UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-23634
KFX INC.
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(Exact name of Registrant as specified in its charter)
Delaware 84-1079971
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification number)
1999 BROADWAY, SUITE 3200, DENVER, COLORADO USA 80202
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(Address of principal executive offices)
(303) 293-2992
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(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 August 14, 2000 there were 25,017,935 shares of the Registrant's common
stock, $.001 par value, outstanding.
KFX INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999 (Unaudited)........................ 3
Consolidated Statements of Operations - Three Months Ended
June 30, 2000 and 1999 (Unaudited)....................... 4
Consolidated Statements of Operations - Six Months Ended
June 30, 2000 and 1999 (Unaudited)....................... 5
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2000 and 1999 (Unaudited)................... 6
Notes to Consolidated Financial Statements (Unaudited)........ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................ 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................ 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................... 19
SIGNATURES............................................................. 20
<TABLE>
<CAPTION>
KFX INC.
CONSOLIDATED BALANCE SHEETS
UNAUDITED
JUNE DECEMBER
30, 2000 31, 1999
--------------------- -------------
ASSETS
Current
<S> <C> <C>
Cash and cash equivalents ............................. $ 120,248 $ 654,429
Accounts receivable and unbilled revenue .............. 617,237 697,572
Prepaid expenses ...................................... 50,572 69,715
Deferred job costs .................................... 244,137 183,750
------------ ------------
Total current assets ................................. 1,032,194 1,605,466
Property, plant and equipment, net of accumulated
depreciation ............................................... 1,739,193 2,258,426
Patents, net of accumulated amortization ................... 2,093,567 2,297,708
KFX Fuel Partners, LP investment at estimated
recoverable value .......................................... 1,351,180 1,527,048
Investment in K-Fuel, LLC .................................. 998,037 1,171,585
Investment in Charco Redondo, LLC .......................... 629,238 629,238
Goodwill, net of accumulated amortization .................. 1,974,987 2,298,250
Debt issue costs, net of accumulated amortization .......... 901,433 1,246,565
Prepaid royalty ............................................ 498,000 498,000
Other assets ............................................... 735,709 735,709
------------ ------------
$ 11,953,538 $ 14,267,995
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current
Accounts payable and accrued expenses ................. $ 1,581,903 $ 859,295
Interest payable ...................................... 439,470 543,068
Liability to issue warrants ........................... -- 2,200,000
Contingent sale of Pegasus Technologies Inc. ..........
common stock .......................................... 1,000,000 --
Deferred revenue ...................................... 729,131 985,858
Short term note payable to a director ................. 150,000 --
Current maturities of long-term debt .................. 908,476 891,167
------------ ------------
Total current liabilities ......................... 4,808,980 5,479,388
Deferred income ............................................ 804,354 1,000,000
Long-term debt, less current maturities .................... 321,150 484,625
Convertible debentures ..................................... 16,250,000 17,000,000
------------ ------------
Total liabilities ................................. 22,184,484 23,964,013
------------ ------------
Commitments and contingencies
Minority interest .......................................... 1,000,000 --
------------ ------------
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 24,961,685 and 24,482,240 shares
issued and outstanding ................................. 24,962 24,482
Additional paid-in capital ................................. 52,917,495 49,080,632
Accumulated deficit ........................................ (64,173,403) (58,801,132)
------------ ------------
Total stockholders' equity (deficit) .............. (11,230,946) (9,696,018)
------------ ------------
$ 11,953,538 $ 14,267,995
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statement
<TABLE>
<CAPTION>
KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED JUNE 30,
2000 1999
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OPERATING REVENUES
<S> <C> <C>
Pegasus software licenses and services ..................... $ 760,554 $ 329,559
K-Fuel contract revenue .................................... 99,976 95,905
K-Fuel license fee ......................................... -- 1,000,000
------------ ------------
Total operating revenues .............................. 860,530 1,425,464
------------ ------------
OPERATING COSTS & EXPENSES
Costs of Pegasus software licenses and services ............ 425,041 251,261
K-Fuel royalty expense ..................................... -- 250,000
Marketing, general and administrative expenses ............. 1,291,116 1,394,838
Pegasus software research and development .................. 144,590 77,804
K-Fuel demonstration plant and laboratory operations ....... 90,653 119,861
Depreciation and amortization .............................. 706,091 688,039
------------ ------------
Total operating costs and expenses .................... 2,657,491 2,781,803
------------ ------------
