<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-23634
KFX INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1079971
-------- ----------
(State or Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1999 Broadway, Suite 3200
Denver, Colorado 80202
(303) 293-2992
(Address and telephone number of
principal executive offices)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
(X) Yes ( ) No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of August 8, 1996:
Common Stock, $.001 par value
22,531,040 shares
<PAGE>
KFX INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
INDEX
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION PAGE
------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 1996 (Unaudited) and December 31, 1995... 3
Consolidated Statements of Operations - Six Months Ended
June 30, 1996 and 1995 (Unaudited)......................................... 4
Consolidated Statements of Operations - Three Months Ended
June 30, 1996 and 1995 (Unaudited)......................................... 5
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 1996 and 1995 (Unaudited)......................................... 6,7
Notes to Consolidated Financial Statements (Unaudited).......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 10
PART II. OTHER INFORMATION.......................................................... 12, 13
SIGNATURES........................................................................... 14
</TABLE>
<PAGE>
KFX INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
ASSETS (UNAUDITED)
------
<S> <C> <C>
Current:
Cash and cash equivalents.................................................... $ 2,584,759 $ 2,870,039
Reclamation deposit.......................................................... - 1,503,032
Accounts receivable.......................................................... 137,416 26,002
Prepaid expenses............................................................. 265,735 281,711
------------ ------------
Total current assets.................................................... 2,987,910 4,680,784
------------ ------------
Property, plant and equipment, net of accumulated depreciation.................... 5,219,513 5,619,546
Patents, net of accumulated amortization.......................................... 3,955,200 4,273,583
Investment in KFX Fuel Partners, L.P.............................................. 2,792,304 2,792,304
Property held for sale............................................................ 1,032,012 1,032,012
Advance royalty payment........................................................... 500,000 -
Other assets...................................................................... 314,844 213,264
------------ ------------
$ 16,801,783 $ 18,611,493
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current:
Accounts payable............................................................. $ 1,083,501 $ 836,538
Accrued expenses and other liabilities....................................... 100,356 698,765
Due to related parties....................................................... 325,596 585,814
Interest payable............................................................. 38,913 91,985
Current maturities of long-term debt......................................... 66,000 214,000
------------ ------------
Total current liabilities............................................... 1,614,366 2,427,102
------------ ------------
Long-term debt, less current maturities........................................... 1,205,000 1,399,851
Mine reclamation liability........................................................ 1,032,012 1,032,012
------------ ------------
Total liabilities....................................................... 3,851,378 4,858,965
------------ ------------
Commitments and contingent liabilities (Note 2)
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000 shares authorized;
none issued............................................................. - -
Common stock, $.001 par value, 80,000,000 shares authorized;
22,531,040 and 22,159,374 shares issued and outstanding, respectively... 22,531 22,159
Additional paid-in capital................................................... 43,833,238 42,293,556
Accumulated deficit.......................................................... (30,905,364) (28,563,187)
------------ ------------
Total stockholders' equity.............................................. 12,950,405 13,752,528
------------ ------------
$ 16,801,783 $ 18,611,493
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED JUNE 30,
1996 1995
<S> <C> <C>
K-Fuel, L.L.C. joint venture fee.................. $ 1,000,000 $ -
Contract revenue.................................. 8,410 133,271
Interest and other income......................... 128,238 10,808
----------- -----------
Total revenue.................................... 1,136,648 144,079
----------- -----------
Marketing, general and administrative expenses.... 1,924,796 1,380,314
Depreciation and amortization..................... 930,365 807,545
Research and development.......................... 200,000 137,000
Demonstration plant and laboratory operations,
net of third party reimbursements................ 337,523 143,104
Litigation settlement............................. - 800,000
Interest expense.................................. 86,141 483,151
----------- -----------
Total expenses................................... 3,478,825 3,751,114
----------- -----------
