to this Agreement to object
to or take steps to remedy any one or more failures to perform any of the terms,
covenants or conditions of this Agreement or to exercise any right hereunder
shall not be construed as a waiver of or relinquishment of the future
performance of any such terms, covenants or conditions or the future exercise of
such right, or of the performance of any other term, covenant or condition of
this Agreement, but the obligations of the respective parties with respect to
such future performance shall continue in full force and effect.
7.4 Severability.o In the event that any one or more of the provisions of this
Agreement shall for any reason be held to be void, invalid, illegal or
unenforceable in any respect, such holding shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such void,
invalid, illegal or unenforceable provision had never been contained herein.
7.5 Changes or Modifications. No representation or statement made on behalf of
either party shall in any way change or modify the terms or conditions contained
herein unless made in a writing signed by the party to be charged.
7.6 Amendments and Assignments, This Agreement may be modified, and the rights
and/or obligations hereunder may be assigned to any other party, only by written
document signed by all the parties, provided that any Partner may assign its
rights and obligations hereunder to any other Company under common management
and control of such Partner.
7.7 Entire Agreement. The Patent, Information and Trademark Agreement (Exhibit
A) attached to this Agreement shall form and be read as integral parts of this
Agreement. Together with this Agreement, they form the entire agreement between
the parties, and supersede all prior written and oral understandings, conditions
or warranties between the parties on the subjects covered by such agreements.
7.8 Governing Law and Language. This agreement shall be constructed in
accordance with R.O.C. law. It shall be executed in four originals.
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7.9 Headings. The headings of the Articles and sections of this Agreement are
inserted for convenience only and shall not constitute a part hereof or affect
in any way the meaning or interpretation of this Agreement.
7.10 Effectiveness. This agreement shall come into full force and effect upon
the approval of it by the Board of Directors of the Partners, subject to any
necessary governmental approvals
7.ll Notices. All notices, requests, demands and other communications required
or permitted hereunder shall be writing and shall be deemed to have been duly
given if delivered by hand, telecopied (with receipt confirmed), by overnight
courier service or mailed, by certified or registered mail:
(a) If to CTL, to:
Compositech Ltd.
120 Ricefield Lane
Hauppauge, New York 11788-2008
Attn: Mr. Fred Klimpl
or to such other person or address as CTL shall furnish to Fidelity in writing.
(b) to Fidelity, to:
Fidelity Venture Capital Corp
5th Fl., No. 143, Sec 2, Min-Sheng E. Road
Taipei, Taiwan, R.O.C.
Attn: Dr. Cheng-Ming Lee
or to such other person or address as Fidelity shall furnish to CTL in
writing.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day and year first above written.
COMPOSITECH LTD.
BY:_______________________
Name: Fred E. Klimpl
Title: President
FIDELITY VENTURE CAPITAL CORP.
FIDELITY'S INVESTORS
BY:_________________________
Name: Dr. Cheng-Ming Lee
Title: President
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Exhibit 10.35
PATENT, INFORMATION AND TRADEMARK AGREEMENT
Agreement effective February 9, 1998 by and between COMPOSITECH LTD.
(hereinafter referred as Licensor"), having a place of business at 120 Ricefield
Lane, Hauppauge, New York 11788-2008, U.S.A; and Compositech Taiwan or Composite
Technologies, Inc. (hereinafter referred to as "Licensee") having a place of
business at 5th Fl., Bld. 143, Sec.2, Min-Sheng East Road, Taipei, Taiwan,
Republic of China ("R.O.C.").
WHEREAS, Licensor owns or controls certain patent rights and proprietary
information relating to laminates used in the production of printed circuit
boards (hereinafter defined as "Licensor's Patents" and "Licensor's
Information");
WHEREAS, Licensor owns or control trademarks (hereinafter defined as the
"Trademark") relating to said laminates:
WHEREAS, Licensor has been and is engaged in extensive research and
experimentation to develop said laminates;
WHEREAS, Licensor has the right to grant licenses under such patent rights and
for the use of such proprietary information;
WHEREAS, Licensor has the right to grant licenses for the use of the Trademark;
WHEREAS, Licensee desires to engage in the development, manufacture and sale of
laminates used in the production of printed circuit boards; and
WHEREAS, Licensee desires acquiring an exclusive right and license under
Licensor's aforesaid rights to make and sell laminates in accordance with
Licensor's Patents and/or Licensor's Information and using the Trademark, in a
certain Territory, and Licensor has agreed to grant such license to Licensee
upon the terms and conditions hereinafter set forth;
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
ARTICLE I
DEFINITIONS
As used throughout this Agreement, the following terms shall have the following
meanings:
1.1 Territory. "Territory" shall mean the R.O.C. and The Peoples Republic of
China.
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1.2 Licensed Products. "Licensed Products" shall mean copper clad laminates for
use as printed circuit boards, in which the filaments in the layers are parallel
rather than woven, but excluding all such laminates within the scope of any
claims of Licensor's Patents relating to (i) multi-layer printed circuit board
process, including claims (numbers to be added) of Licensor's R.O.C. patent No.
34906 and (ii) integral circuits and process, including claims (numbers to be
added) of Licensor's R.O.C. patent No.
34906.
1.3 Licensor's Patents. "Licensor's Patents" shall mean all patents and/or
applications in the Territory owned or controlled by Licensor or under which
Licensor has the right to grant licenses at any time during the term of this
Agreement and relating to the field of Licensed Products, and any and all
reissues, extensions, patents of addition and patents for improvements thereon,
including Licensor's R.O.C. Patent No. 34906 but excluding claims (numbers to be
added) thereof.
1.4 Licensor's Information. "Licensor's Information" shall mean and include all
proprietary know-how, formulations, engineering and other data and
specifications relating to the manufacture or use of Licensed Products, now
possessed by Licensor or which may be acquired by Licensor during the term of
this Agreement or which Licensor may acquire the right to use and disclose in
the Territory during the term of this Agreement, and which are useful to produce
Licensed Products in an efficient way.
