UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______.
COMMISSION FILE NO. 0-21911
SYNTROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 73-1565725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1350 SOUTH BOULDER, SUITE 1100
TULSA, OKLAHOMA 74119-3295
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 592-7900
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO __.
--
At November 7, 2000, the number of outstanding shares of the issuer's common
stock was 33,131,550.
<PAGE>
SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements.
<S> <C>
Unaudited Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Statements of Operations for the three month and nine month
periods ended September 30, 2000 and 1999. . . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Statements of Stockholders' Equity for the nine
month period ended September 30, 2000. . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . 4
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . 20
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 20
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . 20
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements as
well as historical facts. These forward-looking statements include statements
relating to our gas-to-liquids technology known as the Syntroleum Process and
related technologies, gas-to-liquids plants based on the Syntroleum Process,
anticipated costs to design, construct and operate these plants, the timing of
commencement and completion of the design and construction of these plants,
obtaining required financing for these plants, anticipated costs to make
products from these plants, the economic construction and operation of gas to
liquids plants, the value and markets for plant products, testing,
certification, characteristics and use of plant products, the continued
development of the Syntroleum Process (alone or with partners), anticipated
capital expenditures, use of proceeds from our recent public offering,
anticipated revenues, the sale of and costs associated with our real estate
inventory and any other statements regarding future growth, cash needs,
operations, business plans and financial results. When used in this document,
the words "anticipate," "believe," "estimate," "expect," "intend," "may,"
"plan," "project," "should" and similar expressions are intended to be among the
statements that identify forward-looking statements. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
these kinds of statements involve risks and uncertainties. Actual results may
not be consistent with these forward-looking statements. Important factors that
could cause actual results to differ from these forward-looking statements
include the risks that the cost of designing, constructing and operating
commercial-scale gas to liquids plants will exceed current estimates,
commercial-scale gas to liquids plants will not achieve the same results as
those demonstrated on a laboratory or pilot basis, gas to liquids plants may
experience technological and mechanical problems, improvements to the Syntroleum
Process currently under development may not be successful, plant economics may
be adversely impacted by operating conditions, including energy prices,
construction risks and risks associated with investments and operations in
foreign countries, our ability to implement corporate strategies, competition,
intellectual property risks, our ability to obtain financing and other risks
described in this Quarterly Report on Form 10-Q and Syntroleum's Annual Report
on Form 10-K for the year ended December 31, 1999.
As used in this Quarterly Report on Form 10-Q, the terms "we," "our" or "us"
mean Syntroleum Corporation, a Delaware corporation, and its predecessors and
subsidiaries, unless the context indicates otherwise.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 97,705 $ 20,316
Short-term investments 3,439 3,565
Accounts and notes receivable 596 1,193
Other current assets 151 365
--------- ---------
Total current assets 101,891 25,439
REAL ESTATE HELD FOR SALE 23 2,665
REAL ESTATE UNDER DEVELOPMENT 3, 347 3,349
INVESTMENTS 939 1,104
RESTRICTED INVESTMENTS 13,221 -
PROPERTY AND EQUIPMENT, net 20,051 6,442
NOTES RECEIVABLE 2,356 297
OTHER ASSETS, net 522 295
--------- ---------
$142,350 $ 39,591
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,889 $ 2,188
Accrued liabilities 457 453
--------- ---------
Total current liabilities 9,346 2,641
LONG-TERM DEBT 696 -
OTHER NONCURRENT LIABILITIES 41 94
MINORITY INTERESTS 906 1,024
DEFERRED REVENUE 28,245 11,000
--------- ---------
Total liabilities 39,234 14,759
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000 shares authorized,
no shares issued - -
Common stock, $0.01 par value, 150,000 shares authorized,
40,736 and 34,669 shares issued in 2000 and 1999,
respectively, including shares in treasury 407 347
Additional paid-in capital 163,600 68,935
Notes receivable from sale of common stock (599) (699)
Accumulated deficit (60,215) (43,674)
--------- ---------
103,193 24,909
Less-treasury stock, 7,675 shares in
2000 and 1999, respectively (77) (77)
--------- ---------
Total stockholders' equity 103,116 24,832
--------- ---------
$142,350 $ 39,591
========= =========
The accompanying notes are an integral part of these unaudited consolidated balance sheets.
</TABLE>
1
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Joint development revenue. . . . . . . . . $ 428 $ 792 $ 970 $ 1,942
Real estate sales. . . . . . . . . . . . . 319 590 4,353 1,110
Licensing. . . . . . . . . . . . . . . . . - - 2,000 -
Other. . . . . . . . . . . . . . . . . . . 1 166 76 491
-------- -------- --------- ---------
Total revenues . . . . . . . . . . . . . 748 1,548 7,399 3,543
-------- -------- --------- ---------
COST AND EXPENSES:
Cost of real estate sales. . . . . . . . . 159 345 3,390 749
Real estate operating expense. . . . . . . 11 192 200 581
Pilot plant, engineering and research and
development. . . . . . . . . . . . . . . 5,114 3,199 12,383 7,736
General and administrative . . . . . . . . 2,585 2,676 9,049 7,355
-------- -------- --------- ---------
INCOME (LOSS) FROM OPERATIONS. . . . . . . . (7,121) (4,864) (17,623) (12,878)
INVESTMENT AND INTEREST INCOME . . . . . . . 1,687 436 2,637 1,551
FOREIGN EXCHANGE GAIN (LOSS) . . . . . . . . 835 - 835 -
OTHER INCOME (EXPENSE) . . . . . . . . . . . - (8) (16) (5)
-------- -------- --------- ---------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES . . . . . . . . (4,599) (4,436) (14,167) (11,332)
MINORITY INTERESTS . . . . . . . . . . . . . 11 (41) 94 (8)
INCOME TAXES . . . . . . . . . . . . . . . . (2,468) - (2,468) -
-------- -------- --------- ---------
NET INCOME (LOSS). . . . . . . . . . . . . . $(7,056) $(4,477) $(16,541) $(11,340)
======== ======== ========= =========
NET INCOME (LOSS) PER SHARE -
Basic and diluted. . . . . . . . . . . . . $ (0.22) $ (0.17) $ (0.57) $ (0.42)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING. . . . . . . . . . . . . . . . 32,685 26,900 29,094 26,900
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
2
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
--------------- FROM TOTAL
NUMBER PAID-IN SALE OF ACCUMULATED TREASURY STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL COMMON STOCK DEFICIT STOCK EQUITY
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 34,669 $347 $ 68,935 $(699) $(43,674) $(77) $ 24,832
STOCK OPTIONS EXERCISED 423 4 2,196 - - - 2,200
CONSULTANT OPTIONS ISSUED - - 306 - - - 306
OTHER (6) - (135) 100 - - (35)
COMMON STOCK ISSUANCE 5,650 56 92,298 - - - 92,354
NET INCOME (LOSS) - - - - (16,541) - (16,541)
------- ---- --------- ------ --------- ----- ---------
BALANCE, September 30, 2000 40,736 $407 $163,600 $(599) $(60,215) $(77) $103,116
======= ==== ========= ====== ========= ===== =========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
3
<PAGE>
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(16,541) $(11,340)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations:
Minority interest in income (loss) of subsidiary (118) 8
Depreciation and amortization 728 450
Foreign currency exchange (1,863) -
Non-cash compensation expense 306 -
Equity in earnings of affiliates (85) (127)
Changes in real estate held for sale and under development 2,644 336
Changes in assets and liabilities--
Accounts and notes receivable (1,294) (1,754)
Other assets (34) (17)
Accounts payable 6,701 251
Accrued liabilities and other (49) 30
Deferred revenue 18,520 -
Net cash provided by (used in) operating activities 8,915 (12,163)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,896) (1,525)
Distribution from investments 250 -
Increase in restricted cash (14,249) -
Sale (purchase) of short-term investments 126 (16)
--------- ---------
Net cash used in investing activities (27,769) (1,541)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Settlement of merger contingency - 5,997
Proceeds from issuance of long-term debt 696 -
Proceeds from sale of common stock and option exercises 94,519 -
--------- ---------
Net cash provided by financing activities 95,215 5,997
--------- ---------
FOREIGN EXCHANGE EFFECT ON CASH 1,028 -
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 77,389 (7,707)
CASH AND CASH EQUIVALENTS, beginning of period 20,316 34,981
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 97,705 $ 27,274
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
statements.