Net Loss.......................................... $(2,342,177) $(3,607,035)
----------- -----------
Net Loss Per Common Share......................... $(.10) $(.21)
=========== ===========
Weighted Average Common Shares Outstanding........ 22,374,000 17,237,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED JUNE 30,
1996 1995
<S> <C> <C>
K-Fuel, L.L.C. joint venture fee................. $ 1,000,000 $ -
Contract revenue................................. - 53,442
Interest and other income........................ 71,194 9,494
----------- -----------
Total revenue................................... 1,071,194 62,936
----------- -----------
Marketing, general and administrative expenses... 1,149,180 782,600
Depreciation and amortization.................... 496,243 403,773
Research and development......................... 120,000 62,000
Demonstration plant and laboratory operations,
net of third party reimbursements............... 183,005 76,782
Litigation settlement............................ - 800,000
Interest expense................................. 58,376 143,574
----------- -----------
Total expenses.................................. 2,006,804 2,268,729
----------- -----------
Net Loss......................................... $ (935,610) $(2,205,793)
----------- -----------
Net Loss Per Common Share........................ $(.04) $(.13)
=========== ===========
Weighted Average Common Shares Outstanding....... 22,486,000 17,480,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED JUNE 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................... $(2,342,177) $(3,607,035)
Adjustments to reconcile net loss to cash used for operating activities:
Depreciation and amortization.............................................. 930,365 807,545
Amortization of notes payable issuance discount............................ - 273,000
Litigation settlement...................................................... - 800,000
Other...................................................................... (32,942) (5,437)
Changes in assets and liabilities:
Increase in accounts receivable............................................ (111,414) (952)
Increase in prepaid expenses............................................... (227,149) (7,000)
Decrease in reclamation deposit............................................ 1,503,032 -
Increase (decrease) in accounts payable.................................... 279,905 (73,355)
Increase (decrease) in accrued expenses.................................... (120,515) 61,212
Increase (decrease) in due to related parties.............................. (50,438) 65,000
Increase (decrease) in interest payable.................................... (53,072) 64,921
----------- -----------
Cash used for operating activities........................................... (224,405) (1,622,101)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Development costs credited to KFX Fuel Partners, L.P........................ - (120,341)
Advance royalty payment..................................................... (300,000) -
Purchases of equipment...................................................... (69,404) -
Other....................................................................... (1,000) (37,908)
----------- -----------
Cash used for investing activities........................................... (370,404) (158,249)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of placement fees................... 852,380 1,306,875
Proceeds from issuance of notes payable..................................... - 1,155,000
Payments on notes payable................................................... (542,851) (455,405)
----------- -----------
Cash provided from financing activities...................................... 309,529 2,006,470
----------- -----------
Net increase (decrease) in cash and cash equivalents......................... (285,280) 226,120
Cash and cash equivalents, beginning of period............................... 2,870,039 79,264
----------- -----------
Cash and cash equivalents, end of period..................................... $ 2,584,759 $ 305,384
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
KFX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED JUNE 30,
1996 1995
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................. $139,187 $125,347
Cash paid for income taxes......................... - 2,500
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Six Months Ended June 30, 1996
- ------------------------------
During January 1996, the Company issued 41,426 shares of common stock under
its Restricted Stock Plan in payment of 1995 board of director fees totaling
$209,780 that were included in due to related parties at December 31, 1995.
During January 1996, the Company issued 93,240 shares of common stock, and
issued a common stock purchase warrant for 100,000 shares of common stock for
$4.00 per share, in exchange for professional service fee obligations totaling
$477,894 that were included in accrued expenses at December 31, 1995.
In June 1996, the Company entered into a royalty amendment agreement
whereby the Company issued a promissory note in the amount of $200,000, payable
in June 1998. See Note 5.
Six Months Ended June 30, 1995
- ------------------------------
During January 1995, the Company issued 40,312 shares of common stock under
its Restricted Stock Plan in payment of 1994 board of director fees totaling
$167,315.
