UNITED STATES
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 quarterly period ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 0-27908
Semiconductor Laser International Corporation
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(Exact name of small business issuer as specified in its charter)
Delaware 16-1494566
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 Link Drive, Binghamton, New York 13904
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(Address of principal executive offices)
(607) 722-3800
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(Issuer's telephone number)
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(former name,former address and former fiscal year,if changed since last report)
As of August 4, 2000, there were 28,518,263 shares of the issuer's common
stock, par value $.01 per share outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [x]
<PAGE>
1
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements.
Semiconductor Laser International Corporation
Balance Sheet
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
(unaudited)
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 347,825 $ 3,380,947
Accounts Receivable, net of allowance for
doubtful accounts of $583,293 and $510,257,
respectively 295,483 241,515
Inventory 861,911 1,008,673
Prepaid expenses and other assets 21,147 26,531
------------ ------------
Total current assets 1,526,366 4,657,666
Property, plant and equipment, net 2,584,974 2,541,254
Deposits and other assets 151,021 126,152
------------ ------------
Total assets $ 4,262,361 $ 7,325,072
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 701,738 $ 520,597
Notes Payable ( Line of Credit ) 1,000,000 789,776
Accrued expenses and other liabilities 174,810 188,199
Current portion of long-term debt 44,368 55,972
------------ ------------
Total current liabilities 1,920,916 1,554,544
Long-term debt 713,668 702,213
Accrued royalty payments 100,000 100,000
------------ ------------
Total liabilities 2,734,584 2,356,757
------------ ------------
Commitments and contingencies (Notes 2 and 5)
Shareholders' Equity
Common stock, $.01 par value, 75,000,000 shares
authorized, 15,641,064 issued and outstanding
at December 31, 1999; 28,476,255 issued and
outstanding at June 30, 2000 156,411 284,762
Subscriptions Receivable (100,000) -
Treasury stock (248,241) (248,241)
Convertible Preferred Stock 10,000 10,000
Additional paid-in capital 22,034,364 27,460,162
Accumulated deficit (20,324,757) (22,538,368)
------------ ------------
Total Shareholders' Equity 1,527,777 4,968,315
------------ ------------
Total Liabilities and
Shareholders' Equity $ 4,262,361 $ 7,325,072
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
2
Semiconductor Laser International Corporation
Statement of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 363,003 358,362 $ 661,548 $ 764,212
Cost of sales (687,049) (653,024) 1,350,936 1,466,790
----------- ----------- ----------- -----------
Gross margin (324,046) (294,662) (689,388) (702,578)
Operating expenses:
Research and development expenses $ - $ 14,691 $ 1,738 26,466
Sales and marketing expenses 131,155 114,666 194,014 197,347
General and administrative expenses 594,701 552,270 1,165,865 1,367,399
---------- ---------- ----------- -----------
Loss from operations 1,049,902 976,289 2,051,005 2,293,790
Interest income 5,731 60,461 6,036 80,180
---------- ---------- ----------- -----------
Net loss 1,044,171 915,828 2,044,969 2,213,610
========== ========== =========== ===========
Earnings per share - basic and diluted $(0.09) $(0.03) $(0.15) $(0.10)
========== ========== =========== ===========
Weighted average shares outstanding 12,280,181 28,517,875 13,453,643 23,329,417
========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
3
Semiconductor Laser International Corporation
Statement of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,044,969) $(2,213,610)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 113,384 113,981
Change in assets and liabilities:
Decrease in accounts receivable, net 55,729 53,768
(Increase)/decrease in inventory 3,553 (146,762)
(Increase)/decrease in prepaid
expenses and other assets 25,863 (3,475)
(Increase)/decrease in deposits
and other assets (23,685) 23,160
Decrease in accounts payable (112,642) (181,141)
Increase/(decrease) in accrued
expenses and other liabilities (11,078) 20,447
----------- -----------
Net cash used in operating activities (1,993,845) (2,333,632)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (49,371) (59,880)
Sale of equipment - -
----------- -----------
Net cash provided from (used for)
investing activities (49,371) (59,880)
----------- -----------
Cash flows from financing activities
Issuance of stock, net of expenses 2,974,189 5,648,315
Issuance of warrants 31,500 -
Proceeds(Payments) on short-term debt 450,000 (210,224)
(Payments) on long-term debt (29,644) (11,457)
----------- -----------
Net cash provided by financing
activities 3,426,045 5,426,634
----------- -----------
Net increase in cash, cash
equivalents and restricted cash 1,382,829 3,033,122
Cash, cash equivalents and restricted
cash at beginning of period 111,820 347,825
----------- -----------
Cash, cash equivalents and restricted
cash at end of period $1,494,649 $ 3,380,947
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
4
Semiconductor Laser International Corporation
Notes to Financial Statements
June 30, 2000
(Unaudited)
1. Organization
Semiconductor Laser International Corporation (the "Company") was
incorporated in the state of New York in September 1993 and, subsequently,
reincorporated in the Commonwealth of Delaware in September 1997, to produce
high power semiconductor diode laser wafers and bars and to market these
products worldwide.