4
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SYNTROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BASIS OF REPORTING
The primary operations of Syntroleum Corporation (together with its
predecessors and subsidiaries, the "Company" or "Syntroleum") to date have
consisted of the research and development of a proprietary process (the
"Syntroleum Process") designed to convert natural gas into synthetic liquid
hydrocarbons. Synthetic liquid hydrocarbons produced by the Syntroleum Process
can be further processed into high quality liquid fuels such as diesel,
kerosene, gasoline, naphtha and fuel for fuel cells, or high quality specialty
products such as synthetic lubricants, process oils, high melting point waxes,
liquid normal paraffins, drilling fluids and chemical feedstocks.
The Company's current focus is to further demonstrate the commercial
viability of its proprietary technology. The Company has sold license
agreements to seven oil companies and the Commonwealth of Australia and
participated in the operation of a pilot plant located at ARCO's refinery in
Cherry Point, Washington. The Company is developing a commercial-scale
specialty products plant to be located in Western Australia known as the
Sweetwater plant.
The consolidated financial statements included in this report have been
prepared by Syntroleum without audit pursuant to the rules and regulation of the
Securities and Exchange Commission ("SEC"). Accordingly, these statements
reflect all adjustments (consisting of normal recurring entries) which are, in
the opinion of management, necessary for a fair statement of the financial
results for the interim periods presented. These financial statements should be
read together with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K/A for the year ended December 31, 1999
filed with the SEC under the Securities Exchange Act of 1934, as amended, on
April 25, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements
to conform with the 2000 presentation. These reclassifications did not impact
net income (loss).
3. EARNINGS PER SHARE
The Company applies the provisions of SFAS No. 128, "Earnings Per Share."
Basic and diluted earnings (losses) per common share were computed by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding during the reporting periods. Options to purchase 2,369,938 shares
of common stock at an average exercise price of $8.20 were not included in the
computation of diluted earnings per share for the nine months ended September
30, 2000 because inclusion of these options would be anti-dilutive. Options to
purchase 2,823,619 shares of common stock at an average exercise price of $7.21
were not included in the computation of diluted earnings per share for the nine
months ended September 30, 1999 because inclusion of these options would be
anti-dilutive.
The Company completed the sale of 5,250,000 shares of common stock on July
6, 2000 pursuant to a public offering and completed the sale of an additional
400,000 shares pursuant to the underwriter's exercise of a portion of the
over-allotment option on July 17, 2000.
4. RESTRICTED INVESTMENTS
Restricted investments consist of funds held in two escrow accounts
denominated in Australian dollars and carried at fair value. These restricted
funds are held in the Company's name in a custodian account with a major
Australian financial institution and are restricted as to withdrawal (see Notes
6, 7 and 9).
5
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5. NOTES RECEIVABLE
In February 2000, the Company closed the sale of its Reno parking garage to
Fitzgeralds Reno, Inc. The sale price of $3 million was paid by $750,000 in
cash at or before closing and the balance in the form of Fitzgeralds' promissory
note in the principal amount of $2,250,000. The note bears interest at the rate
of 10% and is payable in monthly installments of principal and interest based on
a 20 year amortization, with the entire unpaid balance due in 10 years. The
note is secured by the ground lease on which the garage is located as well as
the parking garage itself.
6. FOREIGN CURRENCY TRANSACTIONS
All of the Company's subsidiaries use the U.S. dollar for their functional
currency. Assets and liabilities are translated into U.S. dollars at the rate
of exchange in effect at the balance sheet date. Transaction gains and losses
that arise from exchange rate fluctuations applicable to transactions
denominated in a currency other than the U.S. dollar are included in the
results of operations as incurred.
7. LONG-TERM DEBT
In August 2000, a wholly-owned subsidiary of the Company entered into a
loan agreement with the Commonwealth of Australia under which the Commonwealth
will make an unsecured, non-amortizing, interest-free loan to the Company in the
amount of AUD$40 million (approximately U.S.$25 million) with a 25-year
maturity. Loan proceeds are to be used to support the further development and
commercialization of GTL technologies in Australia. Under the terms of the loan
agreement we have agreed to conduct a feasibility study on constructing a
large-scale GTL fuels plant in Australia. Loan proceeds are to be made available
to the Company in three successive advances. Pending satisfaction of certain
conditions relating to the financing, construction and completion of the
Sweetwater project, proceeds will be held in escrow. Should the conditions not
be fully satisfied by August 2004, any loan proceeds remaining in escrow will be
returned to the Commonwealth.
During the third quarter, AUD$12 million (approximately U.S. $6.9 million) of
the funds became available under the first advance by the Commonwealth of
Australia under the loan agreement and were placed in the escrow. The funds
are being held in Australian currency. Both the restricted funds and the
long-term debt have been adjusted to reflect the exchange rates in effect as of
the balance sheet date at the end of the third quarter. The long-term debt
amount reflects cash loan proceeds received in escrow (AUD$12 million which is
approximately U.S.$6.9 million) discounted over the remaining term of the loan
using an imputed interest rate of 9%. The difference between the cash received
and the discounted long-term debt amount of $696,000 has been recorded as a
reduction in the costs of the related property, plant and equipment. The long
term debt amount reflected for these proceeds will increase over time as the
remaining term of the loan declines.
8. MINORITY INTERESTS
Subsequent to the third quarter, the Company entered into a letter of
intent with Ivanhoe Energy, Inc., ("Ivanhoe") providing for Ivanhoe to
participate in the Company's Sweetwater project. Ivanhoe is a Canadian oil and
natural gas exploration and development company. Ivanhoe has funded $2 million
for pre-construction engineering and other project development costs and, upon
execution of definitive agreements will acquire a 13% equity position in the
project for an additional $19 million. Ivanhoe would have the right to receive
cash flow from distributions in excess of 13% if the Sweetwater project does not
meet specified performance targets Consummation of the transaction contemplated
by the Ivanhoe letter of intent requires the satisfaction of a number of
conditions, some of which are not within the Company's control, including
Ivanhoe management approvals, satisfactory completion of due diligence by
Ivanhoe, funding of commitments with respect to other debt and equity financing
and the negotiation and execution of definitive agreements. As a result, the
transactions contemplated by the letter of intent may not be realized or may
only be realized under terms and conditions that differ materially from those
contemplated by the letter of intent.
