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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23634
KFX INC.
(Exact name of Registrant as specified in its charter)
Delaware 84-1079971
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification number)
3300 EAST 1ST AVENUE, SUITE 290, DENVER, COLORADO USA 80206
(Address of principal executive offices)
(303) 293-2992
(Registrant's telephone number including area code)
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
On November 13, 2000 there were 25,115,280 shares of the Registrant's
common stock, $.001 par value, outstanding.
KFX INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
<S> <C>
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 (Unaudited).................................. 3
Consolidated Statements of Operations - Three Months Ended
September 30, 2000 and 1999 (Unaudited)............................ 4
Consolidated Statements of Operations - Nine Months Ended
September 30, 2000 and 1999 (Unaudited)............................ 5
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2000 and 1999 (Unaudited)........................... 6
Supplemental Disclosure of Non-Cash Investing and Financing
Activities (Unaudited)............................................ 7
Notes to Consolidated Financial Statements (Unaudited)............... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................... 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.............................................. 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 20
SIGNATURES .................................................................. 21
</TABLE>
<TABLE>
<CAPTION>
KFX INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
SEPTEMBER DECEMBER
30, 2000 31, 1999
--------------------- -------------
ASSETS
Current
<S> <C> <C>
Cash and cash equivalents............................. $ 278,893 $ 654,429
Accounts receivable and unbilled revenue............... 562,062 697,572
Prepaid expenses....................................... 51,779 69,715
Deferred job costs..................................... 210,188 183,750
----------------- ---------------
Total current assets.................................. 1,102,922 1,605,466
Property, plant and equipment, net of accumulated
depreciation................................................ 1,477,154 2,258,426
Patents, net of accumulated amortization.................... 2,051,483 2,297,708
KFX Fuel Partners, LP investment at estimated recoverable
value....................................................... - 1,527,048
Investment in K-Fuel, LLC................................... 853,239 1,171,585
Investment in Charco Redondo, LLC........................... 629,238 629,238
Goodwill, net of accumulated amortization................... 1,813,359 2,298,250
Debt issue costs, net of accumulated amortization........... 806,762 1,246,565
Prepaid royalty............................................. 498,000 498,000
Other assets................................................ 716,004 735,709
----------------- ----------------
$ 9,948,161 $ 14,267,995
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current
Accounts payable and accrued expenses ................. $ 1,780,803 $ 859,295
Interest payable....................................... 231,713 543,068
Liability to issue warrants............................ - 2,200,000
Contingent sale of Pegasus Technologies Inc.
common stock........................................... 1,000,000 -
Deferred revenue....................................... 539,186 985,858
Short term note payable to a director.................. 218,849 -
Current maturities of long-term debt................... 898,476 891,167
---------------- ----------------
Total current liabilities.......................... 4,669,027 5,479,388
Deferred income............................................. 658,962 1,000,000
Long-term debt, less current maturities..................... 321,150 484,625
Convertible debentures...................................... 16,341,500 17,000,000
--------------- --------------
Total liabilities.................................. 21,990,639 23,964,013
--------------- --------------
Commitments and contingencies
Minority interest........................................... 1,715,041 -
--------- -
Stockholders' equity (deficit)
Preferred stock, $.001 par value, 20,000,000 shares
authorized; none issued................................. - -
Common stock, $.001 par value, 80,000,000 shares
authorized; and 25,017,935 and 24,482,240 shares
issued and outstanding.................................. 25,018 24,482
Additional paid-in capital.................................. 53,122,751 49,080,632
Accumulated deficit......................................... (66,905,288) (58,801,132)
-------------- ---------------
Total stockholders' equity (deficit)............... (13,757,519) (9,696,018)
-------------- ---------------
$ 9,948,161 $ 14,267,995
============== ==============
The accompanying notes are an integral part
of these consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------- ------------
OPERATING REVENUES
<S> <C> <C>
Pegasus software licenses and services.................... $ 375,379 $ 524,184
K-Fuel contract revenue................................... 129,417 35,320
------------------ -------------
Total operating revenues............................. 504,796 559,504
----------------- --------------
OPERATING COSTS & EXPENSES
Costs of Pegasus software licenses and services........... 467,564 353,478
Marketing, general and administrative expenses............ 1,315,585 1,525,499
Pegasus software research and development................. 189,820 108,373
K-Fuel demonstration plant and laboratory operations...... 101,080 96,962
Depreciation and amortization............................. 690,702 661,145
----------------- ---------------
Total operating costs and expenses................... 2,764,751 2,745,457
---------------- --------------
OPERATING INCOME (LOSS)................................... (2,259,955) (2,185,953)
Interest and other income (expense)....................... 9,541 23,980
Interest expense.......................................... (366,434) (288,999)
Accretion of debenture premium............................ (91,500) -
Equity in income (loss) of unconsolidated affiliates...... (23,537) (42,567)
----------------- ---------------
Loss before income taxes.................................. (2,731,885) (2,493,539)
Income tax benefit........................................ - -
------------------ ----------------
NET INCOME (LOSS)......................................... $ (2,731,885) $ (2,493,539)
=============== ==============
BASIC AND DILUTED NET LOSS PER COMMON SHARE............... $ (0.11) $ (0.10)
============== =============
Weighted average common shares outstanding................ 24,998,000 24,155,000
============== ===========
The accompanying notes are an integral part
of these consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------- ------------
OPERATING REVENUES
<S> <C> <C>
Pegasus software licenses and services.................... $ 1,601,571 $ 1,230,875
K-Fuel contract revenue................................... 229,393 310,250
K-Fuel license fee........................................ - 1,000,000
--------------- -------------
Total operating revenues............................. 1,830,964 2,541,125
--------------- --------------
OPERATING COSTS & EXPENSES
Costs of Pegasus software licenses and services........... 1,265,855 845,074
K-Fuel royalty expense.................................... - 250,000
Marketing, general and administrative expenses............ 3,804,281 4,135,475
Pegasus software research and development................. 455,653 208,981
K-Fuel demonstration plant and laboratory operations...... 277,840 336,420
Depreciation and amortization............................. 2,112,865 2,041,576
----------------- ---------------
Total operating costs and expenses................... 7,916,494 7,817,526
---------------- --------------
OPERATING INCOME (LOSS)................................... (6,085,530) (5,276,401)
Interest and other income (expense)....................... (28,753) 321,473
