SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
(Mark one)
[x] Quarterly Report under section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1998
[ ] Transition Report under section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-27908
Semiconductor Laser International Corporation
------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 16-1494566
- ---------------------------------------- -------------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
15 Link Drive, Binghamton, New York 13904
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (607) 722-3800
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
preceding 12 months (or for a 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 [ ]
As of October 31, 1998, there were outstanding 10,039,552 shares of the
issuers common stock, par value $.01 per share.
Transitional Small Business Disclosure Format
Yes [ ] No [x]
<PAGE>
1
Part I. Financial Information
Item 1. Financial Statements
Semiconductor Laser International Corporation
Balance Sheet
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(unaudited)
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash $ 1,934,574 $ 456,225
Accounts Receivable, net of allowance for
doubtful accounts of $49,810 and $99,810,
respectively 201,070 622,069
Inventory 139,201 269,101
Prepaid expenses and other assets 70,717 28,380
------------ ------------
Total current assets 2,345,562 1,375,775
Property, plant and equipment, net 2,719,816 2,744,145
Intangible assets, net 674 -
Deposits and other assets 591,320 278,500
------------ ------------
Total assets $ 5,657,372 $ 4,398,420
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 512,447 $ 825,074
Accrued expenses and other liabilities 161,545 169,986
Current portion of long-term debt 36,394 31,353
Notes payable under line of credit arrangement - 550,000
------------ ------------
Total current liabilities 710,386 1,576,413
Long-term debt 798,283 776,211
Accrued royalty payments 100,000 100,000
------------ ------------
Total liabilities 1,608,669 2,452,624
------------ ------------
Commitments and contingencies (Note 5)
Shareholders' Equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued and outstanding at
December 31, 1997 and September 30, 1998 - -
Common stock, $.01 par value, 20,000,000 shares
authorized, 8,389,552 issued and outstanding
at December 31, 1997, and 10,039,552 issued
and outstanding at September 30, 1998 83,896 100,396
Treasury stock (248,241) (248,241)
Additional paid-in capital 17,035,225 18,061,560
Accumulated deficit (12,822,177) (15,967,919)
------------ ------------
Total Shareholders' Equity 4,048,703 1,945,796
------------ ------------
Total liabilities and
Shareholders' Equity $ 5,657,372 $ 4,398,420
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
2
Semiconductor Laser International Corporation
Statement of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1998 1997 1998
(unaudited) (unaudited) (unaudited)(1) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 147,916 $ 600,110 $ 326,724 $ 1,375,016
Cost of sales (517,466) (962,588) (1,001,678) (2,399,532)
----------- ----------- ----------- -----------
Gross margin (369,550) (362,478) (674,954) (1,024,516)
Operating expenses:
Research and development expenses 30,571 - 911,912 7,273
Sales and marketing expenses 62,337 40,421 307,878 343,867
General and administrative expenses 543,883 738,681 1,571,404 1,807,205
---------- ---------- ----------- -----------
Loss from operations (1,006,341) (1,141,580) (3,466,148) (3,182,861)
Interest income 14,318 5,109 90,597 37,119
---------- ---------- ----------- -----------
Net loss (992,023) (1,136,471) (3,375,551) (3,145,742)
========== ========== =========== ===========
Net loss per share ($0.28) ($0.11) ($0.95) ($0.35)
========== ========== =========== ===========
Weighted average shares outstanding 3,569,600 10,039,552 3,541,320 9,078,563
========== ========== =========== ===========
(1) Reclassified for comparative purposes (see Note 4).