2. Financial Resources and Liquidity
The Company has incurred net losses from inception and has at June 30, 2000
an accumulated deficit of $22,538,368 and working capital of $3,103,122.
While the Company has raised $5,830,000 from a series of private placements
since January 1, 2000 (more fully described in Note 8).
Prospectively, however, the Company needs to demonstrate an ability to
increase its sales and generate positive gross margins and net income. Based
upon the fiscal 2000 budget, the Company expects that its cash and working
capital requirements will continue to be significant as its operations
expand. The Company expects that such cash and working capital requirements
will be satisfied through a combination of revenue growth and additional
private equity financings. There can be no assurance that such additional
financing can be consummated. The need to raise equity capital at current
stock prices is likely to result in substantial dilution to shareholders and
could result in a change of control. One investor who purchased shares of
common stock and shares of common stock issuable upon the exercise of
warrants in March 2000, now beneficially owns approximately 53.4% of the
Company's common stock, inclusive of warrants purchased by such investor.
<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
June 30, 2000 and the results of operations and cash flows for the six
months ended June 30, 2000 and 1999. The results of operations for the
six months ended June 30, 2000 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less, at the date of purchase, to be cash equivalents.
Inventory
Inventory is valued at the lower of cost or market on a 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. Expenditures for major renewals and betterments that extend the
useful lives of the property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
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. In the event such cash flows are not to be
sufficient to recover the recorded value of the assets, the assets are
written down to their estimated fair values.
<PAGE>
6
Revenue recognition
Revenue recognition is based on the terms of the underlying sales agreements
(purchase orders or contracts), typically when products are shipped to
customers.
Research and development
Research and development costs are expensed as incurred.
Income taxes
The Company provides for income taxes in accordance with the liability method
as set forth in Financial Accounting Standards No. 109, "Accounting for
Income Taxes." This method provides that deferred tax assets and liabilities
are recorded, using currently enacted tax rates, based upon the difference
between the tax bases of assets and liabilities and their carrying
amounts 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
Net loss per share, basic and diluted, is computed using the weighted
average number of shares of common stock outstanding.
As of June 30, 2000, the Company had outstanding warrants and options to
purchase 12,473,271 and 515,629 shares of common stock, respectively, which
are not included in the calculation of earnings per share for the six
months ended June 30, 2000, and would not be included in such calculation
due to the anti-dilutive nature of these instruments.
As of June 30, 1999, the Company had outstanding warrants and options to
purchase 3,446,334 and 170,730 shares of common stock, respectively, which
are not included in the calculation of earnings per share for the six
months ended June 30, 1999, 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
Rent expense under non-cancellable operating leases, including the FINOVA
leases, was $525,320 for the six months ended June 30, 2000. Rent expense
under non-cancellable operating leases, including the FINOVA leases, was
$555,233 for the six months ended June 30, 1999.
Future minimum payments under non-cancellable operating leases, including
the FINOVA lease agreement, at June 30, 2000, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Commitment
------------- -------------
<S> <C> <C>
2000(1) $ 642,751(1)
2001 465,830
-------------
$1,108,581
=============
(1) Six months
</TABLE>
6. Income taxes
Net operating loss carry forwards of approximately $20,500,000 expire in
the years 2008 to 2013. Internal Revenue Code Section 382 places a
limitation on the utilization of Federal net operating loss carryforwards
when an ownership change, as defined by tax law, occurs. The annual
utilization of net operating loss carryforwards generated prior to such
changes in ownership will be limited, in any one year, to a percentage of
fair market value of the Company at the time of the ownership change.