Prior to the third quarter, the Company entered into a non-binding letter
of intent with a subsidiary of Enron Corp. with respect to its contemplated
contribution of $21 million in exchange for a 13% equity investment in the
Sweetwater project. Under the letter of intent, upon execution of definitive
agreements Enron would receive a $1 million credit toward its investment in the
Sweetwater plant as a result of its prior contribution toward the development of
the project, resulting in net equity funding to be received from Enron of $20
million. Enron would have the right to receive cash flow distributions in excess
of 13% if the Sweetwater project does not meet specified performance targets.
6
<PAGE>
Upon Enron's funding of its net capital contribution, it would become
entitled to convert its interest in
the Sweetwater project into a maximum of 1,500,000 shares of the Company's
common stock during a period beginning one year after the date on which the
project completes successful performance testing and ending on the tenth
anniversary of execution of definitive agreements relating to the transaction
contemplated in the letter of intent. In addition, upon Enron's funding of its
net capital contribution, it would receive a warrant to acquire no more than
1,500,000 additional shares of the Company's common stock at an exercise price
equal to $21.00 per share.
Consummation of the transaction contemplated by the Enron letter of intent
requires the satisfaction of a number of conditions, some of which are not
within the Company's control, including Enron management approvals, satisfactory
completion of due diligence by Enron, funding of commitments with respect to
other debt and equity financing and the negotiation and execution of definitive
agreements. As a result, the transactions contemplated by the letter of intent
may not be realized or may only be realized under terms and conditions that
differ materially from those contemplated by the letter of intent.
The Company also received $2 million from Methanex Corporation towards the
cost of the engineering work being performed by a third party for the Sweetwater
project. These funds were received pursuant to a letter of intent with Methanex
that provided for the contribution by Methanex of an additional $43 million in
exchange for an equity interest in the Sweetwater project, subject to the
execution of definitive agreements and the satisfaction of certain conditions.
During the second quarter, Methanex informed the Company that it was terminating
further participation in the Sweetwater plant. The $2 million contribution was
recorded as a reduction in engineering costs for the Sweetwater plant during the
second quarter of 2000.
9. LICENSING ACTIVITY
In August 2000, the Company signed a non-exclusive license agreement with
the Commonwealth of Australia. This license provides the Commonwealth the right
to utilize Syntroleum's proprietary gas-to-liquids technology to convert natural
gas to synthetic liquid hydrocarbons, which can be refined into ultra clean
fuels. Under the license agreement, the Commonwealth has paid the Company a
license fee in the amount of AUS $30 million (approximately US $19 million),
half of which is being held in escrow and will be distributed to the company
upon satisfaction of certain conditions relating to the construction of the
Sweetwater project. Should the conditions not be fully satisfied by August
2004, any license proceeds remaining in escrow will be returned to the
Commonwealth.
In October 2000, the Company modified its existing volume license agreement
with Ivanhoe to a master license agreement. The license agreement, as amended,
no longer contains limitations on the volume of synthetic hydrocarbons which may
be produced by Ivanhoe under the agreement and enables Ivanhoe to pursue an
unlimited number of gas-to-liquids projects around the world.
Prior to the third quarter, the Company recognized $2 million in license
revenue reflecting funds previously received by the Company as payment for an
option granted to a licensee to acquire the right to use the Syntroleum Process
in certain additional geographic areas not included in the original licensed
territory. Revenue received upon the grant of this option was deferred until
the earlier of the licensee exercising the option or the expiration of the
option. The option lapsed in April 2000, resulting in the recognition of the
related revenue.
10. PUBLIC OFFERING
In July 2000, the Company completed the sale of 5,650,000 shares of common
stock (including 400,000 shares of common stock pursuant to the exercise of a
portion of the underwriter's over-allotment option) pursuant to a public
offering at a price to the public of $17.50 per share. The Company received net
proceeds of approximately $92 million after the underwriting discount and
offering expenses.
7
<PAGE>
The Company intends to use a substantial portion of the net proceeds from
the offering to fund a portion of the Sweetwater project construction costs.
The Company intends to use any remaining net proceeds to fund costs associated
with pilot plant facilities, the development of additional GTL plants, research
and development activities, the acquisition of complementary technologies,
working capital needs and other general corporate purposes.
11. TAX PAYMENTS
During the third quarter, the Company made Australian withholding tax
payments in the amount of $2,468,000 for Australian sourced income. These taxes
were withheld by the Commonwealth of Australia upon the Commonwealth's payment
of the initial license fee under the license agreement and the Commonwealth's
first advance under the loan agreement. Under the Australian tax treaty with
the U.S., the payor is required to withhold 10% on Australian sourced revenue
and to remit it to the Australian tax authorities.
12. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
''Accounting for Derivative Instruments and Hedging Activities.'' SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting
treatment. SFAS No. 133, as amended by SFAS No. 137, and further amended by SFAS
No. 138, is effective for fiscal years beginning after June 15, 2000. However,
companies may elect to adopt SFAS No. 133 prior to that date. SFAS No. 133
cannot be applied retroactively and must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997.
The Company does not purchase futures contracts nor does it hold derivative
investments. The Company anticipates adopting SFAS 133 beginning January 1,
2001, and has begun the process of evaluating its contracts for embedded
derivatives. The Company has not yet quantified the impact of adopting SFAS 133
on its financial statements.
13. FOOTNOTES INCORPORATED BY REFERENCE
Certain footnotes are applicable to the financial statements, but
would be substantially unchanged from the footnotes presented in the audited
financial statements included in the Company's Annual Report on Form 10-K/A for
the year ended December 31, 1999 as filed with the SEC, and are incorporated
herein by reference as follows:
NOTE DESCRIPTION
---- -----------
1. Summary of Significant Accounting Policies
2. Investments
3. Property and Equipment
4. Notes Receivable from Sale of Common Stock
5. Accrued Liabilities
6. Income Taxes
7. Supplemental Cash Flow Information
8. Commitments
9. Fair Value of Financial Instruments
10. Cash Equivalents and Short-Term Investments
11. Stock Options
12. Significant Customers
13. Stockholder Rights Plan
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
You should read the following information together with the information
presented elsewhere in this Quarterly Report on Form 10-Q and with the
information presented in our Annual Report on Form 10-K/A for the year ended
December 31, 1999 (including our audited financial statements and the
accompanying notes).
OUR BUSINESS
We are a leading developer, owner and licensor of a proprietary catalytic
process for converting natural gas to synthetic liquid hydrocarbons, generally
known as gas-to-liquids, or GTL, technology. We sell licenses to use our GTL
technology, the Syntroleum Process, for the production of fuels, and we plan to
develop and own GTL plants based on the Syntroleum Process that produce refined
specialty products and fuels. We believe that the costs to produce many products
from natural gas using the Syntroleum Process, including diesel fuel, gasoline
and lubricants, can be competitive with the costs to produce comparable quality
products from crude oil using conventional refining processes. The key
advantages of our technology over traditional GTL technologies are the use of
air in the conversion process (in contrast to the requirement for pure oxygen in
alternative technologies) and the use of our proprietary catalysts, which
enhance the conversion efficiency of the catalytic reaction. These advantages
reduce the capital and operating costs of GTL plants based on the Syntroleum
Process, while also permitting smaller unit sizes, including mobile plants that
could be placed on skids, barges and ocean-going vessels. Based on our
demonstrated research, we believe that the Syntroleum Process can be
economically applied in GTL plants with throughput levels from as low as 2,000
to over 100,000 barrels a day. As a result of the advantages of our technology
and the large worldwide resource base of stranded natural gas, we believe that a
significant market opportunity exists for the use of the Syntroleum Process by
our company and our licensees to develop cost-effective GTL plants.