</TABLE>
See accompanying notes to financial statements
<PAGE>
3
Semiconductor Laser International Corporation
Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1998
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,375,551) $(3,145,742)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 90,204 152,846
Amortization of deferred expenses 61,341 -
Gain on sale of equipment (17,364) -
Change in assets and liabilities:
Increase in accounts
receivable, net (176,856) (420,999)
Increase in inventory (122,554) (129,900)
Decrease in prepaid expenses
and other assets - 42,337
(Increase)decrease in deposits
and other assets (350,490) 312,820
Increase in accounts
payable 91,518 312,627
Increase(decrease) in accrued
expenses and other liabilities (9,786) 8,441
----------- -----------
Net cash used in operating activities (3,809,538) (2,867,570)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (2,837,439) (176,501)
Sale of equipment 3,010,145 -
----------- -----------
Net cash provided from (used for)
investing activities 172,706 (176,501)
----------- -----------
Cash flows from financing activities
Proceeds from long-term debt 31,306 550,000
Payments on long-term debt (24,109) (27,113)
Issuance of stock, net of expenses 1,971 1,042,835
----------- -----------
Net cash provided by (used for) financing
activities 9,168 1,565,722
----------- -----------
Net (decrease) increase in cash (3,627,664) (1,478,349)
Cash at beginning of period 4,266,168 1,934,574
----------- -----------
Cash at end of period $ 638,504 456,225
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
4
Semiconductor Laser International Corporation
Notes to Financial Statements
September 30, 1998
(Unaudited)
1. Organization
Semiconductor Laser International Corporation (the "Company") was
incorporated in New York State in September 1993 (inception) and,
subsequently, reincorporated in Delaware in September 1997, to produce high
power semiconductor diode laser wafers and bars ("HPDLs"), and to market
these products worldwide.
The Company's primary activities since incorporation as a development stage
enterprise had been research and development, business and financial
planning, raising capital and constructing and equipping its manufacturing
facility. The Company had previously relied on facilities provided through
the Wright Cooperative Research and Development Agreement (CRDA) with the
U.S. Air Force for the development and quality control testing of its HPDLs
The Company has since completed the construction of its manufacturing
facility in Binghamton, New York, where it is conducting all activities.
Effective April 1, 1997, the Company ceased operating as a development stage
enterprise as it began commercial production of its products.
2. Financial Resources and Liquidity
The Company has incurred net losses from inception (September 21, 1993) and
has an accumulated deficit at September 30, 1998 of $15,979,950. Such losses
have resulted primarily from the Company's activities as a development stage
enterprise and have been financed primarily out of proceeds from the
Company's initial public offering and private equity financing. The Company
expects that its cash and working capital requirements will continue to be
significant as its operations expand. Potential sources for such cash
and working capital requirements are revenue growth and additional private
equity financing. In this regard, the Company completed a private equity
financing on June 8, 1998 in the amount of $1,237,500 and has used and
intends to continue to use the net proceeds of approximately $1,043,000
for working capital requirements. The Company is currently seeking to issue
additional equity capital through a private placement. The Company is also
taking actions to reduce operating expenses. Without an infusion of
additional equity, however, the Company estimates that it has sufficient
cash flow to operate through approximately January 31, 1999. Legal fees
associated with pending investigations are expected to be an additional
drain on the Company's cash flow. See Note 5 of Notes to Financial
Statements.
<PAGE>
5
3. Basis of Presentation
The accompanying unaudited financial statements have been prepared by the
Company. Certain information and footnote disclosures normally included in
financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted. In the opinion of the
Company's management, the disclosures made are adequate to make the
information presented not misleading, and the financial statements contain
all adjustments necessary to present fairly the financial position as of
September 30, 1998 and the results of operations and cash flows for the nine
months ended September 30, 1998 and 1997. The results of operations for the
nine months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
4. Summary of Significant Accounting Policies
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses during
the period. Actual results could differ from those estimates.
Reclassification
Certain costs previously reported in 1997 as general and administrative
costs have been reclassified to cost of sales and research and development
costs in order to conform with the current period classification. This
reclassification had no effect on previously reported net income or earnings
per share.
Inventory
Inventory is valued at the lower of cost or market. Cost is determined by
the first in, first out (FIFO) method.