OPERATING INCOME (LOSS) .................................... (1,796,961) (1,356,339)
Interest and other income (expense) ........................ (39,947) 240,212
Interest expense ........................................... (268,494) (289,637)
Accretion of Debenture premium ............................. (1,000,000) --
Equity in income (loss) of unconsolidated affiliates ....... 55,887 (129,454)
------------ ------------
Loss before income taxes ................................... (3,049,515) (1,535,218)
Income tax benefit ......................................... -- --
------------ ------------
NET INCOME (LOSS) .......................................... $ (3,049,515) $ (1,535,218)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE ................ $ (.12) $ (.06)
============ ============
Weighted average common shares outstanding ................. 24,940,000 23,952,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<TABLE>
<CAPTION>
KFX INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
SIX MONTHS ENDED JUNE 30,
2000 1999
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OPERATING REVENUES
<S> <C> <C>
Pegasus software licenses and services ..................... $ 1,226,192 $ 706,691
K-Fuel contract revenue .................................... 99,976 274,930
K-Fuel license fee ......................................... -- 1,000,000
------------
Total operating revenues .............................. 1,326,168 1,981,621
------------ ------------
OPERATING COSTS & EXPENSES
Costs of Pegasus software licenses and services ............ 798,291 491,596
K-Fuel royalty expense ..................................... -- 250,000
Marketing, general and administrative expenses ............. 2,488,696 2,609,476
Pegasus software research and development .................. 265,833 100,608
K-Fuel demonstration plant and laboratory operations ....... 176,760 239,458
Depreciation and amortization .............................. 1,422,163 1,380,931
------------ ------------
Total operating costs and expenses .................... 5,151,743 5,072,069
------------ ------------
OPERATING INCOME (LOSS) .................................... (3,825,575) (3,090,448)
Interest and other income (expense) ........................ (38,294) 297,493
Interest expense ........................................... (554,631) (580,898)
Accretion of Debenture premium ............................. (1,000,000) --
Equity in income (loss) of unconsolidated affiliates ....... 46,230 (407,489)
------------ ------------
Loss before income taxes ................................... (5,372,270) (3,781,342)
Income tax benefit ......................................... -- --
------------
NET INCOME (LOSS) .......................................... $ (5,372,270) $ (3,781,342)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE ................ $ (.22) $ (.16)
============ ============
Weighted average common shares outstanding ................. 24,747,000 23,952,000
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
<TABLE>
<CAPTION>
KFX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
SIX MONTHS ENDED JUNE 30,
2000 1999
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OPERATING ACTIVITIES
<S> <C> <C>
Net loss .............................................. $(5,372,270) $(3,781,342)
Adjustments to reconcile net loss to cash
used in operating activities
Depreciation and amortization .................. 1,422,163 1,380,931
Equity in loss of unconsolidated affiliates .... (46,230) 407,489
Accretion of Debenture premium
1,000,000 --
Changes in operating assets and liabilities:
Accounts receivable, unbilled revenue,
and deferred job costs ........................... 19,947 216,448
Deferred revenue .................................. (256,727) 47,480
Accounts payable and accrued expenses ............. 722,608 221,797
Due to related parties ............................ (471,504)
Deferred income ................................... 1,000,000
Interest payable .................................. (103,598) (51,233)
Other assets ...................................... 19,118 205,748
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Cash used in operating activities .......................... (2,594,989) (824,186)
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INVESTING ACTIVITIES
Purchases of equipment ................................ (35,381) (56,098)
Pending patent applications ........................... (107,644) (70,768)
Contingent sale of subsidiary stock ................... 1,000,000 --
Investments in K-Fuel, LLC ............................ -- (1,000,000)
Cash recovery of investment in KFx Fuel Partners LP ... 200,000 --
Other ................................................. -- (8,652)
----------- -----------
Cash provided by (used in) investing activities ............ 1,056,975 (1,135,518)
----------- -----------
FINANCING ACTIVITIES
Issuance of preferred stock in subsidiary ............. 1,000,000 --
Short term notes issued ............................... 550,000 --
Payments on notes payable ............................. (546,167) (214,208)
----------- -----------
Cash provided by (used in) financing activities ............ 1,003,833 (214,208)
----------- -----------
Increase (decrease) in cash and cash equivalents ........... (534,181) (2,173,912)
Cash and cash equivalents, beginning of period ............. 654,429 5,649,992
----------- -----------
Cash and cash equivalents, end of period ................... $ 120,248 $ 3,476,080
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest...................................... $ 658,114 $ 632,131
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Six Months Ended June 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 second quarter of 2000; see Note 3.