The Syntroleum Process produces synthetic liquid hydrocarbons, also known
as synthetic crude oil, which can be further processed into higher margin
products through conventional refining processes. These products include:
- Premium, ultra-clean liquid fuels, such as diesel, kerosene,
gasoline, naphtha and fuel for fuel
cells, and
- Specialty products, such as synthetic lubricants, process oils, high
melting point waxes, liquid
normal paraffins, drilling fluids and chemical feedstocks.
We have successfully demonstrated many elements and variations of the
Syntroleum Process in pilot plant operations and laboratory tests, including our
joint participation in a 70 barrel per day GTL demonstration plant with one of
our licensees, ARCO. While we have not yet built a commercial-scale GTL plant
based on the Syntroleum Process, we are currently developing a 10,000 barrel per
day specialty product GTL plant based on the Syntroleum Process known as the
Sweetwater plant to be constructed in Western Australia. We are also evaluating
the potential development of additional GTL plants, including facilities that
will produce synthetic liquid fuels.
BUSINESS STRATEGY
Our objectives are to rapidly establish the Syntroleum Process as an
industry standard and maximize our market share relative to alternative GTL
technologies. Our business strategy to achieve these objectives involves the
following key elements:
- continue broadly licensing our technology for the production of synthetic
crude oil and fuels,
- use our technology to build and own plants designed to make specialty
products and fuels,
- develop alternative markets for the synthetic products of GTL plants based
on the Syntroleum Process like ultra-clean fuels and fuels for fuel cell
applications, and
- continue our research and development program alone and with strategic
partners to lower costs and expand the potential applications for our
technology.
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OPERATING REVENUES
General. During the periods discussed below, our revenues were primarily
generated from the following:
- sales of real estate holdings owned by SLH Corporation prior to the merger
of Syntroleum Corporation and SLH Corporation,
- reimbursement for research and development activities associated with
the Syntroleum Process, and
- other sources, including rent generated by real estate holdings owned
by SLH prior to the merger.
Because our real estate portfolio has been substantially sold, we expect to
receive lower levels of revenues from these sources in following periods. In the
future, we expect to receive revenue relating to the Syntroleum Process from
four principal sources:
- licensing,
- catalyst sales,
- sales of products from GTL plants in which we own an equity interest,
and
- revenues from research and development activities carried out with
industry partners.
Until the commencement of commercial operation of GTL plants in which we
own an interest, we expect that cash flow relating to the Syntroleum Process
will consist primarily of license fee deposits, site license fees and revenues
associated with joint development activities. We will not receive any cash flow
from GTL plants in which we own an equity interest until the first of these
plants is constructed. Our future operating revenues will depend on the
successful commercial construction and operation of GTL plants based on the
Syntroleum Process, the success of competing GTL technologies and other
competing uses for natural gas. Our results of operations and cash flows are
expected to be affected by changing crude oil, fuel and specialty product
prices. If the price of these products increases (decreases), there could be a
corresponding increase (decrease) in operating revenues.
License Revenues. The revenue earned from licensing the Syntroleum Process is
expected to be generated through four types of contracts: master license
agreements, volume license agreements, regional license agreements and site
license agreements. Master, volume and regional license agreements provide the
licensee with the right to enter into site license agreements for individual GTL
plants. A master license agreement grants broad geographic and volume rights,
while volume license agreements limit the total production capacity of all GTL
plants constructed under the agreement to specified amounts, and regional
license agreements limit the geographical rights of the licensee. Master, volume
and regional license agreements require an up-front cash deposit that may offset
or partially offset license fees for future plants payable under site licenses.
We have acquired technology, commitment of funds for joint development
activities, services or other consideration in lieu of the initial cash deposit
in cases where we believed the technologies or commitments had a greater value.
Our site license agreements require fees to be paid in increments when
milestones during the plant design and construction process are achieved. The
amount of the license fee under our existing master and volume license
agreements is determined pursuant to a formula based on the present value of the
product of: (1) the yearly maximum design capacity of the plant, (2) an assumed
life of the plant and (3) our per barrel rate, which currently is approximately
$.50 per barrel of daily capacity, regardless of plant capacity. Our licensee
fees may change from time to time based on the size of the plant, improvements
that reduce plant capital cost and competitive market conditions. Our existing
master and volume license agreements allow for the adjustment of fees for new
site licenses under certain circumstances. Our accounting policy is to defer all
up-front deposits under master, volume and regional license agreements and
license fees under site license agreements and recognize 50% of the deposits and
fees as revenue in the period in which the engineering process design package
for a plant licensed under the agreement is delivered and recognize the other
50% of the deposits and fees when the plant has passed the performance tests.
The amount of license revenue we earn will be dependent on the construction of
plants by licensees, as well as the number of licenses we sell in the future.
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Catalyst Revenues. We expect to earn revenue from the sale of our proprietary
catalysts to our licensees. Our license agreements require our catalyst to be
used in the initial fill for the licensee to receive our process guarantee.
After the initial fill, the licensee may use other catalyst vendors if
appropriate catalysts are available. The price for catalysts purchased from us
pursuant to license agreements is equal to our cost plus a specified margin. We
will receive revenue from catalyst sales if and when our licensees purchase
catalysts. We expect that catalysts will need to be replaced every three to five
years.
GTL Plant Revenues. We intend to develop several GTL plants and to retain
significant equity interests in these plants. These plants will enable us to
gain experience with the commercial operation of the Syntroleum Process and, if
successful, are expected to provide ongoing revenues. The anticipated products
of these plants (i.e., fuels, synthetic lube base oils, process oils, waxes,
synthetic drilling fluid and liquid normal paraffins) have historically been
sold at premium prices and are expected to result in relatively high margins for
these plants. We anticipate forming several joint ventures with energy industry
and financial partners in order to finance and operate these plants. We
anticipate that our GTL plants will include partners who have low-cost gas
reserves in strategic locations and/or have distribution networks in place for
the specialty products to be made in each plant.
Joint Development Revenues. We continually conduct research and development
activities in order to reduce the capital and operating costs of GTL plants
based on the Syntroleum Process. We conduct our research and development
activities primarily through two initiatives: (1) independent development
utilizing our own resources and (2) formal joint development arrangements with
our licensee partners and others. Through these joint development agreements, we
may receive revenue as reimbursement for specified portions of our research and
development expenses. Under some of these agreements, the joint development
partner may receive credits against future license fees for monies expended on
joint research and development.
Real Estate Sales Revenues. As of September 30, 2000, our real estate inventory
consisted of undeveloped land in Houston, Texas (286 acres of undeveloped land
and 122 lots comprising the "Houston Project"), and in Corinth, Texas (nine
acres). This real estate inventory was owned by SLH Corporation prior to the
merger of Syntroleum Corporation and SLH Corporation and reflects the remaining
assets of a real estate development business that was conducted by SLH's former
parent corporation. Our total real estate inventory had an aggregate carrying
value at September 30, 2000 of approximately $3.4 million. All of our real
estate inventory is held for sale except the Houston Project, which is being
developed for commercial and residential use and ultimate sale. The timing of
real estate sales will create variances in period-to-period earnings
recognition. We do not intend to acquire additional real estate holdings for
development and/or sale outside our core business interests, and real estate
sales revenues should decrease as the current real estate inventory is
liquidated.
