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 quarter ended March 31, 2000
[ ] Transition Report under section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period from ______ to ______
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)
(607) 722-3800
--------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(former name,former address and former fiscal year,if changed since last report)
As of April 30, 2000, there were 28,478,263 shares of the issuers common
stock, par value $.01 per share outstanding.
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, March 31,
1999 2000
(unaudited)
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 347,747 $ 4,999,660
Accounts Receivable, net of allowance for
doubtful accounts of $583,293 and $583,293,
respectively 295,561 290,683
Inventory 861,911 877,074
Prepaid expenses and other assets 24,957 24,957
------------ ------------
Total current assets 1,530,176 6,192,374
Property, plant and equipment, net 2,584,974 2,533,524
Deposits and other assets 149,396 132,802
------------ ------------
Total assets $ 4,264,546 $ 8,858,700
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 708,193 $ 770,114
Notes Payable ( Line of Credit ) 1,000,000 1,000,000
Accrued expenses and other liabilities 174,809 193,797
Current portion of long-term debt 44,368 41,505
------------ ------------
Total current liabilities 1,927,320 2,005,416
Long-term debt 713,668 703,122
Accrued royalty payments 100,000 100,000
------------ ------------
Total liabilities 2,741,038 2,808,538
------------ ------------
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; 28,474,397 issued and
outstanding at March 31, 2000 156,411 284,744
Subscriptions Receivable (100,000) -
Treasury stock (248,241) (248,241)
Convertible Preferred Stock 10,000 10,000
Additional paid-in capital 22,034,365 27,636,453
Accumulated deficit (20,329,027) (21,632,794)
------------ ------------
Total Shareholders' Equity 1,523,508 6,050,162
------------ ------------
Total Liabilities and
Shareholders' Equity $ 4,264,546 $ 8,858,700
============ ============
</TABLE>
See accompanying notes to financial statements
<PAGE>
2
Semiconductor Laser International Corporation
Statement of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 2000
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Net sales $ 298,545 405,850
Cost of sales (663,886) (813,766)
----------- -----------
Gross margin (365,341) (407,916)
Operating expenses:
Research and development expenses $ 1,738 $ 11,774
Sales and marketing expenses 63,220 82,681
General and administrative expenses 570,804 821,861
---------- ----------
Loss from operations 1,001,103 1,324,232
Interest income 305 20,465
---------- ----------
Net loss 1,000,798 1,303,767
========== ==========
Earnings per share - basic and diluted ($0.09) ($0.07)
========== ==========
Weighted average shares outstanding 11,226,052 18,125,138
========== ==========
</TABLE>
See accompanying notes to financial statements
<PAGE>
3
Semiconductor Laser International Corporation
Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 2000
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,000,798) $(1,303,767)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 51,990 51,870
Change in assets and liabilities:
(Increase)/decrease in accounts
receivable, net 144,745 4,878
(Increase)/decrease in inventory 10,390 (15,163)
(Increase)/decrease in prepaid
expenses and other assets 4,731 -
(Increase)/decrease in deposits
and other assets (27,160) 16,594
Increase/(decrease) in accounts
payable (18,998) 61,921
Increase/(decrease) in accrued
expenses and other liabilities 6,882 16,126
----------- -----------
Net cash used in operating activities (828,218) (1,167,541)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment (326) -
Sale of equipment - -
----------- -----------
Net cash provided from (used for)
investing activities (326) -
----------- -----------
Cash flows from financing activities
Issuance of stock, net of expenses 707,964 5,830,000
Issuance of warrants 31,500 -
Proceeds from short-term debt 300,000 -
Payments on long-term debt (9,769) (10,546)
----------- -----------
Net cash provided by financing
activities 1,029,695 5,819,454
----------- -----------
Net increase in cash, cash
equivalents and restricted cash 201,151 4,651,913
Cash, cash equivalents and restricted
cash at beginning of period 112,695 347,747
----------- -----------
Cash, cash equivalents and restricted
cash at end of period $ 313,846 $ 4,999,660
=========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
4
Semiconductor Laser International Corporation
Notes to Financial Statements
March 31, 2000
(Unaudited)
1. Organization
Semiconductor Laser International Corporation (the "Company") was
incorporated in New York State in September 1993 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.