1.5 Licensee's Patents. "Licensee's Patents" shall mean any and all patents
filed by or for or issued to Licensee in any country of the world relating to
any addition or to or modification of Licensed Products.
1.6 Licensee's Information. "Licensee's Information" shall mean and include the
sum of Licensee's research and development efforts and manufacturing experience
including all information, know-how, formulations, engineering data and
specifications related to the field of Licensed Products, now possessed or
acquired by Licensee during the term of this Agreement or which Licensee may
acquire the right to use and disclose during the term of this Agreement.
1.7 Trademark. "Trademark" shall mean collectively any one or more of the
trademarks, trade names or service marks adopted by Licensor anywhere in the
world to identify Licensed Products.
1.8 Net Sales. "Net Sales" shall mean the gross invoice prices charged by
Licensee for Licensed Products, less credit for goods returned and (to the
extent separately stated in each invoice) charges for packing, shipping and
insurance. In the case of anything other than an arms length sale by Licensee of
Licensed Products, Net Sales shall mean the price ordinarily charged at that
time by Licensee for Licensed Products sold for cash in an arms length
transaction.
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1.9 Notice. "Notice" shall mean a communication in writing sent by recorded
delivery to the herein listed address of Licensee or Licensor or to such other
address or addresses as the addressee may from time to time specify by written
notice to the Licensor.
1.10 Calendar Year and Calendar Quarter. "Calendar Year" and "Calendar Quarter"
shall mean respectively the twelve-month periods beginning each January 1 and
the three-month periods beginning each January 1, April 1, July 1 and October 1.
1.11 Information. "Information" shall mean collectively or individually, as is
apparent from the context, Licensor's Information and Licensee's Information.
1.12 Joint Venture Agreement. "Joint Venture Agreement" shall mean the agreement
executed substantially contemporaneously with this Agreement by the parties
hereto with respect to the formation by them of a joint venture for the
production of copper-clad laminates.
1.13 Sold or Sale. "Sold" or "sale" shall be understood in it broadest sense to
include sales, leases and any other form of disposal of Licensed Product by
Licensor.
ARTICLE II
GRANT OF LICENSES
2.1 Grant-Patents. Licensor hereby grants to Licensee, and Licensee hereby
accepts from Licensor, a personal, nontransferable, exclusive license under
Licensor's Patents (1) to manufacture Licensed Products in the Territory, and
(2) to sell Licensed Products in the Territory for use within the Territory,
except that Licensed Products may be sold outside or for use outside the
Territory only as provided in Section 2.8 hereof.
2.2 Grant-information. Licensor hereby grants to Licensee, and Licensee hereby
accepts from Licensor, a personal, nontransferable, exclusive right to use
Licensor's Information in the Territory solely for the manufacture within the
Territory of Licensed Products.
2.3 Grant-Trademark. Licensor hereby grants to Licensee, and Licensee hereby
accepts from Licensor, a personal, nontransferable exclusive right and license
to use the Trademark on and to apply it to Licensed Products made by Licensee in
the Territory, and Licensee agrees to use it in connection with the sale of
Licensed Products.
2.4 Limitation on Transfer or Sub-License. None of the licenses or rights
granted in Sections 2.1, 2.2 or 2.3 hereof may be transferred or sub-licensed by
Licensee to others except in the case of companies related to or commonly owned
by
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Licensee, and then only subject to prior notification to and receipt of prior
written approval from Licensor.
2.5 Grant of License in Licensee's Improvement Patents. Licensee hereby grants
to Licensor, and Licensor accepts from Licensee, the non-exclusive right and
license under any and all Licensee's Improvement Patents to make and have made,
use and sell Licensed Products and, subject to Section 2.7, to sub-license other
licensees of Licensor to do the same within their licensed territories. Without
the consent of Licensor, Licensee is not permitted to issue sublicenses to third
parties, to make, to have made, to use or sell Licensed Products covered by
Licensee Improvement Patents.
2.6 Grant of License in Licensee's Information. Licensee hereby grants to
Licensor, and Licensor accepts from Licensee, the non-exclusive right and
license to use Licensee's Information in connection with the manufacture, use
and sale of Licensed Products and, subject to Section 2.7, to sub-license other
licensees of Licensor to do the same within their licensed territories. Without
the consent of Licensor, Licensee is not permitted to disclose Licensee's
Information or to issue sublicenses to third parties, to make, to have made, to
use or sell Licensed Products covered by Licensee's Information.
2.7 Grant of Reciprocal Rights. Notwithstanding the foregoing provisions of
Sections 2.5 and 2.6, Licensor's right to sublicense its other licensees
thereunder may be exercised only insofar as the respective other licensees of
Licensor, to the extent they have developed or acquired rights in proprietary
information or patents useful in the manufacture, use or sale of Licensed
Products, shall have granted reciprocal rights to Licensor and through Licensor
to Licensee.
2.8 Additional Territory of Sales. Notwithstanding the foregoing, Licensee may
have an non-exclusive right to sell Licensed Products in the Asia-Pacific region
including countries such as Japan, China (including Hong Kong), Korea and,
Singapore. This non-exclusive right to sell in the Asia-Pacific region outside
the Territory shall be subject to the terms and conditions of licensing
agreement(s) established between Licensor and any future joint venture partner
and/or licensee in any country(ies) in the Asia-Pacific region.
ARTICLE III
TRANSFER OF LICENSOR'S INFORMATION: TRAINING
3.1 Disclosure of Licensor's Information. Within 30 days following the approval
of the license of the Joint Venture by Hsin-Chiu Science Base Industrial Park,
Licensor shall disclose Licensor's Information to Licensee in the form of
Technical Documents.
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3.2 Initial Training. Licensor shall provide a reasonable number of Licensee's
qualified employees with one or more training courses in the manufacture of
Licensed Products under Licensor's Patents and Licensor's Information. Such
training shall take place at such times and places as may be recommended by
Licensor or requested by Licensee and are acceptable to both parties. All
travel, living, salary and other expenses incurred by Licensee's employees, and
a reasonable salary plus travel and living expenses for each individual
furnished by Licensor to Licensee in connection with such training that may take
place other than at Licensor's facility, shall be borne by Licensee.