In February 2000, we closed the sale of our Reno parking garage to
Fitzgeralds Reno, Inc. The sale price of $3 million was paid by $750,000 in
cash at or before closing and the balance in the form of Fitzgeralds' promissory
note in the principal amount of $2,250,000. The note bears interest at the rate
of 10% and is payable in monthly installments of principal and interest based on
a 20 year amortization, with the entire unpaid balance due in 10 years. The
note is secured by the ground lease on which the garage is located as well as
the parking garage itself.
Operating Expenses
Our operating expenses historically have consisted primarily of pilot
plant, engineering and research and development expenses and general and
administrative expenses, which include costs associated with general corporate
overhead, compensation expense, legal and accounting expense and expenses
associated with other related administrative functions. Our policy is to expense
pilot plant, engineering and research and development costs as incurred. All of
these research and development expenses are associated with our development of
the Syntroleum Process. We have also recognized depreciation and amortization
expense primarily related to office and computer equipment. Our operating
expenses have also included costs of real estate sold and real estate operating
expense. Our general and administrative expenses have increased substantially,
and we have expanded our research and development, engineering and commercial
staffing levels. These expenses are expected to continue to increase. We also
expect to continue to incur pilot plant, engineering and research and
development expenses as we continue to develop and improve our GTL technology.
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We expect to incur significant expenses in connection with the start-up of
our GTL plants. For example, we expect that our expenses will increase at the
time of commencement of construction of GTL plants in which we own an interest.
Upon the commencement of commercial operation of GTL plants in which we own an
equity interest, we will incur cost of sales expenses relating primarily to the
cost of natural gas feedstocks for our specialty plants and operating expenses
relating to these plants, including labor, supplies and maintenance. Due to the
substantial capital expenditures associated with the construction of GTL plants,
we expect to incur significant depreciation and amortization expense in the
future. Our policy is to expense costs associated with the development of GTL
plants until financial close. Engineering costs are capitalized once an
engineering contract leading to a firm lump sum price has been signed.
RESULTS OF OPERATIONS
OVERVIEW
During the first nine months of 2000, we continued our efforts to
commercialize our GTL technology on several fronts. We completed our joint
participation with ARCO in a 70 barrel per day demonstration GTL plant located
at ARCO's Cherry Point refinery in the State of Washington. The plant began
operating in July 1999 and operated successfully until it was shut down at the
completion of testing shortly after June 30, 2000. ARCO funded the construction
and operation of this plant under our joint development agreement. Plant
operations exceeded our expectations and successfully demonstrated a number of
key aspects of our proprietary autothermal reformer and moving bed reactor
designs and related catalyst performance. The data and experience generated
from our participation in plant operations will be useful in our efforts to
apply these reactor designs on a commercial basis both for fuels and specialty
product plants. We are currently conducting engineering studies with others
for commercial-scale plants using these reactor designs.
We continued our activities to confirm catalyst performance and reactor designs
for our proposed Sweetwater project. These activities included operation of new
pilot scale Fischer-Tropsch reactors at our pilot plant in Tulsa, Oklahoma.
Operation of these reactors will allow us to complete a battery of confirmation
tests and continue detailed engineering of our proposed Sweetwater plant during
the year 2000. To date our pilot plant operations have met or exceeded our
Sweetwater project design targets. We also began construction of a product
upgrading pilot plant to be located at our technology center. This plant is
expected to be completed during the first quarter of next year.
We also continued our efforts to advance numerous other aspects of the
Sweetwater project, including completion of our license and loan agreements with
the Commonwealth of Australia and execution of a letter of intent with Ivanhoe
Energy to participate as an equity partner in the Sweetwater project. Each of
these transactions is discussed in more detail below under "Liquidity and
Capital Resources - Initial Specialty Product GTL Plant."
In September 2000, we were selected by the U.S. Department of Energy to
participate in one of eight teams of companies that have been identified as
potential participants in the DOE's program to help pioneer a new generation of
ultra-clean transportation fuels and tailpipe emission controls. Our team will
use our GTL technology to demonstrate the effective production, testing,
adaptation and use of ultra-clean synthetic fuels that can be delivered by
existing fuel insfrastructrues. The final participants have not yet been
selected by the DOE, and we can give no assurance that our team will be selected
for a DOE grant for this project. In addition, the terms and conditions of our
participation have not yet been finalized.
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Subsequent to the third quarter, we modified our existing volume license
agreement with Ivanhoe to a full master license agreement. The license
agreement, as amended, no longer contains limitations on the volume of synthetic
hydrocarbons which may be produced by Ivanhoe under the agreement and enables
Ivanhoe to pursue an unlimited number of gas-to-liquids projects around the
world.
During April of 2000 the Company recognized $2 million in license revenue
reflecting funds previously received by the Company as payment for an option
granted to a licensee to acquire the right to use the Syntroleum Process in
certain additional geographic areas not included in the original licensed
territory. Revenue received upon the grant of this option was deferred until
the earlier of the licensee exercising the option or the expiration of the
option. The option lapsed in April 2000, resulting in the recognition of the
related revenue.
Because we are incurring costs with respect to developing and
commercializing the Syntroleum Process and do not anticipate recognizing any
significant revenues from licensing our technology or from production from a
specialty plant in the near future, we expect to continue to operate at a loss
unless and until sufficient revenues are recognized from licensing activities,
GTL plants or real estate sales.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Joint Development Revenue. Revenues from our joint research and
development and pilot plant operations were $428,000 in the third quarter of
2000, down $364,000 from the third quarter of 1999 when they were $792,000. The
decrease was primarily due to reduced funding received under our joint
development agreement with ARCO relating to the construction of the pilot plant
at ARCO's Cherry Point refinery in Washington. Construction of this pilot plant
was completed in 1999 and we continued to receive funding for the operation of
this pilot plant through June 2000. Testing was completed and the plant was
shut down in early July 2000.
Real Estate Sales Revenue. Revenues from the sale of real estate were
$319,000 in the third quarter of 2000, down $271,000 from the third quarter of
1999 when they were $590,000. The decrease was due to the sale of 15 lots from
our Houston Project during the third quarter of 2000 compared to the sale of 32
lots in the Houston Project during the third quarter of 1999. Real estate sales
revenues should continue to decrease as the remaining real estate inventory is
sold.
Other Revenue. Other revenues were $1,000 in the third quarter of 2000,
down $165,000 from the third quarter of 1999 when they were $166,000. The
decrease resulted from the absence of parking and retail rentals from our
parking garage in Reno, Nevada, which we sold in February 2000.
Cost of Real Estate Sold and Real Estate Operating Expense. The cost of real
estate sold was $159,000 in the third quarter of 2000 down $186,000 from
$345,000 in the third quarter of 1999. The decrease resulted from the sale of
15 lots from our Houston Project in the third quarter of 2000 compared to the
sale of 32 lots in the third quarter of 1999. Real estate operating expense
was $11,000 during the third quarter of 2000, down $181,000 from $192,000 in the
third quarter of 1999. This decrease was due to the sale of the Reno parking
garage in February 2000.