7. Litigation/Investigation
The Company is currently engaged in litigation with a former employee, Dr.
Keith Evans, against whom the Company brought an action for breach of
confidentiality obligations and defamation of character. The action is pending
in the Supreme Court of Broome County, New York(the "Court"). In 1997, Dr.
Evans responded with a counterclaim alleging defamation of character and is
seeking $500,000 in damages. A motion to dismiss the counterclaim was presented
to the Court on July 28, 2000. The Company believes that the ultimate outcome
of such action will not have a material impact on the financial condition,
results of operations or cash flows of the Company. The action has been
recently placed on the trial calendar of the Court.
Since April 1998, the Company had been responding to informal requests for
information from the Securities and Exchange Commission (the "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 Company does not know whether or not this investigation
remains active and is not able to speculate as to the specific subject matter
of 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. The Company has cooperated
with the investigation and has responded to all requests for information in
connection with the investigation. No such requests for information have been
forthcoming since late 1998.
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 but has been informed that the Company is not presently a target
of the investigation. The Company has cooperated fully with the
investigation and has responded to a grand jury subpoena issued in connection
with the investigation. The Company does not know whether or not this
investigation remains active and is unable to speculate as to the outcome or
possible effect of the investigation on the Company or its management. 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. The Company does
not know whether or not this investigation remains active and it is unable to
speculate as to the outcome or possible effect of the investigation on the
Company or its management. No requests for information have been received since
late 1998.
In November 1999, an action was filed against the Company and several of
its present and former officers and directors in the United States Federal Court
for the District of Massachusetts entitled Timothy Geran v. Semiconductor Laser
International Corporation, Whale Securities Co., LP, Geoffrey T. Burnham, Allen
W. Johnson, Jr., Theodore W. Konopelski, Susan M. Burnham, George Barrett, David
L. Koffman, Brian Thompson, and Nicholas L. Prioletti, Jr., Case No. CA99-30-251
-MAP. The complaint alleges violations by the defendants of Section 12(a)(2) of
the Securities Act of 1933 arising out of alleged misrepresentations by
defendants as to the Company that allegedly induced plaintiff to purchase
warrants to purchase common stock. The complaint seeks damages of
$27,782. The Company believes it has meritorious defenses to this action
and intends to defend the action vigorously and further 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.
The Company is currently engaged in litigation with Newport Corporation in the
Supreme Court of Broome County, New York, a vendor who is seeking to recover
$100,508 for goods allegedly sold to the Company. The action was commenced on
June 2, 1999. Based on losses sustained by the Company as a result of
previously supplied defective equipment from this vendor, the Company's
counterclaim exceeds the amount sued for by Newport Corporation. The Company
believes that the ultimate outcome of the action will not have a material impact
on the financial condition or results of operations of the Company.
The Company is currently engaged in litigation with IOS Capital Corporation,
a vendor who is seeking to recover $55,821 on the basis of an alleged default
by the Company in making its lease agreement installments for color copying
equipment. The action was commenced on July 9, 1999 in the Supreme Court of
Oneida County, New York. The Company believes that the vendor was incapable of
providing a working product acceptable to the Company and the equipment was
returned to the vendor as a result. The Company believes that the ultimate
outcome of the action will not have a material impact on the financial condition
or results of operations of the Company.
The Company is currently engaged in a lawsuit with one of its customers, Rocky
Mountain Instruments ("RMI"). RMI disputes the amounts owed to the Company
regarding certain orders, has made claims regarding defects in certain of the
units delivered and it is currently late in making payments on such orders. The
Company believes that RMI owes approximately $468,571 (including a late charge)
to the Company. The Company also has asserted claims for lost profits and
other damages. The Company has retained an expert in the lawsuit with RMI to
determine the total amount of its damages. On November 2, 1999, the Company
filed a complaint and jury demand against RMI claiming, among other things, that
RMI had breached its contract and failed to fulfill its promises relating to
RMI's purchase of laser diodes from the Company. A trial date has not yet been
established. The Company's allowance for doubtful accounts includes the
aforementioned amount which remains uncollected.