Interest expense.......................................... (921,065) (869,897)
Accretion of debenture premium............................ (1,091,500) -
Equity in income (loss) of unconsolidated affiliates...... 22,693 (450,056)
------------- ----------------
Loss before income taxes.................................. (8,104,155) (6,274,881)
Income tax benefit........................................ - -
--------------- ---------------
NET INCOME (LOSS)......................................... $ (8,104,155) $ (6,274,881)
============== =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE............... $ (0.33) $ (0.26)
============== =============
Weighted average common shares outstanding................ 24,831,000 24,020,000
================ =============
The accompanying notes are an integral part
of these consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
KFX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
----------------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss................................................ $(8,104,155) $(6,274,881)
Adjustments to reconcile net loss to cash
used in operating activities
Depreciation and amortization.................... 2,112,865 2,041,576
Equity in (income) loss of unconsolidated
affiliates...................................... (22,693) 450,056
Accretion of debenture premium................... 1,091,500 -
Amortization of debt discount.................... 89,889 -
Common stock and warrants issued for services 205,313 13,125
Changes in operating assets and liabilities:
Accounts receivable, unbilled revenue,
and deferred job costs............................. 109,072 273,276
Deferred revenue.................................... (446,672) -
Accounts payable and accrued expenses............... 921,483 546,345
Due to related parties ............................. - (456,966)
Interest payable.................................... (311,355) (278,245)
Deferred income..................................... 1,000,000
Other............................................... 37,643 10,038
------------ ------------
Cash used in operating activities............................ (4,323,110) (2,675,676)
------------ ------------
INVESTING ACTIVITIES
Purchases of equipment.................................. (51,854) (79,190)
Pending patent applications............................. (221,453) (136,716)
Contingent sale of subsidiary stock..................... 1,000,000 -
Investments in K-Fuel, LLC.............................. - (1,000,000)
Investments in KFx Fuel Partners LP..................... - (267,446)
Cash recovery of investment in KFx Fuel Partners LP..... 1,527,048 -
Cash provided by (used in) investing activities.............. 2,253,741 (1,483,352)
----------- -------------
FINANCING ACTIVITIES
Issuance of preferred stock in subsidiary............... 1,500,000 -
Short term notes payable issued to directors............ 750,000 -
Short term notes payable to directors repaid............ (400,000)
Payments on notes payable............................... (156,167) (219,207)
----------- -----------
Cash provided by (used in) financing activities.............. 1,693,833 (219,207)
----------- -----------
Increase (decrease) in cash and cash equivalents............. (375,536) (4,378,235)
Cash and cash equivalents, beginning of period............... 654,429 5,649,992
-------------- ------------
Cash and cash equivalents, end of period..................... $ 278,893 $ 1,271,757
============== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................. $ 1,148,531 $ 1,148,142
============== ===========
The accompanying notes are an integral part
of these consolidated financial statements
</TABLE>
KFX INC.
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES (UNAUDITED)
Nine Months Ended September 30, 2000:
Convertible Debentures with a face value of $1,750,000 were converted,
under the stated terms of $3.65 per share, into 479,445 shares of the
Company's common stock resulting in an addition to stockholders' equity
approximating $1,637,000, net of a pro rata portion of unamortized debt
issue costs. Warrants valued at $2,200,000 to purchase 1.3 million shares
of KFx common stock at $3.65 per share were issued in the May, 2000; see
Note 3. In July, 2000, in connection with obtaining a $400,000 unsecured
line of credit from a KFx director, Pegasus issued warrants valued at
$215,000 to purchase new shares of it common stock equivalent to 1.5% of
its then outstanding common stock; see Note 6. Through September 30, 2000,
$83,889 of related expense was recorded. In July, 2000, the Company issued
56,250 shares of its common stock for financial consulting services valued
at $205,313.
Nine Months Ended September 30, 1999:
During August 1999, the Company issued 527,000 of its common stock
in exchange for an additional 15% interest in Pegasus Technologies,
Limited. This transaction was recorded based on the average price of KFx
common shares shortly before the transaction was completed, which
approximated $1.45 per share. Accordingly, the additional investment in
Pegasus was recorded at approximately $763,000.
The accompanying notes are an integral part
of these consolidated financial statements
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"), its wholly-owned
subsidiary, KFX Wyoming Inc., and its majority-owned subsidiaries, Pegasus
Technologies, Inc. ("Pegasus"), KFX Technology, Inc. ("KFxT"), and
Heartland Fuels Corporation. The Company's 51% interest in K-Fuel, L.L.C.
("K-Fuel, LLC") is accounted for as an equity investment as the Company
does not have the authority or ability to independently control or manage
this entity. All significant intercompany transactions have been eliminated
in consolidation. See Note 3 related to the Company's investment in KFX
Fuel Partners, L.P. ("KFP").
The consolidated financial statements at September 30, 2000 and for the
three and nine month periods ended September 30, 2000 and 1999 are
unaudited. 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
reclassifications have been made to the 1999 financial statements to
conform to the current year presentation.
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, 1999 included in the Company's Form 10-K/A. 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. The results of operations for the three and
nine months ended September 30, 2000 are not necessarily indicative of the
results of operations expected for the year ended December 31, 2000.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
has incurred losses of $12,730,000, $6,784,000 and $5,095,000 in 1999, 1998
and 1997, respectively, incurred an additional loss of $8,104,000 in the
nine months ended September 30, 2000, and had an accumulated deficit of
$66,905,000 as of September 30, 2000. These factors coupled with the need
for additional financing to fund planned growth in the business raise doubt
about whether the Company can continue as a going concern.
The Company's transaction with Kennecott Energy resulting in a sale of
an interest in Pegasus (Note 2), the signing of additional contracts and
reseller agreements, and the proceeds from the sale of the KFP facility
(Note 3) mitigate this risk. In order to further mitigate this risk, the
Company has been and intends to continue to reduce expenditures as
necessary and to seek further capital through various means which may
include the sale of a portion of its interest in Pegasus, additional sales
of debt or equity securities, a business combination, or other means.
Management believes that its cash balances as of September 30, 2000, the
reduction in expenses, funds expected from current revenue contracts and
various potential sources of capital being pursued will be sufficient to
fund the Company's operations through at least September 30, 2001.
Basic and diluted net loss per common share for the three and nine
month periods ended September 30, 2000 and 1999 are based on the weighted
average number of shares of common stock outstanding during the period, and
exclude approximately 9,724,000 of potentially issuable common shares from
common stock options, warrants and convertible debt, as the effect on the
Company's net loss per share would be anti-dilutive.