2. Financial Resources and Liquidity
The Company has incurred net losses from inception and has at March 31, 2000
an accumulated deficit of $21,632,373 and working capital of $4,186,958.
While the Company has raised approximately $5.7 million from a series of
private placements since January 1, 2000, ( See Note 8 ), certain of the
monies will be utilized to pay payables in arrears.
Prospectively, however, the Company needs to demonstrate an ability to
increase its sales, 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 consumated.
<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
March 31, 2000 and the results of operations and cash flows for the three
months ended March 31, 2000 and 1999. The results of operations for the
three months ended March 31, 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 March 31, 2000, the Company had outstanding warrants and options to
purchase 12,423,271 and 562,629 shares of common stock, respectively, which
are not included in the calculation of earnings per share for the three
months ended March 31, 2000, and would not be included in such calculation
due to the anti-dilutive nature of these instruments. Of the warrants
excluded from such calculation, 1,948,000 expired by their terms on March 19,
2000.
As of March 31, 1999, the Company had outstanding warrants and options to
purchase 3,446,334 and 148,455 shares of common stock, respectively, which
are not included in the calculation of earnings per share for the three
months ended March 31, 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 $262,660 for the three months ended March 31,2000. Rent expense
under non-cancellable operating leases, including the FINOVA leases, was
$278,860 for the three months ended March 31, 1999.
Future minimum payments under non-cancellable operating leases, including
the FINOVA lease agreement, at March 31, 2000, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31, Commitment
------------- -------------
<S> <C> <C>
2000(1) $ 755,061(1)
2001 605,207
-------------
$1,360,268
=============
(1) Nine 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 carry forwards
when an ownership change, as defined by tax law, occurs. The annual
utilization of net operating loss carryforward 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. In 1997, Dr. Evans
responded with a counter claim alleging defamation of character and is
seeking $500,000 in damages. The action is pending in the Supreme Court of
Broome County, New York. The litigation is presently in the discovery
stage. The Company believes the counter claim is without merit and is
vigorously defending such action and further, 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.
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 has 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. 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 the Company's 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 $468,571(including a late charge)
to the Company. The Company also has asserted claims for lost profits and
other damages. The Company has retained an expert in the lawsuit with RMI to
determine the amount of its damages. On November 2, 1999 the Company filed a
Complaint and Jury Demand against RMI in District Court claiming, among other
things, that RMI had breached its contract and failed to fulfill its promises
relating to RMI's purchase of laser diodes from the Company. A trial date has
not yet been established. The Company's allowance for doubtful accounts
includes the aforementioned amount which remains uncollected.
<PAGE>
8
8. Financing
The Company entered into a Securities Purchase Agreement (the "Securities
Purchase Agreement"), dated as of February 5, 1999, with bmp Mobility AG Venture
Capital ("bmp"), as amended by Amendment No. 1 to Securities Purchase Agreement
(the "Amendment"), dated as of April 28, 1999 (the Securities Purchase
Agreement, as amended by the Amendment is hereinafter referred to as the
"Amended Purchase Agreement"). Pursuant to the terms of the Amended Purchase
Agreement, bmp purchased, 2,000,000 shares of the Company's Common Stock and
1,000,000 shares of the Company's Series B Convertible Preferred Stock,$.01
par value per share, (the "Series B Stock") each convertible into 5 shares
of the Company's Common Stock or an aggregate of 5,000,000 shares of the
Company's Common Stock. bmp had previously purchased 367,650 shares of the
Company's 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 Common Stock, at an exercise
price of $0.50 per share (the "bmp Warrrant").