During January 1995, the Company issued 53,798 shares of common stock in
exchange for professional service fee obligations totaling $265,294 that were
included in accounts payable and accrued expenses at December 31, 1994.
In February 1995, the Company issued 254,460 shares of common stock in
exchange for obligations existing under certain promissory notes totaling
approximately $1,035,000.
In May 1995, the Company issued 10,000 shares of common stock to settle a
legal claim against the Company.
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of KFX Inc. ("KFX" or the "Company") and its wholly-owned subsidiary,
KFX Wyoming Inc. ("KFXW"), and its majority-owned subsidiaries, KFX Technology
Inc. ("KFXT", formerly Energy Brothers Technology, Inc.), Atlantic Partners Ltd.
("APL"), and Heartland Fuels Corporation ("HFC"). The Company's 51 percent
interest in K-Fuel, L.L.C. ("K-Fuel") is not consolidated as the net income and
loss of K-Fuel is allocated (by written agreement) 100 percent to Kennecott
Energy and Coal Company during the intial research and development period of K-
Fuel, which is expected to be until approximately the fourth quarter of 1997.
All significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements at June 30, 1996, and for the six-
month and three-month periods ending June 30, 1996 and 1995 have been prepared
without audit. In the opinion of the Company's management, all adjustments,
consisting of only normal recurring adjustments necessary for a fair statement
of the results for the interim periods, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the audited financial statements and notes to financial
statements for the year ended December 31, 1995 included in the Company's Form
10-KSB. The accounting policies used in the preparation of these unaudited
quarterly financial statements are the same as those policies used in the
preparation of the audited annual financial statements except as modified for
appropriate interim accounting policies. The results of operations for the six
months and three months ended June 30, 1996 are not necessarily indicative of
the results of operations expected for the year ended December 31, 1996.
Net loss per common share for the six months and three months ended June
30, 1996 and 1995 are based on the weighted average number of shares of common
stock outstanding during the period, and excludes common equivalent shares
(common stock options and warrants) as the effect would be anti-dilutive.
Certain reclassifications have been made to the 1995 financial statements
to conform to the current year presentation.
NOTE 2. COMMITMENTS AND CONTINGENT LIABILITIES
In November 1995, the Company filed a lawsuit against Fru-Con Construction
Corporation and Fru-Con Engineering, Inc. (collectively, "Fru-Con") in the
Wyoming State Court, 6th Judicial District. The action has been moved to the
United States District Court for the District of Wyoming. The Company's lawsuit
requests that the court enter a declaratory judgment that Fru-Con has no
interest or claim in or against the Company or any of the Company's property or
interests, or that Fru-Con is barred from such claims. Fru-Con had asserted
claims for approximately $1.8 million for engineering services and an interest
in K-Fuel plants built in North America by virtue of contractual arrangements
with a limited partnership sponsored by corporations in which a predecessor
entity to the Company had a partnership interest. The Company believes that
the ultimate resolution of this action will not have a material adverse impact
on the Company's financial position or results of operations.
-8-
<PAGE>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(CONTINUED)
NOTE 3. K-FUEL, L.L.C.
In April 1996, the Company and Kennecott Alternative Fuels, Inc. ("KECC"),
a wholly-owned subsidiary of Kennecott Energy and Coal Company, formed K-Fuel,
L.L.C., a Delaware limited liability company ("K-Fuel LLC"). Pursuant to the
Limited Liability Company Agreement of K-Fuel LLC (the "Agreement"), K-Fuel LLC
will provide support for further technical advancement and the commercialization
of business opportunities arising out of the K-Fuel Technology, including
research and development, sublicensing, marketing and consulting, but not
including any actual construction of plants or facilities to produce K-Fuel
products on a commercial basis ("Commercial Projects"). Commercial Projects will
be constructed by separate entities in which KECC, the Company or both will have
an equity interest and which will receive a sublicense from K-Fuel LLC for the
K-Fuel Technology.