Six Months Ended June 30, 1999:
None
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") and its 5% interest in KFX Fuel Partners, L.P. ("KFP") are
accounted for as equity investments as the Company does not have the
authority or ability to independently control or manage these entities. All
significant intercompany transactions have been eliminated in
consolidation. See Note 3 related to the Company's investment in KFP.
The consolidated financial statements at June 30, 2000 and for the three
and six month periods ended June 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 six months ended
June 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 $5,372,000 in the
six months ended June 30, 2000, and had an accumulated deficit of
$64,173,000 as of June 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 of Pegasus (Note 2), the signing of additional contracts and
reseller agreements, and the expected proceeds from the sale of the KFP
facility (Note 3) mitigate this risk. In order to further mitigate this
risk, the Company intends 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 June 30, 2000, coupled with payments expected
as noted above, the reduction in expenses, funds expected from current
revenue contracts and potential sources of capital will be sufficient to
fund the Company's operations through at least June 30, 2001.
Net loss per common share for the three and six month periods ended June
30, 2000 and 1999 are based on the weighted average number of shares of
common stock outstanding during the period, and excludes approximately
8,425,000 of potentially issuable common shares from common stock options,
warrants and convertible debt, as the effect on the Company's net loss
would be anti-dilutive.
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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 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 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, on May 4, 2000 Kennecott purchased at a price
of $500,000 additional Pegasus Preferred Stock equivalent to an additional
2% interest in Pegasus, on an as converted basis. As a result of these
transactions, at August 14, 2000, the ownership of Pegasus, on an as
converted basis, is approximately as follows: KFx--72%, Pegasus
management--20% and Kennecott Energy--8%. 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 August
14, 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 had been received as of August 3, 2000), (d) KFx increased its K-Fuel
royalty interest related to the operations of the KFP Facility from 3% to
5% and received certain real and personal property from TCK, (e) TCK was to
sell the remaining 2.25 million common shares of KFx it owns to private
investors (all of which have been sold as of 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, including the addition of an incinerator to eliminate certain
process waste streams. The cost to implement these plans is currently
estimated at $6 million to $8 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, since such
modifications are not currently considered necessary. 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.
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
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. In exchange for current interest payments, Wyoming has granted the
Company extensions, most recently to August 31, 2000, to allow the parties
time to renegotiate definitive repayment terms.
Circumstances substantially identical to those in the preceding paragraph
arose relative to a promissory note for $819,000 due to Wyoming by KFx's
Chairman and one of his affiliates. 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. Such note has
been extended on terms identical to those described 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 June 30, 2000 and
1999 and for the three and six month periods then ended:
<TABLE>
<CAPTION>
QUARTER ENDED
------------- RECONCILING
PEGASUS K-FUEL ITEMS(A) CONSOLIDATED
------- ------ -------- ------------
JUNE 30, 2000
-------------
<S> <C> <C> <C> <C>
Operating Revenues ................ $ 760,554 $ 99,976 -- $ 860,530
Operating Income (Loss) ........... $ (785,700) $ (392,410) $ (618,851) $ (1,796,961)
Net Income (Loss) ................. $ (844,423) $ (379,857) $ (1,825,235) $ (3,049,515)
Cash Provided by (Used in)
Operating Activities .............. $ (741,034) $ 88,041 $ (409,379) $ (1,062,372)
Total Assets ...................... $ 3,009,305 $ 8,252,855 $ 691,378 $ 11,953,538
JUNE 30, 1999
Operating Revenues ................ $ 329,559 $ 1,095,905 -- $ 1,425,464
Operating Income (Loss) ........... $ (847,394) $ 315,053 $ (823,998) $ (1,356,339)
Net Income (Loss) ................. $ (869,972) $ 185,599 $ (850,845) $ (1,535,218)
Cash Provided by (Used in)
Operating Activities .............. $ (859,472) $ 1,937,376 $ 176,125 $ 1,254,029