NOTE 2. CONTINGENT SALE OF INTEREST IN PEGASUS AND ISSUANCE OF PREFERRED
STOCK OF PEGASUS
On March 3, 2000, KFx and Pegasus closed a transaction with Kennecott
Energy Company ("Kennecott Energy") resulting in (a) the sale of 4% of the
common stock of Pegasus held by KFx ("Pegasus Common Stock") to Kennecott
Energy for $1,000,000, (b) the issuance by Pegasus to Kennecott Energy, in
exchange for $500,000, of newly authorized 6% cumulative convertible
preferred stock ("Pegasus Preferred Stock") equivalent to an additional 2%
interest in Pegasus, on an as converted and diluted basis, (c) the joint
development by KFx, Pegasus and Kennecott Energy of a work plan for
enhancements to NeuSIGHT, new product development and the completion of
other tasks designed to improve the performance of Pegasus and trigger
additional purchases of Pegasus Preferred Stock by Kennecott Energy at its
discretion of up to $3,500,000, for an additional interest in Pegasus up to
14%, on an as converted and diluted basis, by December 31, 2004 or earlier
and (d) the conversion of secured debt owed by Pegasus to KFx, totaling
$3,630,000, into Pegasus Preferred Stock, at the same price as provided to
Kennecott Energy. Pursuant to these agreements, at September 30, 2000
Kennecott has purchased at a price of $1,000,000 additional Pegasus
Preferred Stock equivalent to an additional 5% interest in Pegasus, on an
as converted basis. As a result of these transactions, at September 30,
2000, the ownership of Pegasus, on an as converted basis, is approximately
as follows: KFx--70%, Pegasus management--19% and Kennecott Energy--11%.
Kennecott Energy has the right to require KFx to repurchase the Pegasus
Common Stock, or find another buyer, at any time before March 3, 2001, at a
price equal to the greater of $1,000,000 or fair market value. Included in
the agreements among KFx, Kennecott Energy and Pegasus are provisions
governing the terms of investments from any new investors in Pegasus,
limiting the borrowing of Pegasus, and limiting the payment of dividends by
Pegasus.
NOTE 3. INVESTMENT IN KFP
As of May 9, 2000, the Company closed a series of agreements with
various parties intended to initiate the redevelopment of the KFP Facility.
Pursuant to the agreements (a) a subsidiary of Black Hills Corporation
(BKH) purchased the KFP Facility and received 2 million shares of KFx
common stock previously held by TCK in exchange for the assumption of the
reclamation liability associated with the KFP Facility, (b) BKH was given
the right to one seat on KFx's board of directors (which, through November
13, 2000, BKH has declined to exercise), and KFx granted BKH a warrant to
purchase 1.3 million shares of KFx common stock at $3.65 per share, subject
to certain adjustments, (c) KFx relinquished its 5% interest in KFP to TCK
and provided certain releases to TCK in exchange for $100,000, as a minimum
purchase price, $150,000 in proceeds of an unsecured note payable to TCK on
June 10, 2000, and future cash payments estimated at $1.4 million (all of
which was received by August 3, 2000), (d) KFx received certain real and
personal property from TCK, (e) TCK was to sell the remaining 2.25 million
common shares of KFx it owned to private investors (all of which was sold
by August 3, 2000) and has canceled the warrants it holds to purchase a
control position in KFx's common stock. KFx and BKH are proceeding to
finalize plans and secure the necessary capital to rectify certain design
flaws in the balance-of-plant systems. The cost to implement these plans is
currently estimated at $2 million. These plans no longer include an
estimated $4 million for additional modifications designed to replace
natural gas with waste coal as the plant's energy source nor an estimated
$4 million to $6 million for the addition of an incinerator to eliminate
certain process waste streams, since such modifications are not currently
considered necessary under the current operating plan. The carrying value
of the Company's investment in KFP was written down effective December 31,
1999 by $1.8 million, to the $1.5 million near term expected cash proceeds
to KFx. In addition, the estimated $2.2 million value of the warrants
issued to BKH was charged to expense effective December 31, 1999; the
warrants were issued at the closing on May 9, 2000.
NOTE 4. NOTES PAYABLE TO THE STATE OF WYOMING
Principal and interest under a promissory note ("Note") to the State of
Wyoming ("Wyoming") in the amount of $500,000 was due February 29, 2000,
but not paid. The Company initiated discussions with Wyoming in advance of
the maturity date and paid the interest due under the Note on April 10,
2000. Since that time through September 30, 2000, the Company and Wyoming
have negotiated a series of monthly extensions coupled with monthly
interest payments and a 2% reduction of principal. On October 10, 2000, the
Company and Wyoming entered into an amended promissory note ("Amended
Note") which provides for monthly principal reductions equal to 1% of the
February 29, 2000 balance and monthly interest payments through the end of
January 2001, with the remaining principal balance at that time of $470,000
due in full on March 1, 2001.
Wyoming has also confirmed in a letter dated October 10, 2000 its
willingness to convey to KFx its K-Fuel royalty rights, upon full payment
of the Amended Note (including the similarly amended note discussed in the
following paragraph), subject to certain conditions. See also Note 8.
Circumstances substantially identical to those in the first paragraph
of this Note 4 arose relative to a promissory note for $819,000 due to
Wyoming by KFx's Chairman and one of his affiliates, which also provides
that the debt will deemed paid in full if on or prior to the due date
$3,000,000 of royalties have been paid to Wyoming. Through September 30,
2000, no royalties have been paid to Wyoming. The Company agreed in 1994 to
indemnify its Chairman and his affiliate for any payments due under such
note. On April 14, 2000, the Company's Chairman and his affiliate agreed
that if any principal payments are required before April 30, 2001, that
they will waive their rights under the indemnity until after April 30,
2001. This note has been extended and amended in substantially the same
manner and on substantially the same terms as discussed in the preceding
paragraph.
NOTE 5. SEGMENT INFORMATION
Consistent with its determination for the year ended December 31, 1999,
KFx's reportable segments are based on its principal products and services,
which are optimization software and related services, through its Pegasus
subsidiary ("Pegasus" segment), and clean fuels technology, through certain
activities of KFx and certain of its subsidiaries ("K-Fuel" segment). KFx
evaluates the performance of its segments and allocates resources to them
primarily based primarily on net income (loss) and operating cash flow.
There are no intersegment revenues; however, KFx's corporate office charges
management and related fees to the Pegasus segment.