3.3 Additional Training. At Licensee's request, at any time during the term of
this Agreement after completion of the initial training courses provided for in
Section 3.2, Licensor shall provide additional training and/or retraining for
reasonable numbers of Licensee's qualified employees in the manufacture of
Licensed Products under Licensor's Patents and Licensor's Information. Licensor
and Licensee shall discuss the cost for such training and attempt in good faith
to agree upon a reasonable charge to be paid by Licensee to Licensor for such
additional training.
3.4 Employer's Responsibility. When employees or agents of either party are on
the premises or under the supervision of the other party, their employer or
principal shall nevertheless remain exclusively responsible for any problem they
may incur, including injury or death, of whatever nature and from whatever cause
(except if caused intentionally by the other party), and shall hold harmless the
other party from all liability therefor including attorneys fees. When employees
or agents of either party are on the premises of the other party they shall
abide by all standards, rules and regulations applicable to the work place.
ARTICLE IV
EXCHANGE OF INFORMATION
4.1 Disclosure of New Licensor's Information. From time to time during the term
of this Agreement, Licensor shall furnish to Licensee, at no extra charge, new
Licensor's Information not yet disclosed to Licensee as it is developed by
Licensor or acquired by Licensor without prohibition against disclosure to
others, in order to maintain Licensee as current as Licensor with respect to the
manufacture and use of Licensed Products. 4.2 Disclosure of New Licensee's
Information. From time to time during the term of this Agreement, Licensee shall
furnish to Licensor, at no extra charge, new Licensee's Information not yet
disclosed to Licensor as it is developed by Licensee or acquired by Licensee
without prohibition against disclosure to others, in order to maintain Licensor
as current as Licensee with respect to the manufacture and use of Licensed
Products.
4.3 Representative's Visits. At least once during each Calendar Quarter, or at
such other intervals as the parties may agree to, Licensor at its expense will
send a representative to one of Licensee's plants in the Territory to meet with
Licensee
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for the purpose of disclosing to Licensee and receiving from Licensee the
parties' respective Information developed since the previous such disclosure.
Licensee may also, from time to time and upon reasonable notice, at its own
expense and without charge from Licensor, send any qualified employee at
reasonable times to Licensor's plant for further Information or demonstration.
4.4 Training in Use of New Licensor's Information. At Licensee's request,
Licensor shall train any of Licensee's qualified employees in the use of new
Licensor's Information furnished pursuant to Section 4.1. Licensor and Licensee
shall negotiate in good faith to determine a reasonable cost for such training
to be paid by Licensee.
4.5 Limitation on Exchange of Information. This Agreement shall not be deemed to
obligate either party to impart or communicate to the other party such
information which it shall have obtained from or in conjunction with others not
party to this Agreement under such circumstances as would constitute a breach of
confidence or good business ethics, or bad faith, provided, however, that
neither party shall enter into agreements with third parties obligating them not
to disclose to the other party any information which would normally be
communicated to the other party under the terms of this Agreement.
ARTICLE V
ROYALTIES
5.1 Royalties. In partial consideration for the licenses granted herein by
Licensor, Licensee shall pay to Licensor a non-refundable lump sum initial
royalty in accordance with Section 5.2, and a running royalty in accordance with
Section 5.3.
5.2 Initial Royalties. As an Initial Royalty, Licensee shall pay to Licensor the
non-refundable sum of Two Million United States Dollars (US $2,000,000) and
Technical Investment Shares, payable as follows:
a. At the signing of the Letter of Intent which has taken place before
the end of January 1998 the sum of US$1.0 million.
b. Within 30 days following the approval of the license of the Joint
Venture by Hsin-Chiu Science Base Industrial Park and the delivery of
the Technical Documents by the Licensor to the Joint Venture the sum
of US$250,000. (The license of the Joint Venture is expected to be
granted by the Hsin-Chiu Science Base Industrial Park within 120 days
from the signing of the Letter of Intent and/or submission of the
license application).
c. US$250,000. upon the completion of the placement of the order for
the equipment of the production plant which is estimated to take place
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within 90 days after the approval of the license of the Joint Venture
by Hsin-Chiu Science Base Industrial Park.
d. US$500,000. upon the completion of the installation and successful
test run of the equipment supplied to the Joint Venture by Compositech
which is estimated to take place approximately 18 months after the
order for the equipment is placed.
e. Within thirty days after the later of the date of the approval of
the license of the Joint Venture by Hsin-Chiu Science Base Industrial
Park or the date of incorporation of the Joint Venture, Licensee shall
deliver to Licensor, in partial consideration for the patent license
granted pursuant to Section 2.1 hereof and without additional charge,
equity shares equal to 8.0% of the common stock of the Joint Venture
to be formed pursuant to the Joint Venture Agreement, as Technical
Investment shares.
5.3 Running Royalties. Licensee shall pay to Licensor running royalties equal to
the Royalty Rate determined in accordance with the following schedule multiplied
by the Net Sales of Licensed Products.
a. Beginning from year 1 from start-up of the production facility in
Taiwan through year 6 a royalty of *%
b. From Year 7 through year 10 a royalty of *% and
c. Years 11 and 12 a royalty of *%
ARTICLE VI
RECORDS, REPORTS AND PAYMENTS
6.1 Records. Licensee shall keep complete and accurate records, commensurate
with generally accepted accounting practice in both the R.O.C. and the United
States, sufficient to establish the basis for and computation of royalties due
hereunder. Such records may be audited not more than once each Calendar Year,
upon reasonable notice, by a qualified accountant appointed by Licensor and to
whom Licensee has no reasonable objection. Such audit shall be conducted at
Licensor's expense, for the sole purpose of verifying the royalty payments due
hereunder. If Licensee shall have failed to furnish any report as required by
Section 6.2 or if any such report understates the royalties due and owing to
Licensor by more than ten (10%) percent, then Licensee shall pay the cost of
such audit, without prejudice to any other remedies or claims of Licensor.