Pilot Plant, Engineering and R&D. Expenses from pilot plant, engineering and
research and development activities were $5,114,000 in the third quarter of
2000, up $1,915,000 from the third quarter of 1999 when these expenses were
$3,199,000. The increase was primarily the result of the continued expansion of
our Tulsa, Oklahoma pilot plant facility, the construction of a product
upgrading pilot plant at our technology center, higher research and development
spending and higher consulting expense associated with the design and
engineering of the Sweetwater plant.
General and Administrative Expense. General and administrative expenses were
$2,585,000 in the third quarter of 2000, down $91,000 from the third quarter of
1999 when these expenses were $2,676,000. The decrease is attributable
primarily to lower spending on outside consultants offset by increased
staffing levels.
Investment, Interest and Other Income (Expense). Investment, interest and other
income increased to $2,533,000 in the third quarter of 2000, up $2,146,000
from the third quarter of 1999 when this income was $387,000. The increase was
primarily attributable to increased interest income from higher cash balances
and foreign currency exchange gains.
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Provision for Income Taxes. Income tax expense was $2,268,000 in the third
quarter of 2000 up from zero in the third quarter of 1999. This tax expense was
an Australian withholding tax on payments made to the Company by the
Commonwealth of Australia under both our license and loan agreements with the
Commonwealth. We expect to incur similar withholding tax expense with respect to
any future payments to the Company by the Commonwealth under either of these
agreements. We incurred a loss in both the third quarter of 2000 and the third
quarter of 1999 and did not recognize an income tax benefit for such loss.
Net Income. In the third quarter of 2000, we experienced a loss of
$7,056,000. The loss was $2,579,000 higher than in the third quarter of 1999
when we experienced a loss of $4,477,000. The increase in the loss is a result
of the factors described above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Joint Development Revenue. Revenues from our joint research and
development and pilot plant operations were $970,000 in the first nine months of
2000, down $972,000 from the first nine months of 1999 when they were
$1,942,000. The decrease was primarily due to reduced funding received under
our joint development agreement with ARCO relating to the construction of the
pilot plant at ARCO's Cherry Point refinery in Washington. Construction of this
pilot plant was completed in 1999 and we continued to receive funding for the
operation of this pilot plant through June 2000. Testing was completed and the
plant was shut down in early July 2000.
Real Estate Sales Revenue. Revenues from the sale of real estate were
$4,353,000 in the first nine months of 2000, up $3,243,000 from $1,110,000 in
the first nine months of 1999. The increase was due to the sale of our Reno
parking garage to Fitzgeralds Reno, Inc. during February 2000 and the sale of 66
lots from our Houston Project during the first nine months of 2000, compared to
our sale of the Santa Rosa land in Kansas City and the sale of 32 lots from our
Houston project during the first nine months of 1999. Real estate sales
revenues should decrease as the remaining real estate inventory is sold.
Licensing Revenue. Revenues from license activities were $2,000,000 in the
first nine months of 2000 compared to zero in the first nine months of 1999.
This increase was a result of our recognition of $2 million in previously
deferred license revenue as a result of the expiration of an option held by a
licensee to expand the licensee's licensed territory .
Other Revenue. Other revenues were $76,000 in the first nine months of
2000, down $415,000 from the first nine months of 1999 when they were $491,000.
The decrease resulted primarily from the lower parking and retail rentals from
our parking garage in Reno, Nevada, which we sold in February 2000.
Cost of Real Estate Sold and Real Estate Operating Expense. The cost of real
estate sold was $3,390,000 the first nine months of 2000, up $2,641,000 from
$749,000 in the first nine months of 1999. The increase resulted from the sale
of our Reno parking garage to Fitzgeralds Reno, Inc. during February 2000 and
the sale of 66 lots from our Houston Project during the first nine months of
2000 compared to our sale of the Santa Rosa land in Kansas City and the sale of
32 lots from our Houston project during the first nine months of 1999. Real
estate operating expense was $200,000 during the first nine months of 2000, down
$381,000 from $581,000 in the first nine months of 1999. This decrease was the
result of decreased costs associated with the parking and retail operation of
the Reno garage.
Pilot Plant, Engineering and R&D. Expenses from pilot plant, engineering and
research and development activities were $12,383,000 in the first nine months of
2000, up $4,647,000 from the first nine months of 1999 when these expenses were
$7,736,000. The increase was primarily the result of the continued expansion of
our Tulsa, Oklahoma pilot plant facility, the construction of a product
upgrading pilot plant at our technology center, higher research and development
spending and higher consulting expense associated with the design and
engineering of the Sweetwater plant.
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General and Administrative Expense. General and administrative expenses were
$9,049,000 in the first nine months of 2000, up $1,694,000 from the first nine
months of 1999 when these expenses were $7,355,000. The increase is
attributable primarily to higher wages and salaries resulting from our higher
staffing levels, higher rent expense and higher expense for outside consultants.
Investment, Interest and Other Income (Expense). Investment, interest and other
income increased to $3,550,000 in the first nine months of 2000, up $2,012,000
from the first nine months of 1999 when this income was $1,538,000. The
increase was primarily attributable to higher interest income from increased
cash balances and foreign currency exchange gains during the first nine months
of 2000 compared to the first nine months of 1999.
Provision for Income Taxes. . Income tax expense was $2,268,000 in the first
nine months of 2000 up from zero in the first nine months of 1999. This tax
expense was an Australian withholding tax on payments made to the Company by the
Commonwealth of Australia under our license and loan agreements with the
Commonwealth. We expect to incur similar withholding tax expense with respect to
any future payments to the Company by the Commonwealth under either of these
agreements. We incurred a loss in the first six months of both 2000 and 1999 and
did not recognize an income tax benefit for such loss.
Net Income. In the first nine months of 2000, we experienced a loss of
$16,541,000. The loss was $5,201,000 higher than in the first nine months of
1999 when we experienced a loss of $11,340,000. The increase in the loss is a
result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
General
As of September 30, 2000, we had $101,144,000 in cash and short-term
investments and $9,346,000 in current liabilities. We currently have long-term
debt of $696,000 which matures in 2025. The long-term debt amount reflects cash
loan proceeds received in escrow (AUD$12 million which is approximately U.S.$6.9
million) discounted over the remaining term of the loan using an imputed
interest rate of 9%. The difference between the cash received and the
discounted long-term debt amount of $696,000 has been recorded as a reduction in
the costs of the related Sweetwater project. The long term debt amount
reflected for these proceeds will increase over time as the remaining term of
the loan declines. Prior to our merger with SLH, our primary sources of
liquidity were equity capital contributions and prepaid license fees and our
principal liquidity needs were to fund expenditures relating to research and
development and pilot plant activities and to fund working capital. At
September 30, 2000, we had $2,952,000 in accounts and notes receivable
outstanding . We currently have short-term investments of approximately $3.4
million, which secure 49.9 percent of a letter of credit for the Powder Basin
Partnership in which we are an 49.9 percent investor. We also have $13,221,000
in restricted investments that are held in escrow representing funds received
from the Commonwealth of Australia under our loan and license agreements with
the Commonwealth.