<PAGE>
8
8. Financing
The Company entered into a Securities Purchase Agreement, dated as of February
5, 1999 (the "Securities Purchase Agreement"), with bmp Mobility AG Venture
Capital ("bmp"), as amended by Amendment No. 1 to Securities Purchase Agreement,
dated as of April 28, 1999 (the "Amendment" together with the Securities
Purchase Agreement, collectively referred to as the "Amended Securities Purchase
Agreement"). Pursuant to the terms of the Amended Purchase Agreement, bmp
purchased 2,000,000 shares of common stock and 1,000,000 shares of Series B
Convertible Preferred Stock, par value $0.01 per share (the "Series B Stock"),
each convertible into 5 shares of common stock or an aggregate of 5,000,000
shares of common stock. bmp had previously purchased 367,650 shares of common
stock in unrelated open market transactions. In connection with the Amendment,
on June 26, 1999 the Company issued to bmp a five year warrant to purchase an
aggregate of 500,000 shares of common stock at an exercise price of $0.50 per
share (the "bmp Warrrant"). The shares of common stock issued to bmp contain
certain demand and piggyback registration rights and the Series B Stock contains
certain anti-dilution rights. Based on public filings, the Company is aware
that bmp has transferred ownership of its shares of common stock, the Series B
Stock and the bmp Warrant to ANB Alster Neue Beiteiligungs GmbH KG ("ANB").
The Company has available a collateralized line of credit with BSB Bank
pursuant to a loan agreement (the "Loan Agreement"), subject to a borrowing base
calculation, with an aggregate availability in the amount of $1,000,000 for
purposes of providing working capital. The line of credit bears interest at
prime plus 2.5%. The Company has utilized $789,776 of this line as of June 30,
2000.
In conjunction with the Securities Purchase Agreement, on February 16, 1999,
the Company issued to BSB a five year warrant to purchase an aggregate of
500,000 shares of common stock at an exercise price of $0.575 per share (the
"BSB Warrant"). The shares issuable upon exercise of the BSB Warrant contain
certain piggyback registration rights. The value of the BSB Warrant has been
reflected as deferred financing costs in the Company's financial statements and
was amortized over the period commencing from date of issue to May 31, 2000.
In January 2000, BSB required the Company to provide it with additional security
for the Loan Agreement in the form of a $750,000 second mortgage on the
Company's facility and a first security interest in all of its assets. The
second mortgage and the security agreement granting the requested security
interest were executed and delivered to BSB on January 31, 2000. BSB has agreed
to release the lien of the second mortgage upon satisfaction of its first
mortgage, and a pay down or permanent reduction of the Company's line of credit
with BSB of $300,000 or a pledge of cash collateral in such amount.
BSB agreed to waive the default of the Company under the Loan Agreement with
respect to "Mandatory Loan Repayments" and waived the "Affirmative Covenants -
Financial Covenants and Ratios" at December 31, 1999. Subsequently, BSB agreed
to waive the default of the Company under the Loan Agreement with respect to
"Mandatory Loan Repayments" for the period ending February 29,
2000 provided the Company met the borrowing base requirements as of March 3,
2000. These requirements were met by the Company. On May 31, 2000, the
Company paid down $210,000 of the collateralized line of credit. On May 16,
2000, the Company extended its $1,000,000 line of credit to March 31, 2001. In
addition, the Company agreed to issue BSB warrants to purchase 50,000 shares of
common stock at an exercise price of $1.00 per share.
On March 14, 2000, the Company entered into a Waiver and Lock-up Agreement with
BSB, pursuant to which BSB waived any rights to adjustment that it may have
under the BSB Warrant. In addition, BSB agreed not to transfer the shares of
common stock issuable to BSB upon conversion of the BSB Warrant until March 20,
2001 without the prior written consent of the Company. The Series B Stock and
the bmp Warrant (subsequently transferred to ANB) contain certain provisions
relating to antidilution protection against private placement issuances of
securities below fair market value. The Company has had certain discussions
with a representative of ANB concerning the applicability of these provisions to
the private placements consummated subsequent to January 1, 2000. The Company
has contended that no such adjustment is required and sought a waiver of such
provisions. To date, no agreement has been reached. To the extent it is
determined that such adjustment is required, the failure to reach such agreement
could result in an increase in the number of shares of common stock issuable
upon exercise of the Series B Stock and warrants and thereby result in potential
dilution to existing shareholders.
In September 1999, 2,979,256 shares of common stock were issued in a private
placement at an aggregate purchase price of $1,117,221. The Company received
$1,061,422 net of finder's fees. The shares of common stock issued in this
private placement contain certain piggyback registration rights.