6.2 Reports and Payments. Within eight weeks after the close of each Calendar
Quarter, Licensee shall furnish to Licensor a report signed by an authorized
* This material has been omitted pursuant to a request for confidential
treatment. The material has been filed with the Securities and Exchange
Commission.
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officer of Licensee stating the royalties due and owing in accordance with
Section 5.3 for that Calendar Quarter together with the number of shippable
quality-inspected panels manufactured in each month during the Calendar Quarter,
the royalty rate applied for each month during the Calendar Quarter, Net Sales
for that month, the name and address of all purchasers of Licensed Products
during the Calendar Quarter and the computation of the royalty due. A report
shall be furnished for every Calendar Quarter during the term hereof and for
every Calendar Quarter after the term until all Licensed Products made during
the term have been sold or otherwise disposed of and royalties paid thereon
pursuant to Section 10.5. With each such report, Licensee shall remit to
Licensor by wire transfer, to an account or accounts designated by Licensor, the
amount stated in the report to be due. In the event that Licensee fails to
timely report and pay any royalty required hereunder, Licensor shall have the
right, immediately upon notice, to convert all licenses granted herein by
Licensor to non-exclusive licenses, and it is understood and agreed that if
Licensor does so in accordance with this Section 6.2, all other obligations of
Licensor and Licensee shall continue in effect as set forth herein, including
Licensee's obligation to make all royalty payments.
6.3 Currency Exchange. All royalties and other payments due hereunder shall be
paid to the Licensor in U.S. dollars, such amounts to be converted from the
currency in which payment for sales is made at the rate of exchange quoted under
"Foreign Exchange" in the U.S Wall Street Journal as applicable to the last date
of the quarter for which the payment is due or, if such date is not a day which
foreign exchange is traded and quoted, then the immediately preceding business
day. In the case of any payment in a currency the exchange rate of which is not
quoted in the U.S. Wall Street Journal, payment shall be deemed to have been
made in the currency of the R.O.C. at the price then currently offered (or if
none is quoted then the price at which the last comparable sale was made in
R.O.C. currency).
6.4 Taxes. In the event that Licensee is required by any law in the Territory to
withhold and/or make payments to taxing authorities in respect of any amounts
payable by Licensee to Licensor under this Agreement, the liability of Licensee
to Licensor shall be to that extent satisfied, and such amounts shall be deemed
to have been paid to Licensor on their due dates, provided that Licensee shall
furnish to Licensor evidence of such payments acceptable to the United States
tax authorities.
ARTICLE VII
PATENTS
7.1 Improvement Applications. Licensee may from time to time make application
for patents on its inventions based upon Licensee information, provided that it
shall first have given Licensor prior notice of and the opportunity to review
such
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application. No such application nor anything filed or divulged in connection
with its prosecution to secure a patent shall in any way reveal Licensor's
Information.
7.2 Licensor's Rights to Licensee's Improvement Patents. If Licensee has an
invention for which it decides not to seek a patent, or if it files for a patent
in some but not all countries of the world or if it files for and then decides
to abandon a patent application or patent, through any means whatsoever
including failure to prosecute it or to pay taxes or maintenance fees, Licensee
shall notify Licensor in writing before the date of abandonment or loss of
rights in order to provide Licensor with an adequate opportunity to secure or
continue patent protection in any or all such countries. Any such patents or
applications procured, continued or prosecuted by Licensor shall be so done at
Licensor's expense, and Licensee shall without charge furnish to Licensor all
papers, information, access to employees or agents (who may have information
useful in obtaining patent protection) and shall assign all rights therein
together with the right to sue for and collect damages for infringement to
Licensor. All such patents so procured by or transferred to Licensor shall be
subject to the license in the Territory granted in this Agreement.
7.3 Claims by Third Parties. If legal proceedings are instituted by a third
party against Licensee in which it claimed that the manufacture or sale of
Licensed Products infringes a patent or patents held by such third party,
Licensee will promptly advise Licensor and confer with Licensor as to the
defense thereof. The parties agree to determine through good faith negotiation
how to respond to and defend such suit.
7.4 Infringement on Licensor's Patents. In the event anyone sells laminates in
the Territory which in Licensor's judgment infringe Licensor's Patents, then
Licensor shall initiate and prosecute such suits or actions as it may deem
appropriate to best secure the cessation of such infringement. Licensee shall
pay all costs of such actions and in the event of any recovery of damages the
Licensee shall first recoup its costs and the balance of the recovery shall be
shared equally by the parties. Both parties agree to cooperate fully in
connection with any action against an alleged infringe of Licensor's Patents.
7.5 Origin Marking. Licensee shall mark all Licensed Products or packages sold
by it with the patent number(s) of Licensor's Patents both in the Territory and
in all other jurisdictions where Licensee may sell Licensed Products in such
manner as will fully comply with all applicable marking provisions of the patent
laws of such jurisdictions. Licensee shall furnish samples of such marking to
Licensor from time to time so that Licensor shall be currently apprised of
Licensee's marking practices.
ARTICLE VIII
TRADEMARKS
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8.1 Use of Trademark. Licensee agrees to use the Trademark on and in connection
with the marketing, advertising and sale of all Licensed Products in accordance
with Licensor's trademark practices and procedures, as they may be amended from
time to time in order to maintain and enhance the value of the Trademark or to
comply with applicable laws, regulations or practices in various countries.
Licensee shall submit samples of any proposed use of the Trademark, or any
change in its usage, to Licensor in advance of their adoption by Licensee,
Licensor's practices. Licensee shall not adopt any trademarks or other indicia
during the term hereof, which may be confusingly similar to the Trademark.
8.2 Infringement on Trademark. Licensee shall promptly notify Licensor in
writing of any use by another of a trademark or indicia that might infringe or
be confusingly similar to the Trademark, and shall assist Licensor without
charge in every reasonable way in any effort by Licensor to take steps against
such use.