Initially, the Company will have a 51 percent interest in K-Fuel LLC and
KECC will have a 49 percent interest, except to the extent of certain research
and development costs, which by written agreement are allocated 100 percent to
KECC. At such time as entities in which KECC has an equity interest have placed
into service Commercial Projects with a collective design capacity equal to or
in excess of 3 million tons of K-Fuel product per annum, KECC will have a 51
percent interest in K-Fuel LLC and the Company will have a 49 percent interest.
The initial capital contributions to K-Fuel LLC by KECC and the Company were
$1,001,000 and $1,000, respectively. Subsequently, K-Fuel LLC made a payment of
$1,000,000 of such capital contribution to the Company in consideration for the
Company entering into the Agreement, which has been recorded by the Company as
joint venture fee revenue in the quarter ended June 30, 1996. Subject to certain
conditions, KECC has also agreed to pay to K-Fuel LLC such amounts as may be
necessary for all research and development costs incurred by K-Fuel LLC, up to
$4,000,000.
ln connection with the Agreement, the Company granted K-Fuel LLC an
exclusive, worldwide, fully-paid, royalty-free right and license (including the
right to grant sublicenses) to and under the K-Fuel Technology, except to the
extent that it pertains to the beneficiation or restructuring of coal or coal
related feedstocks covered under the HFC License (as defined below) (the "KFX
License"). In addition, Heartland Fuels Corporation, an 85 % owned subsidiary of
the Company, granted K-Fuel LLC an exclusive, worldwide, fully-paid, royalty-
free right and license (including the right to grant sublicenses) to and under
the Series "A" and Series "B" K-Fuel Technology, as it pertains to the
beneficiation or restructuring of coal or coal related feedstocks (the "HFC
License"). Both the KFX License and the HFC License specify minimum terms and
provisions for any sublicenses granted by K-Fuel LLC to third parties.
NOTE 4. ROYALTY AGREEMENT
In June 1996, the Company entered into a royalty amendment agreement with
Edward Koppelman, the inventor of the K-Fuel Technology, whereby Mr. Koppelman
will receive royalty payments of 25 percent of the Company's future net license
fees and royalties related to the K-Fuel Technology. All royalty payments to
Mr. Koppelman under the new royalty agreement will reduce a total contingent
royalty obligation of approximately $75.2 million currently owed by the Company
to Mr. Koppelman. Prior to this royalty amendment agreement, the Company was
obligated to pay Mr. Koppelman a royalty of two percent of gross sales of K-Fuel
products, not to exceed $0.84 per ton of production, regardless of the net
royalties received by the Company.
In consideration for the royalty amendment agreement, the Company paid Mr.
Koppelman $300,000 cash and issued a $200,000 promissory note payable in June
1998. The total consideration of $500,000 has been recorded as an advance
royalty payment at June 30, 1996.
-9-
<PAGE>
KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion to follow is based on forward-looking information which is
subject to numerous risks and uncertainties, and should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" at Item 6 of the Company's Form 10-KSB for the year ended
December 31, 1995. Actual results could differ materially from those
anticipated in the forward-looking information.
Since its inception, the Company has not generated any material revenues
from the licensing of the K-Fuel Technology to third party licensees or the
direct manufacturing of beneficiated fuel products. All revenues have been
derived from ancillary sources not directly related to the Company's efforts to
commercialize the K-Fuel Technology. Until the Company successfully negotiates
additional third-party licensing and royalty agreements and/or independently
constructs and operates its own production facilities, net operating losses will
continue. As such, the Company will be dependent on non-operating funding
sources to sustain its operations in the near term (twelve to eighteen months).