Depreciation and amortization
Property , plant and equipment are recorded at cost and depreciated over the
assets' estimated useful lives ranging from three to twenty years.
Depreciation is computed using the straight-line method for financial
reporting and the modified accelerated cost recovery system for income tax
purposes. Expenditures for major renewals and betterments that extend the
useful lives of property, plant and equipment are capitalized. Expenditures
for maintenance and repairs are charged to expense as incurred.
Intangible assets are amortized using the straight-line method over five
years.
Impairment of long-lived assets
Assessments of the recoverability of long-lived assets are conducted when
events or circumstances occur that indicate that the carrying value of the
asset may not be recoverable. The measurement of impairment is based on the
ability to recover such carrying value from the future undiscounted cash
flows of related operations.
<PAGE>
6
Revenue recognition
Revenue recognition is based on the terms of the underlying sales agreements
(purchase orders or contracts). Revenues for fixed price milestone
contracts is recognized upon the completion and billing of the milestone.
Customers entering into long-term contracts with the Company include the
U. S. Government.
Research and development
Research and development costs are expensed as incurred. Included in
research and development costs are the cost of prototypes which amounted
to $7,273 and $911,912 for the nine-month period ended September 30, 1998
and 1997, respectively.
Income taxes
The Company follows the asset and liability method for deferred income
taxes. This method provides that deferred tax assets and liabilities are
recorded using currently enacted tax rates applied to the differences
between the tax bases of assets and liabilities and their carrying values
for financial statement purposes. A valuation allowance is recorded when it
is more likely than not that deferred tax assets will not be realized.
Net loss per share
In December 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings per Share ("FAS 128")
which requires the presentation of basic and diluted earnings per share in
a Company's financial statements for reporting periods subsequent to
December 15, 1997. As required by SEC Staff Accounting Bulletin No. 98,
previously reported per share information contained in the accompanying
consolidated financial statements has been restated to give effect to the
adoption of FAS 128. There was no impact as a result of this retroactive
adoption of FAS 128.
Net loss per share is computed using the weighted average number of common
shares outstanding.
As of September 30, 1998, the Company had outstanding warrants and options
to purchase 2,946,334 and 141,305 shares of common stock, respectively,
which are not included in the calculation of earnings per share for the nine
months ended September 30, 1998, and would not be included in such
calculation due to the anti-dilutive nature of these instruments.
<PAGE>
7
5. Commitment, Contingencies and Other Matters
Operating Leases
In October 1996, the Company entered into a master equipment lease
agreement with FINOVA Technology Finance, Inc. ("FINOVA"). The agreement
provides for the sale and leaseback by the Company of up to $3,850,000 of
equipment, furnishings and fixtures. As part of the consideration for
the agreement, the Company issued a warrant certificate for 58,334
warrants, entitling FINOVA to purchase a corresponding number of shares
of the Company's Common Stock at $5.00 per share. The warrants, which were
valued at $167,710 at the time of issuance, are currently exercisable and
are being amortized over the term of the lease.
Rent expense under non-cancelable operating leases, including the FINOVA
leases, was $788,390 for the nine months ended September 30, 1998.
Future minimum payments under non-cancelable operating leases, including
the FINOVA lease agreement, at September 30, 1998, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Commitment
------------- -------------
<S> <C> <C>
1998 $ 263,000
1999 1,051,000
2000 1,051,000
2001 263,000
-------------
$2,628,000
=============
</TABLE>
Litigation
The Company is currently engaged in litigation with a former employee who
the Company brought an action against for a breach of confidentiality
obligations and defamation of character. The former employee has responded
with a counter claim alleging defamation of character and is seeking
$500,000 in damages. The litigation is presently in the discovery stage.
The Company believes the counter claim is without merit and is vigorously
defending such action. The Company believes that the ultimate outcome of
such action will not have a material impact on the financial condition or
results of operations of the Company.