8.3 Exclusive Right to Trademark. Licensee acknowledges Licensor's ownership of
and exclusive right to use the Trademark, and that no other mark or symbol used
in commerce is likely to cause confusion with it. Upon expiration or termination
of this Agreement, Licensee shall cease and desist from all use of the Trademark
in any way. Licensee shall not at any time, either during or after the term of
this Agreement, adopt or use any mark or symbol which is similar to or is likely
to be confused with the Trademark.
ARTICLE IX
CONFIDENTIALITY
9.1 Secrecy Procedures. Each party agrees that it will (a) use the other's
information solely in connection with the development, manufacture and use of
Licensed Products pursuant to this Agreement and not for any other purpose; (b)
not disclose the other's Information to anyone other than an officer, employee
or qualified consultant and then only if the officer, employee or qualified
consultant is known to the party to be trustworthy and has a legitimate need to
know the information and has signed a written contract obligating him or her to
maintain and treat the other's Information as required by this Agreement; and
(c) adopt and maintain procedures adequate under applicable laws and practices
to preserve and protect the other's Information against unauthorized disclosure
or use to the same degree as it protects its own most valuable confidential
information. Each party agrees, as part of its aforesaid obligation, to keep the
other's Information separately and in a safe place accessible only to those who
properly have access to it. In the event that a receiving party properly
discloses Information of the other party to persons outside the receiving party
(such as in the case of disclosure of Licensee's Information to other licensees
of Licensor), the disclosing party shall take all appropriate precautions to
insure that the receiving party safeguard and preserve the confidentiality of
the Information.
10
<PAGE>
9.2 Authorized Use of Information. Licensee shall timely provide Licensor from
time to time with the names and addresses of all persons to whom it has
disclosed any of Licensor's Information, and shall promptly notify Licensor if,
when and under what circumstances any such person leaves the employ of Licensee.
Licensee shall promptly inform Licensor of any possible unauthorized misuse or
disclosure of Licensor's Information and shall take all steps feasible, at its
expense and in consultation with Licensor, to identify any such possible misuse
or disclosure, to prevent or stop it and to minimize the possibility of injury
to Licensor with respect to its Information.
9.3 Exceptions. All information communicated by Licensor to Licensee or obtained
by Licensee from or in conjunction with Licensor in accordance with this
Agreement shall be deemed Licensor's Information and subject to Sections 9.1 and
9.2 except to the extent Licensee establishes that it shall have been or become
(a) generally known among those in the Territory working in the field of the
Licensed Products, (b) described in Licensee's written records kept in the
ordinary course of its business dated prior to the disclosure thereof by
Licensor, or (c) lawfully been made available to Licensee by a third party
having no obligation of confidentiality to Licensor. In the event Licensee
desires to disclose or use any Licensor Information other than in compliance
with Sections 9.1 and 9.2 in the belief that it has become known within the
purview of this Section 9.3, it shall first consult with Licensor and shall
continue to treat such information as required by Sections 9.1 and 9.2 until
such time as Licensor indicates its agreement in writing or the matter shall
have been resolved between the parties through arbitration or otherwise.
9.4 Survival on Termination and Return of Material. Licensee agrees that upon
the expiration or termination of this Agreement for any reason it will not
thereafter disclose, use or pass on in any way Licensor's Information at any
time, will continue in all respects to fully protect Licensor's Information in
accordance with this Article IX, and will promptly return all written materials
reflecting any Licensor's Information to Licensor at Licensee's expense.
9.5 Limitation on Purchase of Equipment. In order to assure and preserve the
confidentiality of Licensor's Information, Licensee intends to purchase all
laminate production Equipment to produce Licensed Products from Licensor.
ARTICLE X
TERM AND TERMINATION
10.1 Term. The effective date of this Agreement shall be deemed to be the date
when both parties shall have executed the Agreement. The term of this Agreement
shall begin on the effective date hereof and shall continue for a period of
twenty (20) years therefrom or until earlier terminated in accordance with this
Article X. The term shall be extended automatically for an indefinite number of
subsequent five (5) year periods, provided that either party may agree not to
extend the Agreement at any time without cause upon twelve (12) months written
11
<PAGE>
Notice, which termination shall become effective at the end of the aforesaid
twenty-year period (if the notice becomes effective during the twenty year
period) or at the end of the subsequent five-year period during which the notice
becomes effective.
10.2 Termination upon Default. If either party shall default in fulfilling any
of its material obligations hereunder, and such default is not cured within
sixty (60) days after Notice from the party not in default, the party not in
default shall thereafter have the right to terminate this Agreement at once by
written Notice. Upon giving such Notice this Agreement shall be deemed
terminated.
10.3 Bankruptcy. If Licensee shall file a petition in bankruptcy or make a
general assignment for the benefit of creditors or otherwise acknowledge
insolvency, or shall be adjudged a bankrupt or go or be placed into a complete
liquidation (other than for an amalgamation, reorganization, or the merger or
consolidation of such party), or if a receiver shall be appointed for the
business of the Licensee and such receiver shall not be discharged within sixty
(60) days after such appointment, then the Licensor at its option may thereupon
terminate this Agreement by Notice effective upon the date thereof.
10.4 Perpetuity of Licenses Granted to Licensor. Upon termination for any
reason, the licenses granted hereunder to Licensor under Licensee's Information
and Licensee's Patents shall remain in effect in perpetuity.
10.5 Royalty on Unsold Products at Termination. If any Licensed Products
manufactured during the term of this Agreement and subject to royalty remain
unsold at the expiration or termination of the Agreement, said royalty shall be
paid when sold.
ARTICLE XI
DISPUTE RESOLUTION
11.1 Arbitration. In the event of any dispute between the parties relating to
this Agreement, including its scope or validity, they shall first try to resolve
the matter through good faith negotiation and, if a resolution cannot be
achieved in that manner, then it shall be submitted to binding arbitration in
Geneva, Switzerland (or such other place as the parties may agree to) under the
applicable rules of the American Arbitration Association. The arbitration shall
be by a single arbitrator selected in accordance with the procedures of the
American Arbitration Association but who shall be technically grounded and whose
experience and training shall enable him or her to readily comprehend the
technical aspects of the issues to be decided. At the request of either party,
the arbitrator may permit discovery of documents and things as provided in the
Federal Rules of Civil Procedure of the United States. The costs of the
arbitration shall be shared
12
<PAGE>
equally by both parties but the arbitrator shall award costs, including the
amount paid to the arbitrator but excluding attorney's fees, to the prevailing
party.