The tables below presents revenue, net income (loss), cash used in
operating activities, and segment asset information as of September 30,
2000 and 1999 and for the three and nine month periods then ended:
<TABLE>
<CAPTION>
QUARTER ENDED RECONCILING
PEGASUS K-FUEL ITEMS(A) CONSOLIDATED
SEPTEMBER 30, 2000
<S> <C> <C> <C> <C>
Operating Revenues.............. $ 375,379 $ 129,417 - $ 504,796
Operating Income (Loss)......... $(1,051,274) $ (379,312) $(829,369) $ (2,259,955)
Net Income (Loss)............... $(1,150,750) $ (399,900) $ (1,181,235) $ (2,731,885)
Cash Provided by (Used in)
Operating Activities............ $ (595,541) $ (88,670) $ (1,043,910) $ (1,728,121)
Total Assets $ 2,764,433 $ 4,978,093 $ 2,205,635 $ 9,948,161
SEPTEMBER 30, 1999
Operating Revenues.............. $ 524,184 $ 35,320 - $ 559,504
Operating Income (Loss)......... $ (681,893) $ (481,940) $ (1,022,120) $ (2,185,853)
Net Income (Loss)............... $ (715,278) $ (524,542) $(1,253,719) $ (2,493,539)
Cash Provided by (Used in)
Operating Activities............ $ (248,831) $ (25,444) $ (1,588,197) $ (1,862,472)
Total Assets $2,980,449 $ 11,162,360 $3,403,300 $ 17,546,109
RECONCILING
NINE MONTHS ENDED PEGASUS K-FUEL ITEMS(A) CONSOLIDATED
----------------- ------- ------ ----------------- ------------
SEPTEMBER 30, 2000
Operating Revenues.............. $ 1,601,571 $ 229,393 - $ 1,830,964
Operating Income (Loss)......... $(2,796,194) $ (1,262,523) $(2,026,813) $ (6,085,530)
Net Income (Loss)............... $(2,953,967) $ (1,280,228) $(3,869,960) $ (8,104,155)
Cash Provided by (Used in)
Operating Activities............ $(1,731,314) $ (13,237) $(2,578,559) $ (4,323,110)
Total Assets $ 2,764,433 $ 4,978,093 $ 2,205,635 $ 9,948,161
SEPTEMBER 30, 1999
Operating Revenues.............. $ 1,230,875 $ 1,310,250 - $ 2,541,125
Operating Income (Loss)......... $(2,254,918) $ (521,193) $(2,500,290) $ (5,276,401)
Net Income (Loss)............... $(2,328,004) $ (971,284) $(2,975,593) $ (6,274,881)
Cash Provided by (Used in)
Operating Activities............ $(1,247,415) $ 1,179,590 $(2,607,851) $ (2,675,676)
Total Assets $ 2,980,449 $ 11,162,360 $ 3,403,300 $ 17,546,109
(a) Consists primarily of KFx corporate office activities and consolidating entries.
</TABLE>
NOTE 6. NOTES PAYABLE TO DIRECTORS
During the nine months ended September 30, 2000, the Company
borrowed $550,000 under short term unsecured notes payable to a director
bearing interest at 11.5% and personally guaranteed by the Company's
Chairman. At September 30, 2000 the unpaid balance of these notes was
$150,000, due December 31, 2000.
In addition, in July 2000, one of the Company's directors agreed
to loan up to $400,000 to Pegasus on an unsecured basis at prime plus 2%,
due January 2001. The balance due under this note at September 30, 2000 was
$200,000. The terms of the agreement include a warrant, expiring in July
2003, to purchase 350,000 shares of new common stock of Pegasus equivalent
to 1.5% of its currently outstanding common stock, at $1.07 per share, a
price based on a $25 million estimated valuation of Pegasus. The value of
the warrant, estimated at $215,000 using the Black-Scholes valuation model,
was recorded as debt discount and is being amortized to interest expense
over the six month term of the agreement as a non cash expense. During the
third quarter of 2000, $83,889 of this discount had been amortized.
NOTE 7. DEBENTURE PREMIUM
At June 30, 2000 the Company recorded a cumulative charge of
$1,000,000 to correct previously unrecorded accretion of the 12% premium on
its 6% Convertible Debentures ("Debentures"). Although the Company is
working to encourage conversion of the Debentures, there is no assurance
that the Debentures will be converted prior to maturity on July 31, 2002;
accordingly, accretion of this premium is required under generally accepted
accounting principles. The impact of this correction on each of the
quarters since the Debentures were issued in July 1997 was not material.
Accordingly, the correction was recorded in the second quarter of 2000 and
premium accretion will be recorded in subsequent quarters, as appropriate.
NOTE 8. CONTINGENCIES
On September 8, 2000 Pavilion Technologies, Inc. ("Pavilion"), a
competitor of Pegasus, served Pegasus with a complaint that was filed on
August 14, 2000 in US District Court for the Southern District of Texas
asserting that Pegasus infringed 26 patents allegedly issued to or licensed
by Pavilion ("Pavilion's Lawsuit"). The Pavilion Lawsuit seeks injunctive
relief, compensatory and treble damages, as well as attorney's fees, costs
and expenses. Pegasus' products employ its own proprietary computer code as
well as computer code exclusively licensed to Pegasus. On September 15,
2000, the licensor agreed to defend Pegasus in the Pavilion Lawsuit
pursuant to an indemnification provision of the parties' license agreement.
On October 27, 2000, Pegasus filed an answer to the Pavilion Lawsuit
denying the patent infringement claims ("Pegasus' Answer"). In its Answer,
Pegasus also asserted various counterclaims against Pavilion alleging
unfair competition, deceptive trade practices, defamation, tortious
interference with business relationships and attempted monopolization in
violation of Section 2 of the Sherman Antitrust Act ("Pegasus'
Counterclaims"). After consultation with counsel, KFx and Pegasus
management believe that the infringement allegations in the Pavilion
Lawsuit are objectively baseless and without merit. In coordination with
its licensor, Pegasus intends to vigorously defend against the Pavilion
infringement claims and to aggressively pursue its Counterclaims.
Accordingly, although the disposition of this matter cannot be predicted
with certainty, management does not believe that its ultimate outcome will
have a material adverse effect on the Company's financial position or
results of operations.
On November 4, 1999, Link Resources, Inc., a Georgia corporation,
("Link") and its two shareholders, Linda E. Kobel ("Kobel") and Gary A.
Sanden ("Sanden"), filed a complaint against the Company in US District
Court for the District of Colorado. The complaint alleges that KFX, Link,
Kobel and Sanden had entered into an agreement requiring KFX to acquire
Link and that KFX breached such agreement. The complaint seeks damages in
excess of $5.3 million. Although this matter is still in discovery and its
ultimate resolution cannot be predicted with certainty, based on a review
of the underlying facts and discussion with counsel, management believes
that this complaint is without merit. KFX intends to contest this complaint
vigorously. Accordingly, management does not believe that this matter will
have a material impact on the results of operation or financial position of
the Company.