<PAGE>
8
Since April 1998, the Company has been responding to informal requests for
information from the Securities and Exchange Commission. In August 1998, the
Company learned that in June 1998, the Commission had issued a formal order
of investigation to determine whether violations of certain aspects of the
federal securities laws had occurred in connection with the Company.
Pursuant to this formal order of investigation, the Company and certain of
its current and former officers and directors have produced documents
pursuant to subpoenas from the Northeast Regional Office of the Commission.
The investigation is in its early stages and the Company is not able to
speculate as to the specific subject matter of the investigation or the
outcome or possible effect of the investigation on the Company. There can
be no assurance as to the timeliness of the completion of the investigation
or as to the final result thereof, and no assurance can be given that the
final result of the investigation will not have a material adverse effect on
the Company. The Company is cooperating with the investigation, and has
responded and will continue to respond to requests for information in
connection with the investigation.
In August 1998, the Company learned that the United States Attorney's Office
for the Southern District of New York is investigating whether violations of
securities laws have occurred in connection with the Company's public
disclosures. The Company is cooperating with the investigation and is
responding to a grand jury subpoena issued in connection with the
investigation. There can be no assurance as to the timeliness of the
completion of the investigation or as to the final result thereof, and no
assurance can be given that the final result of the investigation will not
have a material adverse effect on the Company or its current management.
Management believes that there are meritorious defenses to the issues raised
by this investigation and intends to defend this matter vigorously.
Financing
On June 8, 1998, the Company completed a private placement of 1,650,000
shares of Common Stock at an aggregate purchase price of $1,237,500. After
deduction of Placement Agent's commissions and expenses of $194,665, the net
proceeds to the Company was approximately $1,042,835. As a condition of the
private placement, the Company, on July 31,1998, filed with the Securities
and Exchange Commission ("SEC") for the registration of the securities
underlying the private placement. The registration is currently pending
with the SEC.
Notes Payable
The Company has a line of credit secured by accounts receivable and
inventory in the amount of $1,000,000. This line of credit bears interest
at the rate of prime plus 1.5% (prime being 8.5% at September 30, 1998) on
the outstanding balance. At September 30, 1998, $550,000 was outstanding
on this line of credit on which the Company is required to pay interest only.
The Company had borrowings in excess of its borrowing base requirements as
of September 30, 1998. However, a waiver of the right to demand payment for
this excess has been provided by the lender through December 31,
1998. There can be no assurance that any additional extension of this
waiver can be negotiated. The Line matures March 31, 1999.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
State of Readiness and Cost
The Company relies on systems developed by other parties in regard to its
business, accounting and operational software. The Company believes that
its significant business, accounting and operational software are Year 2000
compliant. None of the Company's systems are believed to be affected by the
year 2000 issue. The Company expects the costs it incurs, if any, to
achieve Year 2000 compliance will be immaterial.
Risk
The Company has no computer interfaces with its vendors and customers.
However, it does not know the extent to which its vendors, or its customers
would be impaired by their own Year 2000 issues and the impact of such
issues on the Company. The costs of assessing such compliance are expected
to be minimal. In addition, although the Company believes it is adequately
addressing its Year 2000 issues, there can be no assurance that
unanticipated or undiscovered compliance problems with regard to the Company
or its vendors and customers will not have a material adverse effect on the
Company's financial condition, results of operations and business.
Contingency Plans
Given that the Company believes that it is currently Year 2000 compliant, the
Company has not prepared a contingency plan and does not currently believe
that a contingency plan is necessary.
<PAGE>
9
Item 2. Managements Discussion and Analysis or Plan of Operation
Certain statements in this Report under the caption "Management's
Discussion and Analysis and Plan of Operation" and elsewhere constitute or may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"),
including, without limitation, statements regarding future cash requirements.