Cash flows provided by (used in) operations were $8,915,000 in the first
nine months of 2000 compared to ($12,163,000) during the first nine months of
1999. This increase in cash flows was primarily the result of the receipt of
$20,520,000 in deferred revenue offset by the recognition of $2,000,000 of
previously deferred revenue. Cash flows provided by operations also increased
because of the completion of site development for the beginning phases of the
Houston Project, the sale of 65 lots from the Houston Project and the sale of
the Reno garage. Cash flows used in investment activities were $27,769,000 in
the first nine months of 2000 compared to $1,541,000 in the first nine months of
1999. The increase resulted primarily from the increased capitalized costs for
our Sweetwater project and the increase of restricted funds associated with the
Commonwealth of Australia license and loan agreements.
Cash flows provided by financing activities were $95,215,000 in the first
nine months of 2000 compared to $5,997,000 in the first nine months of 1999.
The increase was primarily due to the completion of the sale of 5,650,000
shares of common stock pursuant to a public offering in which we received net
proceeds of approximately $92,000,000 after the underwriting discount and
offering expenses and the receipt of $696,000 in long-term debt under the
Commonwealth of Australia loan agreement. We intend to use a substantial
portion of these net proceeds to fund our portion of the equity financing for
our Sweetwater project. We intend to use any remaining net proceeds to fund
costs associated with pilot plant facilities, the development and construction
of additional GTL plants, research and development activities, the acquisition
of complementary technologies, working capital needs and other general corporate
purposes.
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The construction of our GTL plants will require significant capital
expenditures. Our other efforts to commercialize the Syntroleum Process will
also involve significant expenditures. We have an effective registration
statement for the proposed offering from time to time of shares of our common
stock for an aggregate initial offering price of $21,125,000. We intend to
obtain additional funding through joint ventures, partnerships, license
agreements and other strategic alliances, as well as various other financing
arrangements. We may also seek debt or additional equity financing in the
capital markets. In the event such capital resources are not available to us,
our GTL plant development and other activities may be curtailed. Additionally,
we estimate that construction and disposal costs to complete real estate
projects in development will be approximately $1.5 million, although the actual
amount could be materially different than this estimated amount.
We have sought and intend to continue to temporarily invest our assets, pending
their use, so as to avoid becoming subject to the registration requirements of
the Investment Company Act of 1940. These investments are likely to result in
lower yields on the funds invested than might be available in the securities
market generally. If we were required to register as an investment company under
the Investment Company Act, we would become subject to substantial regulation
that would materially adversely affect us.
Initial Specialty Product GTL Plant
We are developing a 10,000 barrel per day specialty product plant, which
we call the Sweetwater plant. We currently anticipate that this plant will
produce synthetic lube oil, normal paraffins, process oils and light paraffins.
The project is expected to use a fixed tube reactor design because this design
produces a high yield of the desired products with high wax content and has
lower scale-up risks than other reactor designs. The plant is also expected to
include additional refining equipment necessary to produce the targeted
specialty products. We plan to construct this plant through a joint venture. In
February 2000, we selected a site for the plant about four kilometers from the
North West Shelf liquid natural gas facility on the Burrup Peninsula of Western
Australia.
The State of Western Australia recently announced its intention to assist
the Sweetwater project with an AUD$30 million (approximately U.S.$19 million)
common use infrastructure package, including a desalinization plant to which our
project will supply steam and from which our project will receive cooling water.
In addition, we have entered into a gas purchase agreement with the North West
Shelf Gas Partners, whose members include affiliates of BHP Petroleum, BP Amoco,
Chevron, Mitsui, Mitsubishi, Royal Dutch Shell and Woodside Energy Ltd. Subject
to certain conditions, North West Shelf Gas Partners agreed to supply the
Sweetwater plant with the natural gas required to operate the plant at full
capacity for 20 years.
In November 1999, we signed a project development agreement with Tessag, a
wholly-owned subsidiary of RWE AG, to provide us with a fixed price for the
design and construction of the Sweetwater plant. Tessag also agreed to pay
liquidated damages up to certain levels in the event certain process and product
specifications are not achieved. We currently expect that Tessag will complete
the plant design and, subject to completion of plant financing, begin
construction in 2001. We expect the plant to be operational in 2003, although
construction of the plant will be subject to the risk of delay inherent in any
large construction project.
During the third quarter we entered into a license agreement with the
Commonwealth of Australia to license the Syntroleum Process as part of a program
designed to unlock the value of Australia's energy reserves and improve the
quality of the environment. Under the license agreement, the Commonwealth made
an AUD$30 million (approximately U.S.$19 million) deposit, of which AUD$15
million (approximately U.S. $9 million is held in escrow pending satisfaction
of certain conditions relating to the construction of the Sweetwater project.
AUD$20 million (approximately U.S.$12 million) of the license fee may be
credited against future site license fees. At the same time, we entered into a
loan agreement with the Commonwealth under which the Commonwealth will make a
non-amortizing, interest-free loan to us in the amount of AUD$40 million
(approximately U.S.$25 million) with a 25-year maturity to support the further
development and commercialization of GTL technologies in Australia and under
which we have agreed to conduct a feasibility study on constructing a
large-scale GTL fuels plant in Australia. Loan proceeds are to be made
available to the Company in three successive advances. Pending satisfaction of
certain conditions relating to the financing, construction and completion of the
Sweetwater project, loan proceeds will be held in escrow. Should the conditions
not be fully satisfied by August 2004, any license and loan proceeds remaining
in escrow will be returned to the Commonwealth.
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Subsequent to the third quarter, we entered into a letter of intent with
Ivanhoe Energy Inc. providing for Ivanhoe to participate as a partner in the
Sweetwater project. Upon execution of the letter of intent, Ivanhoe funded $2
million for front-end engineering and other project development costs and will
acquire a 13% equity position in the project for an additional $19 million.
Consummation of the transaction contemplated by the letter of intent requires
the satisfaction of a number of conditions, some of which are not within our
control, including Ivanhoe management approvals, satisfactory completion of due
diligence by Ivanhoe, funding of commitments with respect to other debt and
equity financing and the negotiation and execution of definitive agreements. As
a result, the transactions contemplated by the letter of intent may not be
realized or may only be realized under terms and conditions that differ
materially from those contemplated by the letter of intent.
In January 2000, we received $2 million dollars from Methanex Corporation
towards the cost of the Sweetwater project engineering work being performed by
Tessag pursuant to a letter of intent with Methanex that provided for the
contribution by Methanex of an additional $43 million in exchange for an equity
interest in the project, subject to the execution of definitive agreements and
the satisfaction of certain conditions. In May 2000, Methanex informed us that
it was terminating its participation in the Sweetwater project.
In June 2000, we entered into a non-binding letter of intent with a
subsidiary of Enron with respect to its contemplated contribution of $21 million
in exchange for a 13% equity investment in the Sweetwater project. Under the
letter of intent, Enron would receive a $1 million credit toward its investment
in the Sweetwater project as a result of its prior contribution toward the
development of the project, resulting in net equity funding to be received from
Enron of $20 million. As a result of this investment, Enron would have the right
to receive cash flow distributions in excess of 13% if the plant does not meet
specified performance targets.
Upon Enron's funding of its net capital contribution, it would become
entitled to convert its interest in
the Sweetwater project into a maximum of 1,500,000 shares of our common stock
during a period beginning one
year after the date on which the project completes successful performance
testing and ending on the tenth
anniversary of execution of definitive agreements relating to the transaction
contemplated in the letter of intent. In
addition, upon Enron's funding of its net capital contribution, it would receive
a warrant to acquire no more than
1,500,000 additional shares of our common stock at an exercise price equal to
$21.00 per share.