As part of the restructured bond agreement with the State of Wyoming
("Wyoming") in 1994, Energy Brothers Holding, Inc., an affiliate of the
Company, and the Company's Chairman executed a promissory note to Wyoming
for $819,000, with annual interest at 6 percent. The note provides that the
debt will deemed paid in full if on or prior to the due date $3,000,000 of
royalties have been paid to Wyoming. Through September 30, 2000, no
royalties have been paid to Wyoming. The Company has agreed to indemnify
both Energy Brothers Holding, Inc. and its Chairman to the extent that
payments are made to Wyoming under the agreement. See also Note 4. In
addition, the Company entered into a royalty agreement with Wyoming, which
requires the Company to pay Wyoming 12% of its domestic K-Fuel license and
royalty revenue. The rate decreases to 6% when cumulative payments under
the royalty agreement total $5 million. See also Note 4.
In 1996, the Company entered into a royalty amendment agreement with
Edward Koppelman, the inventor of the K-Fuel Technology. As a result of the
agreement, Mr. Koppelman's royalty is now 25% of the Company's worldwide
royalty and license fee revenue, computed after the Wyoming royalty. The
royalty to Mr. Koppelman will cease when the cumulative payments to him
reach the sum of approximately $75,222,000. Mr. Koppelman is now deceased
and his estate holds all royalty rights.
The Company is contingently liable to Ohio Valley Electric Corporation
("OVEC") for an overriding royalty of 0.5% to OVEC on the gross revenues
generated by the sale of fuel produced from any production plant (other
than the current facility owned by BKH) located in the United States in
which the feedstock is coal and which uses the Company's proprietary Series
"C" K-Fuel technology to produce fuel. The Company is also contingently
liable to Fort Union for 20% of the Company's North American royalty
proceeds.
Pegasus is contingently liable to certain of its founding stockholders
for a royalty equivalent to 2% of the license fee revenues derived from the
sale of its NeuSIGHT product through November 30, 2004. This obligation is
limited to the extent of Pegasus pretax income without regard to such
royalty, subject to a maximum of $2.5 million and subject to certain other
limitations.
From time to time the Company and its subsidiaries are named as
defendants in litigation or become aware of potential adverse litigation
that are routine to the nature of their business. Although the final
outcome of such matters cannot be predicted with certainty, based on an
ongoing review of such matters with counsel, management does not believe
that the ultimate outcome of such matters will have a material adverse
impact on the results of operations or financial position of the Company.
NOTE 9. RECENT ACCOUNTING PRONOUNCMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
prescribes accounting for changes in the fair value of derivatives. In July
1999, the FASB delayed the implementation date of this standard to all
fiscal quarters of all fiscal years beginning after June 15, 2000. This
delay was published as Statement of Financial Accounting Standards No. 137
("SFAS 137"). In June 2000, the FASB issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" ("SFAS 138"). This statement
addresses certain implementation difficulties related to SFAS 133. The
Company is currently evaluating these statements and believes that they
will not have a material impact on the Company's consolidated results of
operations.
The Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", in December 1999, providing further interpretive guidance for
public companies on the recognition, presentation, and disclosure of
revenue in financial statements. On June 26, 2000, the SEC issued SAB No.
101B, delaying the implementation of SAB No. 101 until the Company's fourth
quarter of fiscal 2000. In addition, on October 13, 2000, the SEC issued a
Frequently Asked Question ("FAQ") with additional guidance regarding the
implementation of SAB No. 101. The Company is currently evaluating the
guidance and believes that it will not have a material impact on the
Company's consolidated results of operations.
In March 2000, the FASB issued Financial Interpretation No. 44
("FIN 44") "Accounting for Certain Transactions Involving Stock
Compensation an Interpretation of Accounting Principles Board Opinion No.
25 (APB 25)." FIN 44 clarifies the application of APB 25 and is currently
effective. Adoption of this pronouncement has had no effect to the
Company's consolidated results of operations.
KFX INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q filing contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, that include risks and uncertainties.
This Form 10-Q should be read in conjunction with the Company's Form 10-K/A
for the year ended December 31, 1999 and Forms 10-Q for the quarters ended
March 31, 2000 and June 30, 2000 and the Business-Risk Factors and
Management's Discussion and Analysis of Financial Condition and Results of
Operations sections included in these filings. The Company's actual results
may differ materially from those anticipated in these forward-looking
statements.
The forward-looking statements contained in this filing include, among
others, statements regarding potential orders for Pegasus products and
services; impact on the financial condition of the Company of the expected
ultimate outcome of pending litigation; potential results of current
discussions under a principles of agreement; expected investments in
Pegasus Preferred Stock by Kennecott Energy; the potential for Wyoming to
transfer its K-Fuel royalty interests to KFx upon full payment of the
amounts due to Wyoming; potential expansions of product and service
offerings and related potential sources of capital; expected K-Fuel
technology licenses; other potential sources of funding; expected future
operating results and financial condition; future recognition as revenue of
NPS/Pegasus order backlog; benefits to customers of installing its NeuSIGHT
combustion optimization software; benefits to potential customers of using
K-Fuel; and anticipated markets for the Company's products and services.
Important factors that could cause actual results to differ materially from
those anticipated include, but are not limited to, the final outcome of
pending litigation; adverse market and various other conditions that could
inhibit the Company's ability to obtain capital and other funding;
competition and technological developments by competitors; lack of market
interest in the Company's existing and any new products and services;
changes in environmental, electric utility and other governmental
regulations; actions of the Company's strategic partners; breadth or degree
of protection available to the Company's intellectual property;
availability of key management and skilled personnel; unanticipated
problems that arise from research and development activities; cost
overruns, delays and damage that may occur in developing, permitting,
financing and constructing K-Fuel production facilities; and domestic and
international economic and political conditions. The Company does not
undertake to update, revise or correct any of the forward-looking
statements.
OVERVIEW
Pegasus' results have been significantly hampered in the third
quarter of 2000, and may continue to be impacted, by the filing of a
lawsuit by Pavilion Technologies, Inc. ("Pavilion"), a competitor,
asserting that Pegasus infringed 26 patents allegedly issued to or licensed
to Pavilion. After consultation with counsel, KFx and Pegasus management
believe that these infringement allegations are objectively baseless and
without merit. Pegasus employs it own proprietary computer code as well as
computer code exclusively licensed to Pegasus for use in the power
generation industry. Pursuant to an indemnification provision in the
license agreement between Pegasus and the licensor, the licensor has agreed
to defend Pegasus in this lawsuit. The Company has filed an answer denying
the patent infringement claims and has asserted various counterclaims. In
coordination with its licensor, Pegasus intends to vigorously defend
against the Pavilion infringement claims and to aggressively pursue its
counterclaims. The Company believes that the lawsuit was undertaken in an
attempt to interfere with Pegasus' business relationships. Management is
working closely with counsel and customers to minimize the disruption to
Pegasus' marketing efforts that Pavilion's unfounded allegations have
caused. These efforts are directed at providing appropriate assurances to
customers in connection with an effort to finalize various pending orders
as well as to maintain Pegasus marketing efforts in general.