LIQUIDITY AND CAPITAL RESOURCES
The current near-term funding sources available to the Company are (1)
cash on hand, which as of August 8, 1996 was approximately $1.9 million; (2) a
stock purchase option granted to Thermo Ecotek Corporation providing for the
sale of up to 1.25 million shares of the Company's common stock during a two-
month period beginning in December 1996 for proceeds to the Company of up to
$2.5 million; (3) the expected start-up of the KFX Fuel Partners, L.P.
production facility near Gillette, Wyoming in the fourth quarter 1996, which is
expected to result in royalty payments, net profits interest, and possibly
certain management fees to the Company; (4) the expected exercise of certain
outstanding common stock purchase warrants, which could result in proceeds to
the Company in late 1996 of up to approximately $0.5 million; and (5) certain
cost reimbursements from K-Fuel LLC relating to a collective research and
development program conducted by the Company in conjunction with Kennecott
Alternative Fuels, Inc., the Company's joint venture partner in K-Fuel LLC. See
Note 3 to the consolidated financial statements.
The Company is confident that the current cash on hand and the expected
cost sharing payments from K-Fuel LLC will be sufficient to fund the Company's
current operating requirements until the second or third quarter of 1997. In
the event Thermo Ecotek Corporation does not exercise its option, under certain
conditions, to purchase up to 1.25 million shares of the Company's common stock
in December 1996 or January 1997 for proceeds to the Company of up to $2.5
million, the Company will be required to seek additional funding sources in late
1997 or early 1998. Additionally, the Company is actively pursuing other K-Fuel
project development opportunities in the U.S. and internationally. However, the
Company does not expect any material operating revenues (i.e., license fees,
royalties and operating profits) to materialize from such projects in the next
twelve to eighteen months based on currently known facts and circumstances. The
Company may be required to obtain additional financing for an equity
participation interest, if any, in any future K-Fuel production facilities.
The Company does not currently have any commitments with respect to additional
financing, and there can be no assurance that such financing would be available
on terms acceptable to the Company, if at all.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 VS. SIX MONTHS ENDED
JUNE 30, 1995
The $1 million K-Fuel, L.L.C. joint venture fee was realized in April 1996
upon the completion of the joint venture agreement with KECC.
Marketing, general and administrative expenses increased by approximately
$542,000 in the 1996 period over the 1995 period. The increase is generally
attributable to the Company's increased project development efforts, as well as
legal fees associated with the K-Fuel, L.L.C. joint venture agreement.
Specifically, the Company incurred
-10-
<PAGE>
KFX INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
approximately $134,000 in consulting fees and travel expenses in the first six
months of 1996 (vs. none in the comparable 1995 period) related to its project
development efforts in Indonesia. Legal fees specifically associated with the
K-Fuel, L.L.C. joint venture agreement reached in April 1996 were approximately
$328,000. Another significant portion of the increase in the 1996 period was a
one-time $50,000 listing fee with the American Stock Exchange, on which the
Company's common stock began trading in late January 1996.
The increase in depreciation and amortization expense in the 1996 period
is attributable to the Series "C" patents acquisition for approximately $1.3
million in August 1995, which is being amortized over a fifteen year period.
The increase in research and development expenses and demonstration plant
and laboratory operations in the 1996 period is attributable to increased
efforts associated with overall project development activities, with particular
emphasis on proposed K-Fuel projects in Indonesia, Turkey and the KFX Fuel
Partners project currently under construction adjacent to the demonstration
plant and laboratory facility. The Company expects that a substantial portion
of its demonstration plant and laboratory operations, as well as research and
development expenses, will prospectively be reimbursed by K-Fuel, L.L.C.
beginning in the third quarter of 1996.
The decrease in interest expense in the 1996 period is generally
attributable to the substantially lower debt balances outstanding in the 1996
period.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 VS. THREE MONTHS ENDED
JUNE 30, 1995
The $1 million K-Fuel, L.L.C. joint venture fee was realized in April 1996
upon the completion of the joint venture agreement with KECC.
Marketing, general and administrative expenses increased by approximately
$372,000 in the 1996 period over the 1995 period. The increase is generally
attributable to the Company's increased project development efforts, as well as
legal fees associated with the successful K-Fuel, L.L.C. joint venture agreement
discussed previously for the six months ended June 30, 1996.