Consummation of the transaction contemplated by the letter of intent
requires the satisfaction of a number of conditions, some of which are not
within our control, including Enron management approvals, satisfactory
completion of certain due diligence by Enron, funding of commitments with
respect to other debt and equity financing and the negotiation and execution of
definitive agreements. As a result, the transactions contemplated by the letter
of intent may not be realized or may only be realized under terms and
conditions that differ materially from those contemplated by the letter of
intent.
In addition to the $2 million contributed by Ivanhoe, the $1 million
contributed by Enron and the $2 million contributed by Methanex, through
September 30, 2000 we had made a substantial financial contribution toward the
development of the Sweetwater project and we expect to continue to make
additional financial contributions in the future.
The capital costs of the Sweetwater project are currently expected to be
funded primarily by non-recourse senior and subordinated debt at the project
level, as well as the equity financing discussed above, together with our own
equity contribution. We are currently seeking to finalize the equity investment
transactions discussed above and we are exploring sources of debt capital to
fund final design and construction. However, we can give no assurance that the
necessary capital for this project will be obtained.
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CURRENCY RISK
We expect to conduct a portion of our business in currencies other than the
United States dollar. We may attempt to minimize our currency exchange risk by
seeking international contracts payable in local currency or we may choose to
convert our currency position into United States dollars. For example, our
proposed funding plan with the Commonwealth of Australia will be in Australian
dollars. In addition, we expect to seek contractual purchase price adjustments
based on an exchange rate formula related to United States dollars. In the
future, we may also have significant investments in countries other than the
United States. The functional currency of these foreign operations may be the
local currency, and accordingly, financial statement assets and liabilities may
be translated at prevailing exchange rates and may result in gains or losses in
current income. Currently, all of the Company's subsidiaries use the U.S. dollar
for their functional currency. Assets and liabilities are translated into U.S.
dollars at the rate of exchange in effect at the balance sheet date.
Transaction gains and losses that arise from exchange rate fluctuations
applicable to transactions denominated in a currency other than the U.S.
dollar are included in the results of operations as incurred.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
''Accounting for Derivative Instruments and Hedging Activities.'' SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133, as amended by SFAS No. 137, and further amended by SFAS No. 138, is
effective for fiscal years beginning after June 15, 2000. However, companies may
elect to adopt SFAS No. 133 prior to that date. SFAS No. 133 cannot be applied
retroactively and must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997. The company does not
purchase futures contracts nor do we hold derivative investments. The company
anticipates adopting SFAS 133 beginning January 1, 2001, and has begun the
process of evaluating its contracts for embedded derivatives. The company has
not yet quantified the impact of adopting SFAS 133 on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We had $101,144,000 in cash equivalents and short-term investments in the
form of money market instruments and U.S. Treasury securities as of September
30, 2000. The majority of these securities mature in less than 90 days. Our
policy is to hold short-term securities to maturity, which minimizes interest
rate risk. The average interest rate on these investments at September 30, 2000
was approximately 6%. The company also holds restricted funds in the form of
Australian escrow accounts. These funds earn approximately 5.6% and are marked
to market at the end of each reporting period. These accounts can have
fluctuating balances relating to foreign currency exchange between the U.S. and
Australian Dollar.
18
<PAGE>
We expect to conduct a portion of our business in currencies other than the
United States dollar. We may attempt to minimize our currency exchange risk by
seeking international contracts payable in local currency or we may choose to
convert our currency position into United States dollars. For example, our
proposed funding plan with the Commonwealth of Australia will be in Australian
dollars. In addition, we expect to seek contractual purchase price adjustments
based on an exchange rate formula related to United States dollars. In the
future, we may also have significant investments in countries other than the
United States. The functional currency of these foreign operations may be the
local currency and, accordingly, financial statement assets and liabilities may
be translated at prevailing exchange rates. Currently, the functional currency
of all our subsidiaries is U.S. currency and the only foreign currency risk
results in transaction gains and losses that will flow through the income
statement. Foreign exchange risk currently relates to two escrow accounts held
in Australian dollars in the amount of U.S.$13,221,000 at the end of the
reporting period, and to long-term debt held in Australian dollars in the amount
of U.S.$696,000 at the end of the reporting period. This long term debt matures
in 2025 and has been discounted using an imputed interest rate of 9%. The
Company also has deferred revenue that is denominated in Australian currency.
This deferred revenue was U.S.$16,245,000 at the end of the reporting period.
These restricted funds, long-term debt, discount and deferred revenue will be
converted to U.S. dollars for financial reporting at the end of every reporting
period. To the extent that there are gains or losses these will be shown in our
income statement.
We do not purchase futures contracts nor do we purchase or hold any derivative
financial instruments.
19
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Our Registration Statement on Form S-3 (Registration No. 333-32968), as
amended (the "Registration Statement"), in connection with the registration of
shares of our common stock with an aggregate offering price of up to
$120,000,000 was declared effective by the Securities and Exchange Commission on
April 25, 2000. As described in a prospectus supplement dated June 29, 2000, an
offering commended on June 29, 2000 pursuant to the Registration Statement, and
resulted in (i) the sale by us of 5,250,000 shares of common stock on July 6,
2000 and (ii) the sale by us of 400,000 shares of common stock on July 19, 2000
pursuant to the exercise of the underwriters' over-allotment option.
The net proceeds to us from the offering were approximately $92 million.
To date, we have used approximate $6 million in such net proceeds for the
development of our Sweetwater project. The remaining net proceeds from the
offering are currently invested in short-term cash and cash equivalents. None
of such payments were direct or indirect payments to our directors or officers
or their associates, to persons owning ten percent or more of any class of our
equity securities or to our affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2000 annual meeting of the stockholders of the Company was held on
September 14, 2000. Set forth below are the results of the voting with respect
to each matter acted upon at the meeting.
<TABLE>
<CAPTION>
<S> <C>
Votes Votes Cast Votes Broker
Matter Cast For Against Withheld Abstentions Non-votes
-----------------------------------------------------------------------------------------------
Election of Directors:
Mark A. Agee 29,931,580 - 26,484 - -
Frank M. Bumstead 29,932,372 - 35,692 - -
Robert B. Rosene, Jr. 29,821,802 - 146,266 - -
Ratification of the Appointment
of Arthur Andersen LLP as
independent public accountants
for the 2000 fiscal year 29,931,469 15,159 - 21,436
</TABLE>
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K. Not applicable.
20
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Exhibits. The following exhibits are filed as part of this quarterly
report:
10.1 Amendment No. 1 to Volume License Agreement dated October 11, 2000
between Syntroleum Corporation and Ivanhoe Energy Inc.
27 Financial Data Schedule.
21
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNTROLEUM CORPORATION, a Delaware
corporation (Registrant)
Date: November 10, 2000 By: /s/ Mark A. Agee
----------------
Mark A. Agee
President and Chief Operating Officer
Date: November 10, 2000 By: /s/ Randall M. Thompson
-----------------------
Randall M. Thompson
Chief Financial Officer (Principal Financial Officer)
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
-------- ----------------------
10.2 Amendment No. 1 to Volume License Agreement dated October 11, 2000
between Syntroleum Corporation and Ivanhoe Energy Inc.
27 Financial Data Schedule.
23
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