In addition, Pegasus results have been negatively impacted by
additional costs incurred in connection with efforts to meet certain
customer expectations in connection with finalizing certain NeuSIGHT
installations, which has resulted in costs exceeding revenues on such
contracts and in total in the third quarter of 2000. Despite these
difficulties, Pegasus revenues for the first nine months of 2000 exceed its
revenues for all of 1999 by approximately 4.2% and Pegasus earned a gross
profit of $336,000, or 21%, for the first nine months of 2000.
During the third quarter Pegasus signed a letter of intent for the
installation of its flagship NeuSIGHT product at four coal-fired boiler
units, with a total generating capacity of 1200 megawatts, at the Xibanpo
power station in China, near Beijing. With the installation of NeuSIGHT at
a power station in Poland nearing completion and the potential order in
China, which is expected to be finalized soon, Pegasus is beginning to
demonstrate the potential international demand for NeuSIGHT and related
products. Excluding the potential China order, at November 13, 2000, the
backlog of unfilled orders approximated $1.8 million, which are expected to
generate revenue over the next 6 to 18 months.
Pegasus entered into an agreement with Siemens Westinghouse Power
Corporation in the third quarter to provide comprehensive solutions to the
power generation industry. Siemens Westinghouse, Computer Associates
International and Kennecott Energy are actively working with Pegasus on
various marketing opportunities.
In September 2000, Kennecott Energy invested another $500,000 into
Pegasus, with a further $500,000 investment on November 2, 2000. This
brings the total investment by Kennecott Energy in Pegasus to $3 million.
The ownership of Pegasus at November 13, 2000 is approximately as follows:
KFx--68%, Pegasus management--19%, and Kennecott Energy --13%.
Through its K-Fuel, LLC joint venture with Kennecott Energy
Company, the Company and Kennecott Energy are addressing issues associated
with an optimal design for a large-scale K-Fuel commercial production
facility. Test of a new continuous reactor design for the facility have
recently been conducted and have produced results to date generally meeting
or exceeding expectations.
Increasing scrutiny of the potentially harmful effects to human
health of mercury emissions from coal-fired utility boilers is underway at
various environmental regulators and legislative bodies, including the
Environmental Protection Agency and the US Congress, with federal
regulations generally expected to be finalized late this year. Independent
tests of K-Fuel indicate that it contains .01 to .03 part per million (ppm)
mercury, compared to 3 to 5 ppm mercury content of most other coals. The
use of K-Fuel will facilitate the avoidance by the power generation
industry of the high capital cost and operating cost associated with most
other mercury removal technologies. Industry sources have estimated the
capital cost and annual operating costs of mercury scrubbing equipment for
a 500 megawatt generating station at $20 million and $8 million,
respectively. The near term potential for mercury emission regulations is
expected to stimulate significant interest in K-Fuel from the power
generation industry.
Plans for restart of Black Hills Corporation's 500,000
ton-per-year K-Fuel plant near Gillette, Wyoming are continuing to be
refined. At present, the intent is to reduce the capital costs required to
restart the plant to approximately $2 million by eliminating an estimated
$4 million for additional modifications designed to replace natural gas
with waste coal as the plant's energy source and an estimated $4 million to
$6 million for the addition of an incinerator to eliminate certain process
waste streams, since such modifications are not currently considered
necessary under the current operating plan. Once this plan is finalized and
implemented, the plant is expected to be restarted within approximately six
months and the plant is expected to operate with significantly reduced
process waste streams.
RESULTS OF OPERATIONS-THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS
ENDED SEPTEMBER 30, 1999
The operating loss for the third quarter of 2000 of $2,260,000 was
$74,000 (3.4%) higher than for the third quarter of 1999 primarily due to
the net effect of (a) an increase of $369,000 (54.2%) in Pegasus' operating
losses, offset by (b) a reduction in KFx corporate level costs of $193,000
(18.9%), and (c) approximately $91,000 of improvement in the operating
performance of the K-Fuel demonstration plant and laboratory operation, as
its contract revenues have resumed. Pegasus' results stemmed from (a) a
deterioration in gross margin of $263,000 (due to factors discussed above),
(b) increased focus on research and development activities triggering
$81,000 (75.2%) of additional expense, and (c) a $37,000 increase in
goodwill amortization associated with KFx's purchase of certain minority
Pegasus interests in August of 1999. In addition to the above variances, on
a net loss basis, the third quarter comparison includes (a) $92,000 of
Debenture premium accretion in 2000, not recorded in 1999, and (b) a
$77,000 increase from 1999 to 2000 in interest expense due to Pegasus short
term borrowings in 2000. The 2000 third quarter net loss of $2,732,000
includes $366,000 of interest expense and $988,000 of depreciation and
amortization and other non-cash charges.
Consolidated revenues in the third quarter of 2000 declined as compared
to the third quarter of 1999 by $55,000 (9.8%) due to a decline in Pegasus
revenues of $149,000 (28.4%) as a result of the installation issues
discussed above, offset by a $94,000 increase from the resumption of
contract revenues at the K-Fuel demonstration plant and laboratory.
Consolidated operating costs and expenses in the third quarter of 2000
increased as compared to the third quarter of 1999 by $19,000 (0.7%) due
primarily to the net effect of (a) increased costs associated with Pegasus'
installations approximating $114,000 (32.3%), (b) $210,000 (13.8%) of
declines in marketing, general and administrative costs, including $18,000
(3.0%) at Pegasus due to a reduction in marketing staff and $192,000
(20.7%) at the corporate level and in the K-Fuel segment due to various
cost reduction measures and (c) increases of $81,000 (75.2%) in Pegasus
research and development, due to increased focus on development of new
products and enhancement to existing products.