The increase in depreciation and amortization expense in the 1996 period
is attributable to the Series "C" patents acquisition for approximately $1.3
million in August 1995, which is being amortized over a fifteen year period.
The increase in research and development expenses and demonstration plant
and laboratory operations in the 1996 period is attributable to the reasons
discussed previously for the six months ended June 30, 1996.
The decrease in interest expense in the 1996 period is generally
attributable to the substantially lower debt balances outstanding in the 1996
period.
-11-
<PAGE>
KFX INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to Note 2 of the consolidated financial statements regarding the
Company's current litigation action against Fru-Con.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of the Shareholders of the Company was held on June 20,
1996 for the purposes of (i) to elect two directors to the Board of Directors;
(ii) to approve the Company's 1996 Stock Option and Incentive Plan; and (iii) to
ratify the selection of Price Waterhouse LLP as the Company's independent
accountants for the year ended December 31, 1996.
The following votes were cast by shareholders with respect to the election
of directors named in the Company's proxy statement for the Annual Meeting:
<TABLE>
<CAPTION>
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINED
---------------- -------------------- ----------------
<S> <C> <C> <C>
Mr. Jack C. Pester 18,885,697 30,500 12,350
Mr. Theodore Venners 18,914,697 1,500 12,350
</TABLE>
The following votes were cast by shareholders with respect to the approval
of the Company's 1996 Stock Option and Incentive Plan:
<TABLE>
<CAPTION>
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINED BROKER NON-VOTES
---------------- -------------------- ---------------- ----------------
<S> <C> <C> <C>
16,041,313 262,771 38,775 2,585,688
</TABLE>
The following votes were cast by shareholders with respect to the
selection of Price Waterhouse LLP as the Company's independent accountants for
the year ended December 31, 1996:
<TABLE>
<CAPTION>
SHARES VOTED FOR SHARES VOTED AGAINST SHARES ABSTAINED
---------------- -------------------- ----------------
<S> <C> <C>
18,923,872 1,500 3,175
</TABLE>
-12-
<PAGE>
KFX INC.
PART II - OTHER INFORMATION
(CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
10.1 Royalty Amendment Agreement dated June 3, 1996
between the Company, Edward Koppelman and Theodore
Venners.
10.2 Promissory Note to Edward Koppelman dated June 3,
1996.
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
Form 8-K dated April 19, 1996 filed under Item 5 - Other Events.
-13-
<PAGE>
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.
KFX Inc.
/s/ Jeffrey A. Hansen
---------------------------------------
Jeffrey A. Hansen
Controller and Chief Accounting Officer
Date: August 8, 1996
-14-
<PAGE>
Exhibit 10.1
AGREEMENT TO AMEND
AMENDMENT TO AGREEMENTS
AND
ROYALTY AGREEMENT
This Agreement to Amend is entered into this 3rd day of June, 1996, by and
between Theodore Venners ("Venners") and KFx Inc., a Delaware corporation whose
principal place of business is 1999 Broadway, Suite 3200, Denver, Colorado 80202
("KFx") (Venners and KFx are sometimes collectively referred to as the
"Obligors"), and Edward Koppelman, 2009 South Douglas Highway, Gillette, Wyoming
82716, individually, as trustee of the Riverfront Trust, a Revocable Trust dated
December 31, 1980, as trustee of F. H. Prince Trust, a Revocable Trust dated
September 5, 1979, and as General Partner of KGM Associates, a California
Limited Partnership ("KGM") (collectively "Koppelman"). (Venners, KFx and
Koppelman are collectively referred to as the "Parties").
WHEREAS, the Parties, together with Starkey A. Wilson, individually, S. A.