Total Assets ...................... $ 3,072,934 $ 11,577,875 $ 4,772,470 $ 19,423,279
</TABLE>
<TABLE>
<CAPTION>
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
RECONCILING
SIX MONTHS ENDED PEGASUS K-FUEL ITEMS(A) CONSOLIDATED
---------------- ------- ------ ----------------- ------------
JUNE 30, 2000
-------------
<S> <C> <C> <C> <C>
Operating Revenues ......................... $ 1,226,192 $ 99,976 -- $ 1,326,168
Operating Income (Loss) .................... $ (1,744,919) $ (883,211) $ (1,197,445) $ (3,825,575)
Net Income (Loss) .......................... $ (1,803,216) $ (880,328) $ (2,688,726) $ (5,372,270)
Cash Provided by (Used in)
Operating Activities ....................... $ (1,135,773) $ 75,433 $ (1,534,649) $ (2,594,989)
Total Assets ............................... $ 3,009,305 $ 8,252,855 $ 691,378 $ 11,953,538
JUNE 30, 1999
-------------
Operating Revenues ......................... $ 706,691 $ 1,274,930 -- $ 1,981,621
Operating Income (Loss) .................... $ (1,573,025) $ (39,253) $ (1,478,170) $ (3,090,448)
Net Income (Loss) .......................... $ (1,612,726) $ (446,742) $ (1,721,874) $ (3,781,342)
Cash Provided by (Used in)
Operating Activities ....................... $ (998,584) $ 1,205,035 $ (1,030,637) $ (824,186)
Total Assets ............................... $ 3,072,934 $ 11,577,875 $ 4,772,470 $ 19,423,279
</TABLE>
(a) Consists primarily of KFx corporate office activities and consolidating
entries.
NOTE 6. NOTES PAYABLE TO DIRECTORS
During six months ended June 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 June 30, 2000
the unpaid balance of these notes was $150,000, due October 1, 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 December
2000. The terms of the agreement include a warrant to purchase new common
stock of Pegasus equivalent to 1.5% of its currently outstanding common
stock, at a price based on a $25 million estimated valuation of Pegasus.
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 has been recorded in the second quarter of 2000.
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 8. CONTINGENCIES
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 preliminary
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.
In late July 2000 Pegasus received a letter from a competitor alleging
unspecified infringement of several patents that it alleges it owns or to
which it alleges it has exclusive license rights. Pegasus has notified its
licensor, to the extent that any alleged infringement relating to software
programs licensed by Pegasus could thereby be subject to the
indemnification provisions of the license agreement between Pegasus and the
licensor. Management and counsel of Pegasus and its licensor have initiated
a review of the patents referenced by the competitor. Based on preliminary
results, management believes that the allegations are without merit and
management intends to defend its rights vigorously. Accordingly, management
does not believe that the ultimate outcome of this matter will have a
material adverse effect on the Company's financial position or results of
operations.
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 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.
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 a State of 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 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 its NeuSIGHT product through November 30, 2004. This obligation is
limited to the extent of 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 of the results of operations or
financial position of the Company.
KFX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
NOTE 9. RECENT ACCOUNTING PRONOUNCMENTS
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101"). The effective date of SAB 101 has been deferred until the fourth
quarter of 2000. Management is evaluating the impact of SAB 101 on its
accounting policies.
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 Form 10-Q for the quarter ended March 31, 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 results of current discussions under a
principles of agreement, expected investments in Pegasus Preferred Stock by
Kennecott Energy, negotiations with Wyoming to extend the due date of
certain notes, 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, 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
As recently announced, Pegasus has 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. If the related discussions
progress satisfactorily, there is potential to consummate certain
transactions that are under consideration which, in turn, could provide the
Company the basis to undertake steps to significantly improve its balance
sheet. The Company expects to be able to announce additional details about
this matter in the near future.