In connection with the Amendment, the Company entered into a consulting
agreement, dated as of April 28, 1999, (the "Consulting Agreement") between the
Company and bmp Management Consultants GmbH ("bmp Consultants"), a German
limited liability corporation wholly-owned by bmp AG Venture Capital &
Network Management, the parent company of bmp, providing for the retention of
bmp Consultants as strategic and financial consultants to the Company, for an
aggregate consulting fee of $200,000. Pursuant to a verbal agreement with bmp
Consultants the Company will be billed on a work performed basis for the
$200,000 aggregate consulting fee. As of March 31, 2000, bmp Consultants had
been paid $80,887. bmp is no longer providing such services. In addition, bmp
is eligible to receive a finder's fee in the amount of 5% of the net proceeds of
any transaction involving the raising of debt or equity capital in a private
placement from a source introduced to the Company by bmp consummated by the
Company until June 26, 2001. 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, 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(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, bears interest at prime plus 2.5%. The Company has utilized
$1,000,000 of this line as of March 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 8, 2000, the Company
agreed with BSB to pay down approximately $250,000 of the collateralized line of
credit, representing the amount in excess of the borrowing base. Such excess
amount had been cash collateralized. In connection with such agreement, the
line of credit will be extended to March 31, 2001. In addition, the Company
agreed to issue BSB warrants to purchase 50,000 shares of the Company's common
stock at an exercise price of $1.00 per share.
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 the Company's 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 registration rights. The value of the BSB warrant has been
reflected as deferred financing costs in the Company's financial statements and
will be amortized over the period commencing from date of issue to May 31, 2000.
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 Convertible
Preferred Stock and warrants purchased by bmp (and 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 Convertible Preferred 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 12,833,333 shares of Common Stock
and 9,743,333 warrants in a series of private placements consummated between
December 31, 1999 and March 31, 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. The warrants range between 4 to 5 year warrants. The
Company is in discussions with certain other investors concerning up to an
additional $4 million of private placement equity financing. There can be no
assurance that such additional financing can be consummated.
<PAGE>
9
Item 2. Managements Discussion and Analysis or Plan of Operation
Certain statements in this Report under the caption "Managements'
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 Company has raised an aggregate of $5,730,000 from a series of private
placements since January 1, 2000. The Company is currently in discussions with
investors regarding an additional financing of up to $4 million. The Company
intends to grow its business through expansion into telecommunications products.
The Company has the capability without substantial capital expenditures or an
expansion of staff to manufacture products with telecommunications applications.
If the Company is successful in raising additional financing it is anticipated
that it will expend between $500,000 to $4,000,000 on capital expenditures to
expand significantly the products with telecommunications applications that the
Company could manufacture. Therefore, with additional equity financing the
Company believes that the potential for revenues in the area of
telecommunications is significantly increased. However, there can be no
assurances that additional equity financing can be obtained, or that the Company
can increase sales in telecommunications.
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. At this time the Company is not experiencing any technical
difficulty of its production processing. Historically, cash flow problems have
placed considerable strain on Company management, financial, manufacturing and
other resources and limited the Company's ability to grow its revenues.
Although the Company has raised $5,730,000 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
Sales for the three months ended March 31, 2000 were $405,850, representing
an increase of 36% over the first three months ended March 31, 1999. Although
government sales decreased, commercial sales increased in the comparison period.
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 with the Company and therefore to be entitled to a commission on
the orders with this customer. The Company believes that the claims of this
agent are completely without merit and has terminated its relationship with this
agent. 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 received in the second and third
quarters 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.
If the dispute is resolved, and the Company can satisfy the customer on quality
and quantity requirements, the order size may be increased.
Cost of sales, which includes materials, production labor and equipment costs
increased 22.5% to $813,766 for the three months ended March 31, 2000 as
compared to $663,886 for the three months ended March 31, 1999. Gross margin
declined as a result of the increase in the cost of sales. Cost of sales levels
are expected 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 $11,774 for the three months
ended March 31, 2000 as compared to $1,738 in the same period in 1999. The
increase in such expenditures is primarily associated with the majority of R & D
expenses in the first quarter of 1999 being charged to the cost of sales for
such quarter.