Wilson, Inc., a Wyoming corporation and Koppelman Fuel Development Company, a
California Limited Partnership, entered into the Amendment to Agreements and the
Royalty Agreement of December 29, 1992 (collectively the "1992 Agreements"); and
WHEREAS, ML Associates, a California Limited Partnership (ML"), The Goodman
1981 Revocable Trust ("Goodman"), and the remaining general partners of KGM were
to have executed the 1992 Agreements but did not; and
WHEREAS, Venners and others did on September 1, 1991 execute a modification
agreement to the K-Fuel Rights Purchase Agreement dated March 21, 1984 and on
said date did execute and deliver Amended and Restated Notes to (a) KGM, (b) ML
and (c) Goodman in the aggregate amount of Fourteen Million One Hundred Eighty
Two Thousand Three Hundred and Fifty Six Dollars ($14,182,356); and
WHEREAS, Koppelman desires to provide for the indemnification of KFx and/or
Venners in the event KGM, ML and Goodman are entitled to receive payments under
said Amended and Restated Notes as a result of Adjusted Licensing Revenue, as
that term is used in said Notes, deriving from the licensing of the Series C
Technology and to pay any such indemnification out of the proceeds payable to
Koppelman under this Agreement to Amend; and
1
<PAGE>
WHEREAS, Koppelman desires to provide for the indemnification of KFx and/or
Venners in the event KGM, ML and Goodman are entitled to receive payments under
said Amended and Restated Notes as a result of Adjusted Licensing Revenue and/or
Sales Proceeds, as those terms are used in said Notes, deriving from licensing
and/or sale of the K-Fuel/Koppelman Rights and to pay any such indemnification
out of the proceeds payable to Koppelman under this Agreement to Amend; and
WHEREAS, KFx Fuel Partners, L.P., a Wyoming limited partnership was granted
a non-exclusive license from Edward Koppelman dated August 17, 1995 for the use
of the technology embodied in United States Patent No. 5,290,523 (the "LP
License"); and
WHEREAS, Kennecott Alternative Fuels, Inc., a Delaware corporation ("KECC")
and KFx formed K-Fuel, L.L.C., a Delaware limited liability company by executing
the Limited Liability Company Agreement on April 19, 1996 ("LLC Agreement"); and
WHEREAS, KFx and Heartland Fuels Corporation, a Wisconsin Corporation 85%
owned by KFx ("Heartland"), have issued exclusive licenses to K-Fuel, L.L.C.
which provide for payment of license fees and royalties to KFx and Heartland by
sublicensees of K-Fuel, L.L.C. (the "LLC Licenses"); and
WHEREAS, the Parties are desirous of amending the 1992 Agreements to change
the manner and the amount of royalty payments by KFx to Koppelman (the "Payee");
NOW, THEREFORE, the parties agree that:
For and in consideration of the premises and the covenants and agreements
herein contained and the payment of $300,000 to Koppelman by KFx upon execution
hereof and the execution and delivery of the Promissory Note attached hereto as
Exhibit A to Koppelman by KFx, the 1992 Agreements shall be, and hereby are,
amended as follows:
1. The amount of Royalty paid to the Payee shall aggregate $75,721,644.
Koppelman agrees that in the event KFx and/or Venners are required to make
payments to KGM, ML and Goodman under said Amended and Restated Notes because
of the licensing of the Series C Technology Koppelman shall indemnify KFx and/or
Venners for such payments and shall reimburse KFx and/or Venners for such
payments from the payments due Koppelman by KFx under this Agreement to Amend.
2. Koppelman agrees that in the event KFx and/or Venners are required to
make payments to KGM, ML and Goodman under said Amended and Restated Notes
because of the sale and/or licensing of the K-Fuel/Koppelman Rights Koppelman
shall indemnify KFx and/or Venners for such payments and shall reimburse KFx
and/or Venners for such payments from the payments due Koppelman by KFx under
this Agreement to Amend.
2
<PAGE>
3. The $300,000 cash payment and the payment of the Promissory Note shall
serve to reduce and shall be deducted from the $75,721,644 aggregate amount owed
to Koppelman.