11.2 Arbitrator's Award. The arbitrator's award may be enforced in a court of
competent jurisdiction, and the parties hereby submit themselves to the
jurisdiction of any federal or state court within the State of New York for that
purpose.
11.3 Emergency Relief. Notwithstanding the provisions of Sections 11.1 and 11.2,
in the event either party requires emergency relief to protect the value or
confidentiality of its Information, it may seek the same in any federal or state
court sitting in the State of New York, and both parties agree to and hereby
submit to the jurisdiction of any such court for that purpose and agree further
that service of process to initiate such action may be made (and shall be
sufficient if so made) by certified or registered mail, with return receipt.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 Waiver of Compliance. The failure of any party to this Agreement to object
to or take steps to remedy any one or more failures to perform any of the terms,
covenants or conditions of this Agreement or to exercise any right hereunder
shall not be construed as a waiver of or relinquishment of the future
performance of any such terms, covenants or conditions or the future exercise of
such right, or of the performance of any other term, covenant or condition of
this Agreement, but the obligations of the respective parties with respect to
such future performance shall continue in full force and effect.
12.2 Government Regulations. Disclosure of information hereunder shall be
subject to all applicable government regulations. Both parties agree to comply
fully with all export laws, restrictions and regulations of the jurisdictions
here involved including the United States Department of Commerce, and that they
will not knowingly export, or allow the export or re-export, of any product or
information, or any derivatives thereof, in violation of any such restrictions,
laws or regulations and that they will not without all required licenses and
authorizations export any of the foregoing to the People's Republic of China,
Afghanistan or any Group Q, S, W, Y or Z country specified in the then current
Supplement No. 1 to Section 770 of the U.S. Expert Administration Regulations
(or any successor supplement or regulations) .
12.3 Severability. In the event that any one or more of the provisions of this
Agreement shall for any reason be held to be void, invalid, illegal or
unenforceable in any respect, such holding shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such void,
invalid, illegal or unenforceable provision had never been contained herein.
13
<PAGE>
12.4 Assignment by Licensor. Licensor hereby reserves unto itself the right to
assign or transfer all or any of its rights under this Agreement to another
party, provided that such assignment or transfer shall in no way be detrimental
to any of the technical advantages or other rights of which Licensee benefits
under this Agreement. Licensee may not assign or transfer any or all of the
rights enjoyed by it under this Agreement to any other party without the prior
written consent of Licensor.
12.5 Force Majeure. Neither party shall be liable for any delay or default in
performance hereunder (except for the payment of any sums of money owing) due to
any cause beyond its reasonable control, including but not limited to acts of
God or the public enemy; laws, regulations, acts or requests of any government
or any government officer or agent purporting to act under duly constituted
authority; wars, floods, fires, storms, strikes, lockouts, interruptions of
transportation, freight embargoes or failures, exhaustion or unavailability on
the open market or delays in delivery of material, equipment or services
necessary to the performance of any provision hereof; or happening of any
unforeseen act, misfortune or casualty by which performance hereunder is delayed
or prevented: provided, however, that the party so affected will use its best
efforts to remedy the situation.
12.6 Governing Law and Language. This Agreement shall be deemed a contract made
under the laws of the State of New York, U.S.A. and for all purposes, including
matters pertaining to its form and its essential validity, shall be construed
and enforced in accordance with the laws of said State: provided that all
questions relating to termination for insolvency under Section 10.3 shall be
determined in accordance with the laws of the R.O.C.
12.7 Chances or Modification. No representation or statement made on behalf of
either party shall in any way change or modify the terms or conditions contained
herein unless made in a writing signed by the party to be charged.
12.8 Headings. The headings of the Articles and sections this Agreement are
inserted for convenience only and not constitute a part hereof or affect in any
way the meaning or interpretation of this Agreement.
12.9 Entire Agreement. The Joint Venture Agreement shall form and be read as
integral part of this Agreement. Together with this Agreement, they form the
entire agreement between the parties, and supersede all prior written and oral
understandings, conditions or warranties between the parties on the subjects
covered by such agreements.
12.10 Not Staples or Commodities. Licensee agrees that Licensed Products are not
and shall not be deemed staple articles or commodities of commerce.
12.11 No Implied License. Nothing contained in this Agreement shall be construed
as a license, express or implied, under any patents owned or controlled by
Licensor other than Licensor's Patents, or as a license under any information
14
<PAGE>
owned or controlled by Licensor other than Licensor's Information, or as a
license under any trademarks owned or controlled by Licensor other than the
Trademark.
12.12 Survival. The obligations set forth in Articles VII, IX and X shall
survive the termination or expiration of this Agreement and shall continue in
force until such time as they can be of no further effect.
12.13 No Adverse Position. Licensee undertakes and agrees that it will not
contest the validity or take any position adverse to Licensor with respect to
the scope or enforceability of the Licensed Patents.
12.14 Notices. All notices, requests, demands and other communications required
or permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered by hand, telecopied (with receipt confirmed), sent by
overnight courier service or mailed, by certified or registered mail:
15
<PAGE>
(a) If to Licensor, to:
Compositech Ltd.
120 Ricefield Lane
Hauppauge, New York 11788-2008
Attn: Mr. Fred Klimpl
or to such other person or address as Licensor shall furnish to Licensee in
writing.
(b) If to Licensee, to:
COMPOSITECH TAIWAN
5th Fl., No. 143, Sec. 2
Min-Sheng East Road
Taipei, Taiwan, R.O.C
Attn: Dr. Cheng-Ming Lee
or to such other person or address as Licensee shall furnish to Licensor in
writing.