The Company desires to avail itself of certain "safe harbor" provisions of the
Litigation Reform Act and is therefore including this special note to enable
the Company to do so. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: inability to obtain additional financing on
acceptable terms, manufacturing delays due to equipment or technical problems,
delays in product development; costs associated with and outcome of pending
investigations described elsewhere herein; failure to receive or delays in
receiving regulatory approval; lack of enforceability of patents and proprietary
rights; general economic and business conditions; industry capacity; industry
trends; demographic changes; competition; material costs and availability; the
loss of any significant customers; changes in business strategy or development
plans; quality of management; availability, terms and deployment of capital;
business abilities and judgment of personnel; availability of qualified
personnel; changes in, or the failure to comply with, government
regulations; and other factors referenced in this report.
Overview
During 1997, the Company began the commercialization of many of its
proposed products. Since its inception in 1993, the Company had been
engaged primarily in research and development, business and financial
planning, recruitment of key management and technical personnel, raising
capital to fund operations and the development of its HPDL product
prototypes. The Company has since completed the construction and equipping of
the first phase of its manufacturing facility and has begun the
commercialization of its products and the generation of sales revenues. The
Company is seeking to increase sales in order to fully utilize its production
capacity. Increasing sales levels and higher utilization of production capacity
are critical to the Company's financial success. Financial resources and
liquidity during this period of growth are of utmost importance and concern to
the Company. Coherent, Inc., a competitor of the Company, has advised the
Company and Northwestern University that it believes that the patent rights
under the Northwestern License do not cover the manufacture of aluminum free
products other than by MOCVD. Alternatively, Coherent, Inc. claims that its
products do not infringe on the Northwestern patents. The Company is reviewing
its options with respect to such infringements.
<PAGE>
10
The manufacture of semiconductor lasers such as those sold by the Company is
a highly complex and precise process, requiring production in a highly
controlled and clean environment with the utilization of materials free of
defects and contamination. These factors have a significant impact on
production yields and product reliability which in turn affect operating
results and future customer acceptance. The Company as well as other
semiconductor laser manufacturers have, from time to time, experienced
technical production problems which have resulted in adverse financial
consequences. No assurance can be given that the Company's systems,
procedures, procurement efforts and production process are such that these
problems will not be experienced in the future.
Since the onset of commercial production, the Company, on occasion, has
been unable to manufacture certain products in quantities sufficient to meet
the demands of its existing customer base and that of new customers based upon
equipment and/or other technical problems arising at various points during the
production process. While at this time the Company is not experiencing any
significant technical manufacturing problems, there can be no assurance that
technical manufacturing problems could not arise in the future. The recent
growth in the Company's product demand and the expansion in the scope of its
operations has placed considerable strain on Company management, financial,
manufacturing and other resources and has required the Company to continually
improve a variety of operating, financial and other systems. There can be no
assurance that any existing or new systems, procedures or controls will be
adequate to support the Company's operations or that its systems, procedures
and controls will be designed, implemented or improved in a cost effective
and timely manner. Lack of financial resources to implement, improve and
expand such systems, procedures and controls in an efficient manner and at a
pace consistent with the Company's business could have a material adverse
impact on the Company's business and results of operations.
Results of Operations
Effective April 1, 1997, the Company was no longer considered to be a
Development Stage Enterprise. During the period in which the Company was
considered a Development Stage Enterprise, sales of prototype units and the
cost associated therewith were offset against research and development
expenses.
Three months ended September 30, 1998, compared to three months ended September
30, 1997.
Sales were $600,110 for the three months ended September 30, 1998 as compared to
$147,916 for the same period in the prior year. This increase of 406% in
sales was the result of increased demand for the Company's products and the
improvement in the Company's production process which facilitated increased
shipments of product. In view of a delay in shipment caused by a significant
customer of the Company, sales for at least the next two quarters are expected
to be somewhat lower than sales for the three months ended September 30, 1998.
The anticipated decrease in sales is expected to be partially offset by other
orders which have been recently received or are expected to be received by
the Company. There can be no assurance that any such other orders will be
received.