4. The Royalty shall be payable to Koppelman in an amount equal to 25% of
the license fee and royalty payments received by KFx under the LP License and
the LLC Licenses, but shall be exclusive of the license fee and royalty payments
paid by KFx to the State of Wyoming pursuant to the Stipulation and Agreement by
and among the State of Wyoming; Energy Brothers Technology, Inc., a Wyoming
corporation; Energy Brothers Holding, Inc., a Wyoming corporation; KFx; Venners;
and Koppelman.
All other terms, conditions, covenants and agreements in the 1992
Agreements shall remain in full force and effect, except as amended hereby.
/s/ Edward Koppelman /s/ Theodore Venners
-------------------------- --------------------------
Edward Koppelman Theodore Venners
KFx Inc.
/s/ Theodore Venners
---------------------------
Theodore Venners, Chairman
3
<PAGE>
Exhibit 10.2
PROMISSORY NOTE
Denver, Colorado
June 3, 1996
FOR VALUE RECEIVED, the undersigned Maker promises to pay to the order of Edward
Koppelman, 2009 South Douglas Highway, Gillette, Wyoming 82716 ("Payee"), on
June 3, 1998 the principal sum of Two Hundred Thousand Dollars ($200,000.00)
together with interest at the prime rate as reported in the Wall Street Journal,
which is eight and one-quarter percent (8.25%) per annum as of the date of this
Note, from the date hereof until the principal amount of this Note is paid in
full. Such interest shall be computed on the basis of a 365 day year, and shall
not be compounded prior to maturity. Such rate of interest shall be adjusted
upward or downward on the same day that the prime rate changes as reported in
the Wall Street Journal. Both principal and interest on this Note shall be
made to payee at 2009 south Douglas Highway, Gillette, Wyoming 82716, or at such
other place as Payee shall designate from time to time.
This Note may be prepaid in part or in full at any time without penalty. In the
event of partial prepayment, said payment will be applied first to accrued
interest and the balance, if any, will be applied to principal.
It is understood and agreed that, on default on the payment of principal or
interest when due, or any part thereof, when due, the Payee hereof may elect to
accelerate all unpaid balance of the principal and all accrued interest due and
declare the same payable immediately and without notice or demand on any party
to this instrument. Such default shall accrue in the event that principal and
interest hereon has not been paid withing five (5) days from due date. Maker
waives presentment for payment, demand and notice of non-payment of this Note
and consents that Payee may extend the time of payment of any part or the whole
of the debt at any time at the request any other person liable without affecting
the obligation of Maker for payment for the debt evidenced hereby.
In the event of default hereunder, Maker will pay on demand and, in addition to
the then outstanding principal and accrued interest thereon, any and all costs
of collection, legal expenses, and attorneys fees incurred or paid by Payee in
collecting or enforcing this Note on default.
No delay or omission on the part of Payee in exercising any right hereunder
shall operate as a waiver of such right or of any other right under this Note.
A waiver on any on occasion by Payee shall not be construed as a bar to or
waiver of any right or remedy on any future occasion.
The undersigned represents and warrants that he has the requisite authority and
has been duly authorized to execute this Promissory Note on behalf of the
corporation. This Note shall be construed and enforced according to the laws of
the State of Colorado.
KFx Inc. ("Maker")
/s/ Theodore Venners
-----------------------------------------
Theodore Venners, Chairman
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,584,759
<SECURITIES> 0
<RECEIVABLES> 137,416
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,987,910
<PP&E> 11,041,090
<DEPRECIATION> (5,821,576)
<TOTAL-ASSETS> 16,801,783
<CURRENT-LIABILITIES> 1,614,366
<BONDS> 1,271,000
<COMMON> 22,531
0
0
<OTHER-SE> 12,927,874
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 1,136,648
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,392,684
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,141
<INCOME-PRETAX> (2,342,177)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,342,177)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> 0
</TABLE>