WITNESS WHEREOF, the parties hereto have executed this Agreement effective
as of the day and year first above written.
COMPOSITECH LTD.
BY:____________________________
Name: Fred E Klimpl
Title: President
COMPOSITECH TAIWAN (or
Compositech Technologies,
Inc.)
BY: ___________________________
Name:
Title:
16
Exhibit 10.35.1
Patent, Information and Trademark Agreement - Amendment No. 1
The agreement dated February 9, 1998 by and between Compositech Ltd. and
Compositech Taiwan or Compositech Technologies Inc. is hereby amended effective
February 9, 1998 as follows:
Article 1.2 Licensed Products and Article 1.3 Licensor's Patents are deleted and
replaced by the following:
1.2 Licensed Products. "Licensed Products" shall mean copper clad laminates for
use as printed circuit boards, in which the filaments in the layers are parallel
rather than woven, but excluding all such laminates within the scope of any
claims of Licensor's Patents relating to (i) multilayer printed circuit boards,
as defined in claims 86-95 or made by the method defined in claims 96-104 of
Licensor's R.O.C. patent 34,906, and (ii) integral circuits, as defined in
claims 19 and 35 or made according to the method or with the apparatus defined
in claims 16, 33, 34, 36, 37, 43, 44, 53, 54 or 72 of Licensor's R.O.C. patent
34,906, provided that the metal or conductive surface is in the form of a
circuit and further provided that the circuit is formed on the tooling and
transferred to the laminate or printed circuit board during the molding process.
1.3 Licensor's Patents. "Licensor's Patents" shall mean all patents and/or
applications in the Territory owned or controlled by Licensor or under which
Licensor has the right to grant licenses at any time during the term of this
Agreement and relating to the field of Licensed Products, and any and all
reissues, extensions, patents of addition and patents for improvements thereon,
including Licensor's R.O.C. Patent No. 34906 but excluding claims or parts of
claims relating to (i) multilayer printed circuit boards, as defined in claims
86-95 or made by the method defined in claims 96-104 of Licensor's R.O.C. patent
34,906, and (ii) integral circuits, as defined in claims 19 and 35 or made
according to the method or with the apparatus defined in claims 16, 33, 34, 36,
37, 43, 44, 53, 54 or 72 of Licensor's R.O.C. patent 34,906, provided that the
metal or conductive surface is in the form of a circuit and further provided
that the circuit is formed on the tooling and transferred to the laminate or
printed circuit board during the molding process.
COMPOSITECH LTD.
BY:____________________________
Name: Fred E. Klimpl
Title: President
COMPOSITECH TAIWAN (or
Compositech Technologies,
Inc.)
BY: ___________________________
Name:
Title:
1
Exhibit 10.36
PURCHASE AGREEMENT
COMPOSITECH LTD.
Dated as of February 9, 1998
Compositech Taiwan (or Compositech Technologies, Inc.)
Fifth Floor No. 143
Min Sheng East Road Sec. 2
Taipei, Taiwan, R.O.C.
Dear Sirs:
WHEREAS, Compositech Ltd. (hereinafter referred to as the "Company"), a
Delaware corporation, and Fidelity Venture Capital Corp. (hereinafter referred
to as "Fidelity") entered into an Agreement to Form a Joint Venture on February
9, 1998 (the "JV Agreement"); and
WHEREAS, the JV Agreement provided for purchase by the Joint Venture of $2
million worth of the Company's common stock priced at the weighted average
closing price for the 30 day period prior to the signing of the JV Agreement,
with $1 million to be purchased on or before the signing of the JV Agreement and
$1 million within 30 days of the approval of the license of the Joint Venture by
Hsin-Chiu Science Base Park; and
WHEREAS, the JV Agreement was signed on February 9, 1998;
NOW THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. Sale and Purchase of Subject Shares. Subject to the terms and conditions
of this Agreement, at the closing referred below (the "Closing"), the Company
shall sell to you, and you shall purchase from the Company at a purchase price
of One Million Dollars ($1,000,000) (the "Purchase Amount") 587,372 shares (the
"Shares") of the Company's common stock, par value $0.01 per share (the "Common
Stock"), at a purchase price of $1.7025 per share (such amount being equal to
the weighted average closing price for the 30 day period prior to February 9,
1998 - see Schedule A attached).
2. Closing. The Closing shall take place on February 9, 1998, or on such
other date as may be reasonably agreed upon by you and the Company (the "Closing
Date"). At or prior to the Closing, you shall pay to the Company the Purchase
Amount in U.S. dollars by check or wire transfer of funds to an account
designated by the Company. The Share certificates shall be delivered to you
pursuant to instructions provided to the Company in writing by you promptly
following the Company's receipt of the Purchase Amount.
-1-
<PAGE>
3. Representations, Warranties and Covenants of the Company. The Company
represents, warrants and covenants to you as follows:
(A) Corporate Organization, Etc. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware and has full corporate power and authority to carry on
its business as it is now being conducted.
(B) Authorization, Etc. The Company has full corporate power and
authority to enter into this Agreement, to issue and sell the Shares and to
carry out the transactions contemplated by this Agreement. This Agreement
has been duly authorized, executed and delivered by the Company and is a
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, and the Shares, when issued and paid
for in accordance with the terms of this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable.
(C) Consents and Approvals of Governmental Authorities. No consent,
approval or authorization of, or declaration, filing or registration with,
any governmental or regulatory authority is required to be obtained or made
by the Company in connection with the execution, delivery and performance
of this Agreement, the issuance and sale of the Shares or the consummation
of the transactions contemplated hereby, except for such filings or other
actions as may be required by federal or state securities laws.
(D) Full Access. Prior to the Closing Date, the Company shall afford
to you or your agent full access to the plant, offices, properties, books
and records of the Company during the Company's customary business hours in
order that you may have full opportunity to make such investigations as you
shall desire of the affairs of the Company and the Company shall cause its
officers and accountants to furnish such other information as you may
reasonably request.