Cost of sales for the three months ended September 30,1998 increased
approximately $445,000 as a result of an increase in raw materials attributable
to increased product sales, increases in depreciation expense charged to cost of
sales as a result of the purchase of additional manufacturing equipment and
increased levels of production labor to support the growth in sales.
Research and development expenses for the three months ended September 30, 1998
decreased approximately $31,000 to $0 as compared to the three months ended
September 30, 1997 as a result of the Company moving from the development stage
to commercial production during the second quarter of 1997. Certain production
costs reflected as research and development for the three months ended
September 30, 1997 in accordance with development stage accounting practices
are now reflected as cost of sales in accordance with accounting practices
followed by commercially operating entities. Previous levels of research and
development expenses were associated primarily with the Company being in the
development stage wherein all costs associated with the development of the
production process along with the cost and revenues associated with prototype
units were charged to research and development.
Sales and Marketing expenses decreased approximately $22,000 for the three
months ended September 30, 1998 as compared to the same period in 1997 primarily
due to the timing of trade shows.
General and administrative expenses increased approximately $195,000 for the
three months ended September 30, 1998 as compared to the same period in 1997.
The increase was due to increased professional fees (legal and consulting),
increased medical and liability insurance premiums, higher utility costs
associated with increased business activity and increases in interest expense
due to higher levels of debt outstanding primarily occasioned by the need for
additional working capital. These increases were offset by reduced payroll
costs associated with fewer employees performing general and administrative
functions.
Interest income decreased for the three months ended September 30, 1998 as
compared to the three months ended September 30, 1997, as a result of lower cash
balances available for investment.
Nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997.
Sales for the nine months ended September 30, 1998 increased approximately
$1,048,000 over the same period in the prior year. The increase in sales was
attributable to increased recognition of the Company's products in the market
place, the culmination of marketing efforts during 1997. The increase also
resulted from the Company being in production for all nine months of the 1998
period while in the 1997 period it was in the development stage for the first
three months. At such time, prototype sales were credited to research and
development expenses.
Cost of sales for the nine months ended September 30, 1998, increased
approximately $1,397,000 over the nine months ended September 30, 1997, as a
result of the costs associated with increased sales and an increase in the
absolute costs charged to cost of sales during the period. During the first
three months of the comparable period in the prior year, the Company was in
the development stage and certain costs were recognized as research and
development expense as opposed to cost of sales.
Research and development costs decreased approximately $904,000 primarily as a
result of recognition of manufacturing costs as cost of sales for the full nine
months ended September 30, 1998 vs. recognition of such costs as research and
development during the period in 1997 when the Company was in the development
stage for the first three months. During the nine months ended September 30,
1998, the Company has incurred minimal amounts of research and development
costs as a result of an emphasis on the production of existing product lines.
Sales and marketing expense increased approximately $36,000 for the nine months
ended September 30, 1998 as compared to the nine months ended September 30, 1997
primarily as a result of increased costs associated with participation in trade
shows and a write-off of previously deferred expenses associated with a canceled
contract which was entered into in 1997 to provide services through November
1998.
General and administrative expenses increased approximately $236,000 for the
nine months ended September 30, 1998 as compared to the same period in 1997.
The increase was due to increases in liability insurance premiums, increases in
interest expense due to higher levels of debt outstanding, increases in repairs
and maintenance and utility costs associated with increases in business
activity. These increases were offset by decreases in professional fees,
primarily legal associated with litigation and patent activities and decreases
in employee recruiting costs. The Company anticipates that its legal costs
will increase as a result of expenses related to certain pending investigations.
See Note 5 to Notes to Financial Statements.
Interest income decreased as a result of lower cash balances available for
investment.
Liquidity and Capital Resources
The Company's cash and cash equivalents at September 30, 1998 were $456,225 as
compared to $1,934,574 at December 31, 1997, a net decrease of $1,478,349 for
the nine months ended September 30, 1998. The decrease was the result of
$2,867,570 used in operating activities, $176,501 used in investing activities
offset by $1,565,722 provided by financing activities.