RESULTS OF OPERATIONS-NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS
ENDED SEPTEMBER 30, 1999
The operating loss for the first nine months of 2000 of $6,086,000 was
$809,000 (15.3%) higher than for the first nine months of 1999 primarily
due to the lack of a K-Fuel license in 2000, which contributed $750,000 in
operating income in 1999. Pegasus' incurred $541,000 (24.0%) of additional
losses in 2000 over 1999 due to (a) a deterioration in gross margin of
$50,000 (13.0%), (b) additional marketing and overhead costs of $113,000
(5.6%), (c) $247,000 (118.0%) of additional research and development
expense and (d) a $110,000 increase in goodwill amortization. Partially
offsetting the additional Pegasus operating loss was a reduction in KFx
corporate level general and administrative costs of $424,000 (20.0%). In
addition to the above variances, on a net loss basis, the first nine month
comparison includes (a) the 2000 debenture premium accretion of $1,092,000
discussed in Note 7 to the Consolidated Financial Statements and recorded
in the third quarter of 2000, (b) a $293,000 reduction in interest and
other income due to $204,000 of nonrecurring noncash income in the second
quarter of 1999 and reduced cash balances available for temporary
investment, and (c) elimination of 1999's $350,000 in losses from KFP as
operations at KFP's Gillette plant were suspended in mid 1999. The 2000
nine month net loss of $8,104,000 includes $921,000 of interest expense and
$3,410,000 of depreciation and amortization and other non-cash charges.
Consolidated revenues in the first nine months of 2000 declined as
compared to the first nine months of 1999 by $710,000 (27.9%) due to (a) a
$1 million K-Fuel license fee recognized only in 1999, (b) an $81,000
decline in K-Fuel contract revenues in the 2000 while certain contract
activities had been suspended, offset by (c) a $371,000 (30.1%) increase in
Pegasus revenues due to a higher level of installation activity.
Consolidated operating costs and expenses in the first nine months of
2000 increased as compared to the first nine months of 1999 by $99,000
(1.3%) due primarily to the net effect of (a) a $421,000 (49.8%) increase
in Pegasus' cost of software licenses and services triggered, in part, by
the corresponding revenue growth, (b) the lack of K-Fuel royalty expense in
2000, which was $250,000 in 1999, (c) a decline in marketing, general and
administrative expense of $331,000 (8.0%) due to corporate level general
and administrative cost reductions at KFx of $424,000 (20.0%), partially
offset by the cost increases at Pegasus of $113,000 (5.6%) due to a higher
marketing cost structure earlier in the year, (d) the increase in Pegasus'
research and development costs of $247,000 (118.0%), (e) $61,000 of reduced
costs at the K-Fuel demonstration plant and laboratory stemming from
temporarily reduced contract activities, and (f) $71,000 of additional
depreciation and amortization due primarily to $110,000 of additional
Pegasus goodwill amortization triggered by KFx's purchase of certain
minority interests in August 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2000, the Company used $4,323,000 of
cash for its operating activities, compared to $2,676,000 in the first nine
months of 1999. Included in the 1999 amount are cash inflows related to a
$1,000,000 K-Fuel license fee payment, offset by a $250,000 royalty expense
payment, and an additional $1,000,000 related cash payment from Kennecott
Energy that was invested in K-Fuel, LLC , none of which were experienced in
2000. Excluding these amounts, cash used for operating activities year to
date in 2000 was slightly ($103,000) less than the corresponding period of
1999. Included in the 2000 amount are (a) $1,148,000 of KFx interest
payments, (b) $1,731,000 used for Pegasus' operations, (c) $13,000 of cash
used by the K-Fuel segment's demonstration plant and laboratory and related
activities, and (d) $1,430,000 for KFx's corporate activities, including a
intercompany account due from Pegasus of $352,000.
During July 2000, Pegasus entered into a principles of agreement
with a major international supplier of equipment and information technology
services to the power generation industry to create a marketing alliance
and to consider a possible merger. Merger discussions with this party were
put on hold due to the Pavilion Lawsuit but joint marketing activities
continue. In addition, with the assistance of its investment bankers, the
Company is pursuing alternatives to raise capital for Pegasus and to
address the need to improve Pegasus' as well as its consolidated balance
sheet.
During the first quarter of 2000, the Company announced its desire to
induce conversion of its Debentures, which are convertible into KFx common
stock at a conversion price of $3.65. As of November 13, 2000, Debentures
with a face value of $1,900,000 have been converted into 520,540 shares of
the Company's common stock at the contract conversion price of $3.65.
Accordingly, excluding the Debenture premium accretion, long-term debt has
been reduced by $1,900,000, offset by a corresponding increase to
stockholder's equity, less approximately $120,000 of related deferred debt
issue costs. The Company is continuing to evaluate alternatives to
strengthen its balance sheet including ways to induce conversion of all or
substantially all of the Debentures.
On March 3, 2000, KFx and Pegasus closed a transaction with Kennecott
Energy Company ("Kennecott Energy"), as described in Note 2 to the
Consolidated Financial Statements, which, through November 13, 2000 has
generated a total of $3,000,000 in cash investments by Kennecott Energy
related to Pegasus and is expected to generate an additional $2,000,000 in
cash investments in Pegasus through 2004, or earlier. Included in the
agreements among KFx, Kennecott Energy and Pegasus are provisions governing
the terms of investments from any new investors in Pegasus, limiting the
borrowings of Pegasus, and limiting the payment of dividends by Pegasus.
As of May 9, 2000, the Company closed a series of agreements with
various parties intended to initiate the redevelopment of the KFP Facility,
as described in Note 3 to the Consolidated Financial Statements. Pursuant
to the agreements, through the end of the third quarter the Company had
received cash payments approximating $1.6 million, approximating the
estimated recoverable value of the Company's investment in KFP.
As discussed in Note 4 to the Consolidated Financial Statements, the
promissory note ("Note") to the State of Wyoming ("Wyoming") with a balance
of $485,000 at November 13, 2000 has been extended to March 1, 2001,
subject to monthly payments of $5,000 in principal and interest
approximating $2,700. The term of a promissory note with a November 13,
2000 balance of $794,000 due to Wyoming by KFx's Chairman and one of his
affiliates has been similarly extended, subject to monthly payments of
$8,190 in principal and interest approximating $4,000. The Company agreed
in 1994 to indemnify its Chairman and his affiliate for any payments due
under such note. On April 14, 2000, the Company's Chairman and his
affiliate agreed that if any principal payments are required before April
30, 2001, that they will waive their rights under the indemnity until after
April 30, 2001. Since principal and interest payments required under this
note since the date of the waiver have been relatively small (approximately
$58,000), the Company has elected to make payment without enforcing this
waiver.
The Company expects its cash requirements through September 30, 2001
with respect to day-to-day operations and debt service requirements to be
satisfied by (a) cash on hand, which as of November 13, 2000 approximated
$489,000; (b) certain contract revenues relating to the K-Fuel
demonstration plant and laboratory; (c) unsecured short term borrowings for
the Company and/or Pegasus from one or more of its directors (which at
November 13, 2000 approximated $550,000 from two directors) and/or other
parties, (d) potential investments in Pegasus from interested participants
in the power generation industry; (e) potential debt and/or equity
offerings of the Company; (f) potential fees and related revenues from
licensing Pegasus products and/or new K-Fuel facilities; and (g) potential
partners in connection with opportunities to expand the Company's product
and service offerings to the power industry.