The Company has issued an aggregate of 12,877,199 shares of common stock and
10,217,778 shares of common stock issuable upon exercise of warrants in a series
of private placements since January 1, 2000. The Company raised an aggregate of
$5,730,000 from such private placements at purchase prices ranging between $0.30
and $0.50 per share and warrant exercise prices ranging between $0.75 and
$1.0625 per share of common stock. The warrants may be exercised from time to
time over a term of either 4 or 5 years. The Company is in discussions with
certain other investors concerning up to an additional $4,300,000 of private
placement financing. There can be no assurance that such additional financing
can be consummated.
The Company has filed a registration statement with the Securities and Exchange
Commission to register certain shares issued in private placements consummated
over the preceding 18 months.
<PAGE>
9
Item 2. Management's Discussion and Analysis or Plan of Operation.
Certain statements in this report under the caption "Management's
Discussion and Analysis or 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; inability to expand into telecommunications
products; costs associated with and outcome of 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
The Company was considered a development stage company until April 1, 1997.
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.
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 utilizing 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. At this time the Company is not experiencing any technical
difficulty of its production processing. Historically, cash flow problems have
placed considerable strain on the Company's management, financial, manufacturing
and other resources and limited the Company's ability to grow its revenues.
Although the Company has raised $5,830,000 in private placement financing since
January 1, 2000, lack of financial resources in the future could have a material
adverse impact on the Company's business and results of operations.
The Company has not generated material revenues or profits to date.
<PAGE>
10
Results of Operations
Three months ended June 30, 2000, compared to three months ended June 30, 1999.
Sales for the three months ended June 30, 2000 were $358,362 as compared to
$363,003 for the three months ended June 30, 1999. Although government sales
decreased in the comparison period, commercial sales increased correspondingly.
The Company has a purchase order with a customer in China for approximately
$4 million for a single chip high power diode. Such customer has held up the
shipment of approximately $140,000 in products already manufactured by the
Company and delayed processing of the next production order pending resolution
of a claim by an agent in China claiming to have an exclusive sales agency
relationship and claiming to thus be entitled to a commission on the orders with
this customer. The Company believes that the claims of this agent are without
merit. The Company has had certain conversations with the customer concerning
the shipment and production. There can be no assurance that the customer will
be satisfied with the resolution of this claim or willing to permit shipments
and production to resume. As a result, revenues anticipated to be received in
the third quarter will be delayed and, if the dispute as to this agent's rights
cannot be resolved to the satisfaction of the customer, the Company may not
realize any additional revenues from this customer. Even if the dispute is
resolved, the realization of the full $4 million amount of the order is subject
to the Company's ability to satisfy the customer on quality and quantity
requirements.
Cost of sales, which includes materials, production labor and equipment costs
decreased 5.0% to $653,024 for the three months ended June 30, 2000 as
compared to $687,049 for the three months ended June 30, 1999. The decrease was
attributable to the recording of lower material costs as a result of upward
adjustments to the inventory due to physical inventory count transactions.
Gross margin increased as a result of this decrease in the cost of sales. Cost
of sales levels will continue to exceed sales levels until the volume of sales
increases. The Company expects sales levels to increase in the future, thus
steadily increasing production levels to levels approaching optimum capacity,
although no such assurance can be provided.
<PAGE>
11
Research and Development("R & D") expenditures were $14,691 for the three months
ended June 30, 2000. The R & D expenses for the three months ended June 30,
1999 were being charged to the cost of sales for the period.
Sales and Marketing expenses were $114,666 for the three months ended June 30,
2000 as compared to $131,155 for the same period in 1999. The decrease is
attributable to decreases in costs associated with trade shows, brochures and
advertising expenses offset by an increase in travel expenses.
General and Administrative expenses were $552,270 for the three months ended
June 30, 2000 as compared to $594,701 for the same period in 1999. The decrease
was primarily attributable to an decrease in professional fees of $107,285,
offset by increases in insurance costs of $17,856 and bad debt expense of
$25,000. Increases amounting to $21,998 were experienced in other miscellaneous
expenses.
Interest income increased $54,730 as a result of higher levels of invested cash
in the second quarter of 2000 compared to the same period in 1999.
Six months ended June 30,2000, as compared to six months ended June 30, 1999.
Sales for the six months ended June 30, 2000 were $764,212 compared to $661,548
for the same period in 1999 or an increase of $102,664. Although government
contract revenue decreased, commercial revenues increased to more than offset
the aforementioned decline.