The growth potential of Pegasus' operations are beginning to be
realized with Pegasus revenues for the first half of 2000 already at 80% of
the level for the entire 1999 year. Pegasus' revenues for the second
quarter of 2000 of $761,000 was 2.3 times the level of the second quarter
of 1999 and 1.6 times the level of the first quarter of 2000. To continue
Pegasus' revenue growth, management is aggressively pursuing additional
potential orders, several of which are expected to extend to multiple
boiler units of existing customers, and which are expected to be placed in
the coming months. At August 14, 2000 the backlog of unfilled orders
approximated $1.9 million, which are expected to generate revenue over the
next 6 to 18 months.
The consolidated operating loss in the second quarter of 2000 was
$232,000 lower than in the first quarter of 2000 due primarily to a $174,000
reduction in Pegasus' operating losses. The improvement in Pegasus' operating
loss resulted principally from a $243,000 improvement in gross margin derived
primarily from the use of a reseller's installation staff on a training
basis at no cost and other cost reduction measures in connection with
revisions in a third party installation arrangement. Comparing 2000 to
1999, excluding the $750,000 net impact of the 1999 K-Fuel license fee from
Kennecott Energy Company ("Kennecott Energy"), consolidated operating
income for the first half of 2000 was approximately the same as the first
half of 1999.
KFX INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additional significant developments during the first half of 2000
include (a) the March closing of a transaction with Kennecott Energy for
investment in Pegasus, (b) the May closing of a series of transactions with
Black Hills Corporations (BKH) intended to initiate the redevelopment of the
500,000 ton-per-year K-Fuel commercial production facility near Gillette,
WY and (c) the late March 2000 resumption of K-Fuel related research and
development contract revenues. Through August 14, 2000, Kennecott has
invested $2 million in Pegasus, including a $1 million purchase of common
stock of Pegasus held by KFx. Through August 3, 2000, the Gillette K-Fuel
facility related transactions had generated approximately $1.6 million of
cash for KFx, which has resulted in a full realization of the recoverable
value of the Company's related investment, after the 1999 impairment
writedown. At present KFx, BKH, and certain other parties are working to
finalize arrangements to commence the redevelopment of the facility, which
is now expected to require capital expenditures of approximately $6 million
to $8 million and approximately six months to complete.
In addition, KFx is continuing discussions with Kennecott Energy
relative to optimizing the design of a 3 million ton-per-year K-Fuel
production facility. It should also be noted that 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 later this year. Independent tests of K-Fuel indicate that it
contains .01 to .03 part per million mercury (ppm), 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 MW 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.
As disclosed in Note 7 to the Consolidated Financial Statements, the
second quarter of 2000 includes a $1,000,000 non cash, non operational
cumulative charge to correct the previously unrecorded accretion of the 12%
premium on its 6% Convertible Debentures. This maturity premium will only be
paid if the Debentures are not converted prior to their maturity in July 2002.
RESULTS OF OPERATIONS-THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS
ENDED JUNE 30, 1999
The operating loss for the second quarter of 2000 of $1,797,000 was
$441,000 (32%) higher than for the second quarter of 1999 primarily due to
the net effect of (a) the lack of a K-Fuel license in 2000, which
contributed $750,000 in operating income in 1999, offset by (b) a reduction
in KFx corporate level general and administrative costs of $205,000, (c)
$62,000 of improvement in Pegasus' operating losses and (d) approximately
$34,000 of improvement in the operating performance of the K-Fuel
demonstration plant and laboratory operation, as its contract revenues have
resumed. Pegasus' improvement stemmed from (a) an improvement in gross
margin of $257,000 (due to factors discussed above) offset by (b) increased
focus on research and development activities triggering $67,000 of
additional expense, (c) additional marketing and overhead costs of $84,000
to support Pegasus growth and (d) 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 second quarter comparison includes (a) the 2000 Debenture
premium accretion discussed above, (b) approximately $204,000 in non cash
other income in 1999 not recurring in 2000 and (c) a reduction of
approximately $105,000 in losses from KFP as operations at KFP's Gillette
plant were suspended in mid 1999. The 2000 second quarter net loss of
$3,050,000 includes $268,000 of interest expense and $706,000 of
depreciation and amortization charges.
KFX INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated revenues in the second quarter of 2000 declined as compared
to the second quarter of 1999 by $565,000 (40%) due to a $1 million K-Fuel
license fee recognized only in 1999, partially offset by an increase in
Pegasus revenues of $431,000 (131%). The increase in Pegasus revenues
results from an increase in the level of software installation activity and
increased efficiencies as backlog is worked off. During the second quarter
of 2000, 14 jobs were in progress, compared to 11 during the second quarter
of 1999.