Sales and Marketing expenses were $82,681 for the three months ended March 31,
2000 as compared to $63,220 for the same period in 1999. The increase is
attributable to increases in costs associated with trade show expenses
partially offset by a decrease in advertising expenses.
General and Administrative expenses were $821,861 for the three months ended
March 31, 2000 as compared to $570,804 for the same period in 1999. Such
increase was primarily attributable to an increase in professional fees of
$184,227, insurance costs of $14,266 and loan interest expense of $32,431.
Additionally, hourly wages increased net of salary decreases from the first
quarter of 1999 compared to the first quarter of 2000 by $27,833. Increases
amounting to $19,632 were experienced in other miscellaneous expenses.
Offsetting these increases were decreases in maintenance expenses of $18,028 due
to less frequent repairs and a decrease in outside services expense of $9,304
due to reduced requirements.
Interest income increased $20,160 as a result of higher levels of invested cash
in the first quarter of 2000 compared to the same period in 1999.
Liquidity and Capital Resources
The Company's cash and cash equivalents at March 31, 2000 were $4,999,660 as
compared to $347,747 at December 31, 1999, a net increase of $4,651,913 for the
three months ended March 31, 2000. The increase is the result of $1,167,539
used in operating activities and $5,819,452 provided by financing activities.
The $5,819,454 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. The former
was offset by payments on the long-term debt.
The Company has available a collateralized line of credit with BSB Bank(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, bears interest at prime plus 2.5%. The Company has utilized
$1,000,000 of this line as of March 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 8, 2000, the Company
agreed with BSB to pay down approximately $250,000 of the collateralized line of
credit, representing the amount in excess of the borrowing base. Such excess
amount had been cash collateralized. In connection with such agreement, the
line of credit will be extended to March 31, 2001. In addition, the Company
agreed to issue BSB warrants to purchase 50,000 shares of the Company's common
stock at an exercise price of $1.00 per share.
<PAGE>
12
The Company entered into a Securities Purchase Agreement (the "Securities
Purchase Agreement"), dated as of February 5, 1999, with bmp Mobility AG Venture
Capital ("bmp"), as amended by Amendment No. 1 to Securities Purchase Agreement
(the "Amendment"), dated as of April 28, 1999 (the Securities Purchase
Agreement, as amended by the Amendment is hereinafter referred to as the
"Amended Purchase Agreement"). Pursuant to the terms of the Amended Purchase
Agreement, bmp purchased, 2,000,000 shares of the Company's Common Stock and
1,000,000 shares of the Company's Series B Convertible Preferred Stock ,$.01
par value per share (the "Series B Stock"), each convertible into 5 shares
of the Company's Common Stock or an aggregate of 5,000,000 shares of the
Company's Common Stock. bmp had previously purchased 367,650 shares of the
Company's 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 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, Series B Stock and the bmp Warrant to ANB Alster Neue Beiteiligungs GmbH
KG ("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 12,833,333 shares of Common Stock
and 9,743,333 warrants in a series of private placements consummated between
December 31, 1999 and March 31, 2000. The Company raised an aggregate of
$5,730,000 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 range between 4 to 5 year
warrants. 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 Convertible Preferred Stock and warrants purchased by bmp (and 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 Convertible Preferred 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 12 months.
The Company has incurred net losses from inception and has an accumulated
deficit at March 31, 2000 of $21,632,794. 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 is in discussions with certain other investors concerning up to
an additional $4 million of private placement financing. 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 and warrants in March 2000, now beneficially owns 53.4% of
the common stock, inclusive of warrants purchased by such investor.
The Company anticipates that capital expenditures during fiscal 2000 will
range between approximately $500,000 and $4,000,000 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 5 in 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.
None
Item 5. Other Information.
Roger D. O'Brien, who served as a director of the Company during fiscal 1999,
advised the Company of his resignation as a director of the Company, effective
as of February 29, 2000. There has been no disagreement between the Company and
Mr. O'Brien.
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: May 15, 2000 By:/s/ Geoffrey T Burnham
----------------------------
Geoffrey T. Burnham
Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date: May 15, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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