Cost of sales for the six months ended June 30, 2000 increased $115,854 over the
six months ended June 30, 1999. Although government contract costs decreased,
increases were recorded in labor and materials in anticipation of revenue which
did not occur. Cost of sales levels will continue to exceed sales levels until
the volume of sales increases. The Company expects sales levels to increase in
the future, thus steadily increasing production levels to levels approaching
optimum capacity, although no such assurance can be provided.
R & D expenditures were $26,466 for the six months ended June 30, 2000. R & D
expenses for the six months ended June 30, 1999 were primarily being charged to
the cost of sales for the period, however, $1,738 was recorded against operating
expenses.
Sales and Marketing expenses were $197,347 for the six months ended June 30,
2000 as compared to $194,014 for the same period in 1999. The increase is
attributable to increases in costs associated with trade shows and travel
expenses offset by brochures and advertising expenses.
General and Administrative expenses were $1,368,399 for the six months ended
June 30, 2000 as compared to $1,165,865 for the same period in 1999. The
increase was primarily attributable to an increase in professional fees of
$73,516, insurance costs of $32,122, bad debt expense of $25,000 and interest
expense of $43,049. Increases amounting to $28,847 were experienced in other
miscellaneous expenses.
Interest income increased $74,144 as a result of higher levels of invested cash
in the first half of 2000 compared to the same period in 1999.
Liquidity and Capital Resources
The Company's cash and cash equivalents at June 30, 2000 were $3,380,947 as
compared to $347,825 at December 31, 1999, a net increase of $3,033,122 for the
six months ended June 30, 2000. The increase is the result of $2,333,632
used in operating activities, $59,880 used for investing activities and
$5,426,634 provided by financing activities.
The $5,426,634 provided by financing activities was derived from the issuance
of 12,833,333 shares of common stock and warrants to purchase 9,743,333 shares
of Common Stock for an aggregate gross consideration of $5,830,000 ($5,648,315
net of fees), payments on the line of credit of $210,224 and on long-term debt
of $11,457.
In conjunction with the Securities Purchase Agreement, on February 16, 1999,
the Company issued to BSB a five year warrant to purchase an aggregate of
500,000 shares of common stock at an exercise price of $0.575 per share. The
shares issuable upon exercise of the warrants contain certain piggyback
registration rights. The value of the warrants has been reflected as deferred
financing costs in the Company's financial statements and was amortized over
the period commencing from the date of issue to May 31, 2000.
The Company has available a collateralized line of credit with BSB Bank
pursuant to the Loan Agreement, subject to a borrowing base calculation, with an
aggregate availability in the amount of $1,000,000 for purposes of providing
working capital. The line of credit bears interest at prime plus 2.5%. The
Company has utilized $789,776 of this line as of June 30, 2000.
In January 2000, BSB required the Company to provide it with additional security
for the Loan Agreement in the form of a $750,000 second mortgage on the
Company's facility and a first security interest in all of its assets. The
second mortgage and the security agreement granting the requested security
interest were executed and delivered to BSB on January 31, 2000. BSB has agreed
to release the lien of the second mortgage upon satisfaction of its first
mortgage, and a pay down or permanent reduction of the Company's line of credit
with BSB of $300,000 or a pledge of cash collateral in such amount.
BSB agreed to waive the default of the Company under the Loan Agreement with
respect to "Mandatory Loan Repayments" and waived the "Affirmative Covenants -
Financial Covenants and Ratios" at December 31, 1999. Subsequently, BSB agreed
to waive the default of the Company under the Loan Agreement with respect to
"Mandatory Loan Repayments" for the period ending February 29,
2000 provided the Company met the borrowing base requirements as of March 3,
2000. These requirements were met by the Company. On May 31, 2000, the Company
paid down $210,224 of the collateralized line of credit. On May 16, 2000, the
Company extended its $1,000,000 line of credit to March 31, 2001. In addition,
the Company agreed to issue BSB warrants to purchase 50,000 shares of common
stock at an exercise price of $1.00 per share.