Consolidated operating costs and expenses in the second quarter of 2000
declined as compared to the first quarter of 1999 by $124,000 (4%) due
primarily to the net effect of (a) a $174,000 (69%) increase in Pegasus'
cost of software licenses and services triggered 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 $104,000 (7%) due to corporate level cost reductions at KFx of
$180,000, partially offset by the cost increases at Pegasus approximating
$84,000, and (d) an increase in Pegasus' research and development costs of
$67,000 (86%), due to increased focus on development of new products and
enhancement to existing products.
RESULTS OF OPERATIONS-SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS
ENDED JUNE 30, 1999
The operating loss for the first half of 2000 of $3,826,000 was $735,000
(24%) higher than for the first half of 1999 primarily due to the net
effect of (a) the lack of a K-Fuel license in 2000, which contributed
$750,000 in operating income in 1999, (b) a reduction in KFx corporate
level general and administrative costs of $281,000, (c) $234,000 of
additional 2000 Pegasus' operating losses incurred in the first quarter
comparison offset by $62,000 of corresponding improvement in the second
quarter, as discussed above, and (d) $145,000 of additional loss of the
K-Fuel demonstration plant and laboratory incurred in the first quarter of
2000, as compared to the first quarter of 1999, offset by approximately
$34,000 of improvements in the 2000 to 1999 second quarter comparison, due
to the March 2000 resumption of revenues. Triggered by factors similar to
those discussed above, Pegasus' additional losses stemmed from (a) an
improvement in gross margin of $213,000 offset by (b) $165,000 of
additional research and development expense, (c) additional marketing and
overhead costs of $131,000 and (d) a $73,000 increase in goodwill
amortization. In addition to the above variances, on a net loss basis, the
first half comparison includes (a) the 2000 Debenture premium accretion
discussed above, (b) a $336,000 reduction in interest and other income for
reasons similar to those discussed above and due to reduced cash balances
available for temporary investment, and (c) elimination of 1999's $340,000
in losses from KFP as operations at KFP's Gillette plant were suspended in
mid 1999. The 2000 first half net loss of $5,372,000 includes $555,000 of
interest expense and $1,422,000 of depreciation and amortization charges.
Consolidated revenues in the first half of 2000 declined as compared to the
first half of 1999 by $655,000 (33%) due to (a) a $1 million K-Fuel license fee
recognized only in 1999, (b) a $179,000 decline in K-Fuel contract revenues in
the 2000 while certain contract activities had been suspended as discussed
above, and (c) an increase in Pegasus revenues of $520,000, (73%) for reasons
discussed above.
Consolidated operating costs and expenses in the first half of 2000
increased slightly as compared to the first half of 1999 by $80,000 (2%) due
primarily to the net effect of (a) a $307,000 (62%) increase in Pegasus'
cost of software licenses and services triggered 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 $121,000 (5%) due to corporate level general and administrative
cost reductions at KFx of $244,000, partially offset by the cost increases
at Pegasus by $131,000, and (d) the increase in Pegasus' research and
development costs of $165,000 (165%).
KFX INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 2000, the Company used $2,595,000 of cash for its
operating activities, compared to $824,000 in the first half of 1999.
Included in the 1999 amount is $1,000,000 of K-Fuel license fee income and
an additional $1,000,000 related cash payment from Kennecott Energy that
was invested in K-Fuel, LLC, neither of which were experienced in 2000.
Excluding these amounts, there was a reduction in cash used for operating
activities of $229,000 resulting from cost control and cash conservation
measures. Included in the 2000 amount is (a) $658,000 of KFx interest
payments, (b) $1,136,000 for Pegasus' operations, (c) $75,000 of cash
provided by the K-Fuel segment's demonstration plant and laboratory, and
(d) $877,000 for KFx's corporate activities.
As noted above, Pegasus has recently 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. If the related discussions progress
satisfactorily, there is potential to consummate certain transactions that are
under consideration which, in turn, could provide the Company the basis to
undertake steps to significantly improve its balance sheet. The Company expects
to be able to announce additional details about this matter in the near future.