4. Your Representations, Warranties and Covenants. You represent, warrant
and covenant to the Company as follows:
(A) You acknowledge and understand that the Shares have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), or the securities laws of any state and may not be offered or sold
unless first registered under the Securities Act and any applicable state
securities laws or unless such offer or sale is exempt from such
registration. You represent and warrant to the Company that you are
purchasing the Shares for investment only and that you are an "accredited
investor" as such term is defined in Regulation D under the Securities Act.
(B) In connection with any registration of the Company's securities
(whether or not you are participating in such registration), you shall not
sell, make any short sale of, loan, grant any option for the purchase of,
or otherwise dispose of any of the
-2-
<PAGE>
Shares without the prior written consent of the Company for such period of
time up to 12 months from the effective date of such registration statement
as the Company and the managing underwriter may specify.
5. Miscellaneous Provisions.
5.1. Amendment and Modification. This Agreement may only be amended,
modified or supplemented by written agreement of the Company and you.
5.2. Expenses, Transfer Taxes, Etc. Whether or not the transactions
contemplated by this Agreement shall be consummated, the Company agrees that all
fees and expenses incurred by it in connection with this Agreement shall be
borne by it and you agree that all fees and expenses incurred by you in
connection with this Agreement shall be borne by you.
5.3 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand, telecopied (with receipt confirmed), sent
by overnight courier service or mailed by certified or registered mail and shall
be deemed to be received on the date of receipt:
(a) If to the Company, to:
Compositech Ltd.
120 Ricefield Lane
Hauppauge, New York 11788-2008
Attention: Mr. Samuel S. Gross
with a copy to:
Donovan Leisure Newton & Irvine
30 Rockefeller Plaza
New York, New York 10112
Attention: Edward F. Cox, Esq.
or to such other person or address as the Company shall furnish to you in
writing.
(b) If to you, to the address first set forth above or to such other
person or address as you shall furnish to the Company in writing.
5.4 Governing Law; Submission to Jurisdiction. This Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of New York without giving effect to the choice of law principles of such State.
5.5. Counterparts. This Agreement may be executed in counterparts, each
-3-
<PAGE>
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
5.6. Entire Agreement. This Agreement sets forth the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of either party hereto.
Very truly yours,
COMPOSITECH LTD.
By: ________________________
Samuel S. Gross
Executive Vice President
AGREED to and accepted
as of the date first
set forth above.
PURCHASER:
COMPOSITECH TAIWAN
(OR COMPOSITECH TECHNOLOGIES, INC.)
By:________________________________
Dr. Cheng-Ming Lee
Acting Chairman
-4-
<PAGE>
<TABLE>
<CAPTION>
Compositech Ltd. Schedule A
Calculation of Weighted Average Stock Price
Trading in 30 calendar days preceding 2/09/98
[2/09/98 = date of signing of Taiwan Joint Venture Agreement]
Trading Closing Daily Volume * Trailing
Date Price Volume Closing Price 30 day avg.
--------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
12-Jan 1.438 3,700 5,321
13-Jan 1.438 28,200 40,552
14-Jan 1.438 61,900 89,012
15-Jan 1.406 65,200 91,671
MLK B'day 16-Jan 1.406 8,000 11,248
= 1/17/98 20-Jan 1.375 3,733 5,133
21-Jan 1.500 2,300 3,450
22-Jan 1.500 1,300 1,950
23-Jan 1.500 7,100 10,650
26-Jan 1.500 21,100 31,650
27-Jan 1.469 110,950 162,986
28-Jan 1.500 344,950 517,425
29-Jan 1.750 71,500 125,125
30-Jan 1.750 26,600 46,550
2-Feb 1.781 22,300 39,716
3-Feb 1.750 21,320 37,310
4-Feb 1.875 72,393 135,737
5-Feb 2.094 187,500 392,625
6-Feb 2.031 172,200 349,738
----------------------------- --------------
30 trailing calendar days = 1,232,246 2,097,849 1.7025
--------------
</TABLE>
Exhibit 23.1 - Consent of Ernst & Young LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Amendment No. 3 to the
Registration Statement (Form S-3 No. 333-32241) of Compositech Ltd. and in the
related Prospectus of our report dated February 13, 1998, with respect to the
financial statements of Compositech Ltd. included in this Annual Report (Form
10-KSB) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Melville, New York
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Form 10-KSB for the period ended December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 624,254
<SECURITIES> 0
<RECEIVABLES> 44,725
<ALLOWANCES> 0
<INVENTORY> 401,922
<CURRENT-ASSETS> 1,369,654
<PP&E> 6,765,901
<DEPRECIATION> 1,489,229
<TOTAL-ASSETS> 13,145,889
<CURRENT-LIABILITIES> 1,198,573
<BONDS> 5,762,350
0
1,842,483
<COMMON> 77,679
<OTHER-SE> 29,902,910
<TOTAL-LIABILITY-AND-EQUITY> 13,145,889
<SALES> 507,403
<TOTAL-REVENUES> 507,403
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,549,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,555,603<F1>
<INCOME-PRETAX> (7,397,603)<F2>
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,397,603)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> 0
<FN>
<F1> Interest expense includes $1,326,218 of amortization of debt discount and expenses.
<F2> Income before taxes includes equity in loss of joint venture totalling $63,722.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10K-SB
for the period ended December 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 673,084
<SECURITIES> 2,384,700
<RECEIVABLES> 66,293
<ALLOWANCES> 0
<INVENTORY> 217,974
<CURRENT-ASSETS> 3,408,931
<PP&E> 4,894,786
<DEPRECIATION> 1,028,646
<TOTAL-ASSETS> 7,447,870
<CURRENT-LIABILITIES> 1,797,196
<BONDS> 0
0
2,052,483
<COMMON> 61,189
<OTHER-SE> 22,558,933
<TOTAL-LIABILITY-AND-EQUITY> 7,447,870
<SALES> 327,411
<TOTAL-REVENUES> 327,411
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,952,965
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 497,377
<INCOME-PRETAX> (4,534,195)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,534,195)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> 0
</TABLE>