<PAGE>
12
Pursuant to the terms of the Amended Purchase Agreement, bmp purchased 2,000,000
shares of common stock and 1,000,000 shares of Series B Stock, each convertible
into 5 shares of common stock or an aggregate of 5,000,000 shares of common
stock. bmp had previously purchased 367,650 shares of common stock in unrelated
open market transactions. In connection with the Amendment, on June 26, 1999
the Company issued to bmp the bmp Warrrant. The shares of common stock issued
to bmp contain certain demand and piggyback registration rights and the Series B
Stock contains certain anti-dilution rights. Based on public filings, the
Company is aware that bmp has transferred ownership of its shares of common
stock, the Series B Stock and the bmp Warrant to ANB.
In September 1999, 2,979,256 shares of common stock were issued at an aggregate
purchase price of $1,117,221. The Company received $1,061,422 net of finder's
fees. The shares of common stock issued in this private placement contain
certain piggyback registration rights.
The Company has issued an aggregate of 12,877,199 shares of common stock and
10,217,778 shares of common stock issuable upon exercise of warrants in a series
of private placements since January 1, 2000. The Company raised an aggregate of
$5,830,000 in gross proceeds from such private placements at purchase prices
ranging between $0.30 and $0.50 per share and warrant exercise prices ranging
between $0.75 and $1.0625 per share. The warrants may be exercised from time to
time over a term of either 4 or 5 years.
On March 14, 2000, the Company entered into a Waiver and Lock-up Agreement with
BSB, pursuant to which BSB waived any rights to adjustment that it may have
under the BSB Warrant. In addition, BSB agreed not to transfer the shares of
common stock issuable to BSB upon conversion of the BSB Warrant until March 20,
2001 without the prior written consent of the Company. The Series B Stock and
the bmp Warrant (subsequently transferred to ANB) contain certain provisions
relating to antidilution protection against private placement issuances of
securities below fair market value. The Company has had certain discussions
with a representative of ANB concerning the applicability of these provisions to
the private placements consummated subsequent to January 1, 2000. The Company
has contended that no such adjustment is required and sought a waiver of such
provisions. To date, no agreement has been reached. To the extent it is
determined that such adjustment is required, the failure to reach such agreement
could result in an increase in the number of shares of the Company's common
stock issuable upon exercise of the Series B Stock and warrants and thereby
result in potential dilution to existing shareholders.
The Company has filed a registration statement with the Securities and
Exchange Commission to register certain shares issued in private placements
consummated over the preceding 18 months.
The Company has incurred net losses from inception and has an accumulated
deficit at June 30, 2000 of $22,538,368. These losses have been financed
primarily out of proceeds from the Company's initial public offering and private
equity financings. 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. It is anticipated that
the Company will continue to incur losses for the immediate future until it is
able to achieve profitable operations or to generate sales sufficient to support
its operations.
The Company anticipates based upon its business plan, that without any capital
infusion, its cash will be sufficient for its needs at least until June 30,
2001. The Company intends to seek additional financing, from financial and
banking institutions as well as through further equity financings. There can be
no assurance that such additional financing can be consummated. The need to
raise equity capital at current stock prices is likely to result in substantial
dilution to shareholders and could result in a change of control. One investor
who purchased shares of common stock and shares of common stock issuable upon
exercise of warrants in March 2000, now beneficially owns approximately 53.4% of
the Company's common stock, inclusive of warrants purchased by such investor.
The Company anticipates that capital expenditures during fiscal 2000 will be up
to $4,300,000 depending on the level of additional financing raised. There can
be no assurance that the Company will be able to obtain additional financing,
including any institutional financing, when needed, on commercially reasonable
terms or at all. Therefore, it is uncertain that the Company will be able to
meet its obligations as they become due.
<PAGE>
13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in litigation described in Note 7 in the
financial statements.
Item 2. Changes in Securities and Use of Proceeds.
The Company issued 1,858 shares of common stock to a vendor on April 19,
2000.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
The Company is currently in the process of expanding its current Class
1,000 clean room facility by adding an additional 500 square feet of clean
room space. This space will be dedicated to optoelectronic packaging and
telecommunications products. However, there can be no assurance that the
Company will realize any increase in volume or increase in revenues either
from its standard products or its telecommunication products which are
currently under development.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
<PAGE>
14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Semiconductor Laser International Corporation
---------------------------------------------
(Registrant)
Date: August 14, 2000 By:/s/ Geoffrey T Burnham
----------------------------
Geoffrey T. Burnham
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 By:/s/ Leonard E. Lundberg
----------------------------
Leonard E. Lundberg
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