The Company has available $450,000 of a secured line of credit in the amount of
$1,000,000 for purposes of providing working capital, if necessary. The line
bears interest at prime plus 1.5% on the used portion and matures March 31,
1999.
<PAGE>
12
The Company has a line of credit secured by accounts receivable and inventory
in the amount of $1,000,000. This line of credit bears interest at the rate of
prime plus 1.5% (prime being 8.5% at September 30,1998) on the outstanding
balance. At September 30, 1998, $550,000 was outstanding on this line of
credit on which the Company is required to pay interest only. The Company had
borrowings in excess of its borrowing base requirements as of September 30,
1998. However, a waiver of the right to demand payment for this excess has
been provided by the lender through December 31, 1998. There can be no
assurance that any additional extension of this waiver can be negotiated. The
Line matures March 31, 1999.
To date, the Company has experienced significant losses, which losses are
continuing. The Company believes that on an earnings basis it can achieve
break even on monthly sales of approximately $550,000. There is no assurance
that profits will be achieved and/or positive cash flow will be achieved.
Potential sources for such cash and working capital requirements are revenue
growth and additional private equity financing. In this regard, the Company
completed a private equity financing on June 8, 1998, in the amount of
$1,237,500 and has used and intends to continue to use the net proceeds of
approximately $1,043,000 for working capital requirements. The Company is
currently seeking to raise additional equity capital through a private
placement. The Company is also taking actions to reduce operating expenses.
Without an infusion of additional equity, however, the Company estimates that
it has sufficient cash flow to operate through approximately January 31,
1999. Legal fees associated with pending investigations are expected to be an
additional drain on the Company's cash flow. See Note 5 of Notes to
Financial Statements.
<PAGE>
13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in certain litigation and investigations described
in Note 5 to the financial statements.
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its 1998 Annual Meeting of Stockholders (the "Annual
Meeting") on August 17, 1998. As of the record date of June 19, 1998,
there were 8,389,552 shares of the Company's common stock eligible to
vote. Of these shares, 6,420,988, (76.5%) were represented either in
person or by proxy at the Annual Meeting.
At the Annual Meeting, Geoffrey T. Burnham, Susan M. Burnham, George W.
Barrett and Brian J. Thompson were elected directors of the Company. The
number of shares of the Company's common stock voted in favor of the
election of Messrs. Burnham, Barrett and Thompson and Ms. Burnham were
6,317,179, 6,317,179, 6,311,661 and 6,311,661, respectively, and the number
of such shares withheld were 149,157, 149,157, 154,675 and 154,675,
respectively.
At the Annual Meeting, the Company's stockholders also voted to (i)approve
the amendments to the Company's 1995 Stock Option Plan, as amended (the
"Option Plan") to increase the total number of shares of the Company's
common stock available for options to be granted under the Option Plan
from 250,000 to 1,000,000; and permit the Board to grant additional options
to non-employee directors; and (ii)ratify the selection of Price Waterhouse
LLP as independent public accountants for the fiscal year ending December
31, 1998.
The vote on items (i) and (ii) above was as follows:
ITEM FOR AGAINST ABSTAIN
------- --------- --------- ---------
Amendments to Option Plan 1,529,518 250,644 28,961
Ratification of appointment
of Accountants 6,426,969 26,237 13,130
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
No. 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
<PAGE>
14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Semiconductor Laser International Corporation
---------------------------------------------
(Registrant)
Date: November 23, 1998 By:/s/ Geoffrey T. Burnham
----------------------------
Geoffrey T. Burnham
Chairman, President and
Chief Executive Officer
Date: November 23, 1998 By:/s/ Leonard E. Lundberg
----------------------------
Leonard E. Lundberg
Chief Financial Officer,
Principal Financial Officer
and Principal Accounting Officer
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<FISCAL-YEAR-END> DEC-31-1998
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