The K-Fuel, LLC joint venture between the Company and Kennecott Energy
is continuing to work diligently on an optimal design for a large-scale
K-Fuel plant and toward the objective of licensing such a plant. A license
for a 3 million ton-per-year plant, if agreed to, would generate a gross
initial license fee at the granting of the license approximating $5
million, or approximately $2.6 million in cash, net of the 1999 prepayment
by Kennecott Energy of $1 million and approximately $1.4 million of total
royalty obligations. Upon commencement of operations of the plant, an
additional license fee approximating $5 million would be due in three equal
annual installments and royalties on the sale of K-Fuel would commence.
Both the additional license fee and royalties are also subject to
appropriate royalty expense burden.
The Company has had discussions with various parties about potential
transactions to add product and/or service offerings relevant to the power
generation industry. Such discussions have included consideration of
acquisitions and related transactions to raise equity capital for the
Company and/or Pegasus. The Company will continue to evaluate the merits of
pursuing such a strategy, in view of the Company's evolving financial
condition.
In addition, from time to time, directors of the Company have provided
to the Company short term unsecured financing and the Company expects that
such financing, on at least a short-term basis, will continue to be
available if needed.
Depending on the outcome of various uncertainties, including those
discussed herein, the Company may be required to seek additional debt
and/or equity financing for general operating purposes and/or to meet debt
service requirements. The timing of collection of accounts receivable and
payment of accounts payable could significantly alter the Company's need
for at least temporary financing. Should the Company be required to seek
any additional debt and/or equity financing, its ability to do so will be
affected by the terms of the Debentures, under which the Company may only
incur unsecured indebtedness of up to $9.9 million (of which approximately
$1 million was outstanding as of November 13, 2000) and indebtedness that
is secured only by the assets of a particular project and is non-recourse
to the Company and its subsidiaries.
There are no assurances that any of these potential funding sources
will materialize, and the Company does not currently have any commitments
with respect to any such funding sources. If the overall outcome of the
various uncertainties affecting the Company is not favorable, the Company
may be forced to seek debt and/or equity financing on terms and conditions
that may be unfavorable to the Company, if available at all. If the Company
requires additional financing and cannot obtain it when needed or if
Kennecott Energy elects to exercise its right, which expires on March 3,
2000, to sell the Pegasus common stock that it purchased from the Company
back to the Company, the Company may default on payments when due.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 9 to the Consolidated Financial Statements for a discussion of the
potential impact of recent accounting pronouncments.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company is not currently subject to a significant level of direct
market risk related to interest rates, foreign currency exchange rates,
commodity prices or equity prices. The Company has no derivative
instruments or any floating rate debt and does not expect to derive a
material amount of its revenues from interest bearing securities. Currently
the Company has no significant foreign operations. To the extent that the
Company establishes significant foreign operations in the future, it will
attempt to mitigate risks associated with foreign currency exchange rates
contractually and through the use of hedging activities and other means
considered appropriate. The Company is indirectly exposed to fluctuations
in fuel commodity prices. To the extent that fuel prices rise, there may be
a tendency for greater demand for certain of the Company's products and
services, since K-Fuel and NeuSIGHT have been shown to result in lower
usage of coal and coal beneficiated fuel products when used to generate
electric power. The Company's fuel-related products provide various
environmental benefits that management believes significantly mitigate the
fuel commodity risk associated with the Company's business. The Company
holds no equity market securities, but does face equity market risk
relative to its own equity securities. This risk is most likely to be
manifested by influencing the Company's ability to raise debt or equity
financing, if needed.
KFX INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 8, 2000 Pavilion Technologies, Inc. ("Pavilion"), a
competitor of Pegasus, served Pegasus with a complaint that was filed on
August 14, 2000 in US District Court for the Southern District of Texas
asserting that Pegasus infringed 26 patents allegedly issued to or licensed
by Pavilion ("Pavilion's Lawsuit"). The Pavilion Lawsuit seeks injunctive
relief, compensatory and treble damages, as well as attorney's fees, costs
and expenses. Pegasus' products employ its own proprietary computer code as
well as computer code exclusively licensed to Pegasus. On September 15,
2000, the licensor agreed defend Pegasus in the Pavilion Lawsuit pursuant
to an indemnification provision of the parties' license agreement. On
October 27, 2000, Pegasus filed an answer to the Pavilion Lawsuit denying
the patent infringement claims ("Pegasus' Answer"). In its Answer, Pegasus
also asserted various counterclaims against Pavilion alleging unfair
competition, deceptive trade practices, defamation, tortious interference
with business relationships and attempted monopolization in violation of
Section 2 of the Sherman Antitrust Act ("Pegasus' Counterclaims"). After
consultation with counsel, KFx and Pegasus management believe that the
infringement allegations in the Pavilion Lawsuit are objectively baseless
and without merit. In coordination with its licensor, Pegasus intends to
vigorously defend against the Pavilion infringement claims and to
aggressively pursue its Counterclaims. Accordingly, although the
disposition of this matter cannot be predicted with certainty, management
does not believe that its ultimate outcome will have a material adverse
effect on the Company's financial position or results of operations.
On November 4, 1999, Link Resources, Inc., a Georgia corporation,
("Link") and its two shareholders, Linda E. Kobel ("Kobel") and Gary A.
Sanden ("Sanden"), filed a complaint against the Company in US District
Court for the District of Colorado. The complaint alleges that KFX, Link,
Kobel and Sanden had entered into an agreement requiring KFX to acquire
Link and that KFX breached such agreement. The complaint seeks damages in
excess of $5.3 million. Although this matter is still in discovery and its
ultimate resolution cannot be predicted with certainty, based on a review
of the underlying facts and discussion with counsel, management believes
that this complaint is without merit. KFX intends to contest this complaint
vigorously. Accordingly, management does not believe that this matter will
have a material impact on the results of operation or financial position of
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit Number Description
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
On September 22, 2000 the Company filed a Current Report on Form 8-K
(Commission File No 0-23634) to report under Item 5 (Other Events) that on
September 21, 2000, the Company issued a press release announcing that the
licensor, from whom its Pegasus Technologies, Inc. ("Pegasus") subsidiary
licenses the platform for Pegasus' principal product, had decided to accept
the defense of Pegasus in a lawsuit filed by Pavilion Technologies, Inc. on
August 14, 2000 alleging various unspecified claims of patent infringement.
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.
KFX INC.
/s/ SETH L. PATTERSON
----------------------
SETH L. PATTERSON
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
DATE: NOVEMBER 13, 2000