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 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 August 14, 2000, Debentures
with a face value of $1,750,000 have been converted into 479,445 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 $1,750,000, offset by a corresponding increase to
stockholder's equity, less approximately $113,000 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 August 14 2000 has
generated a total of $2,000,000 in cash investments by Kennecott Energy
related to Pegasus and is expected to generate an additional $3,000,000 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, at August 3, 2000 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") in the amount of
$500,000 is due August 31, 2000. The Company is in discussions with Wyoming to
seek additional extensions of principal payments on the Note. There can be no
assurance that such extensions will be granted by Wyoming. The term of a
promissory note for $819,000 due to Wyoming by KFx's Chairman and one of his
affiliates has been similarly extended. 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.
KFX INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company expects its cash requirements over the remainder of 2000 with
respect to day-to-day operations and debt service requirements to be satisfied
by (a) cash on hand, which as of August 14, 2000 approximated $678,000; (b)
$1,000,000 of Kennecott Energy's discretionary investments in Pegasus in
connection with the achievement of milestones under the work plan, pursuant to
provisions of the agreements executed in March 2000; (c) certain contract
revenues relating to the K-Fuel demonstration plant and laboratory; and (d)
unsecured short term borrowings for the Company and/or Pegasus from one or more
of its directors (which at August 14, 2000 approximated $250,000 from two
directors) and/or other parties. Additional potential sources of cash included
(a) potential investments in Pegasus from interested participants in the power
generation industry; (b) potential debt and/or equity offerings of the Company;
(c) potential fees from licensing new K-Fuel facilities; and (d) potential
partners in connection with opportunities to expand the Company's product and
service offerings to the power industry.
The Company and Kennecott Energy are continuing to work diligently on an
optimal design for a 3 million ton-per-year K-Fuel plant and toward the
objective of licensing such a plant within approximately the next 6 months.
Such a license, if agreed to, would a generate 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 of $1 million and
approximately $1.4 million of total royalty obligations.
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 $9.75 million (of which approximately
$750,000 was outstanding as of August 14, 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 sell the Pegasus common stock that it purchased from the Company back
to the Company, the Company may default on payments when due.
KFX INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE
Prior to December 31, 1999, the Company completed various analyses and
remediation procedures, as it considered necessary and prudent, to identify
and remediate potential Year 2000 issues that could create significant
disruptions or other difficulties related to the Company's business. Such
analyses and remediation procedures covered all internal systems of the
Company and the Pegasus products and also included surveys and other
procedures, as considered appropriate, related to the Company's suppliers
and customers. These analyses and remediation procedures were completed at
a nominal cost to the Company. To date the Company has not experienced any
disruptions or other difficulties related to the Year 2000 issue. Based on
the results of analyses and remediation procedures completed prior to
December 31, 1999 and the absence of Year 2000 disruptions or other
difficulties to date, management believes that its systems and products are
substantially Year 2000 compliant and the systems of its suppliers and
vendors are at least sufficiently Year 2000 compliant so as to avoid any
significant disruptions or other difficulties to the Company's business.
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 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 preliminary
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.
In late July 2000 Pegasus received a letter from a competitor alleging
unspecified infringement of several patents that it alleges it owns or to which
it alleges it has exclusive license rights. Pegasus has notified its licensor,
to the extent that any alleged infringement relating to software programs
licensed by Pegasus could thereby be subject to the indemnification provisions
of the license agreement between Pegasus and the licensor. Management and
counsel of Pegasus and its licensor have initiated a review of the patents
referenced by the competitor. Based on preliminary results, management believes
that the allegations are without merit and management intends to defend its
rights vigorously. Accordingly, management does not believe that the ultimate
outcome of this matter will have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held
on June 22, 2000 for the principal purposes of (a) electing three directors
to the Board of Directors and (b) ratifying the selection of
PricewaterhouseCoopers LLP as the Company's independent accountant for the
year ending December 31, 2000.
The following votes were cast by shareholders with respect to the
election of directors named in the Company's Proxy Statement, dated May 17,
2000, for the Annual Meeting:
Nominee Shares Voted For Shares Voted Against Shares Abstained
------- ---------------- -------------------- ----------------
Vincent N. Cook 15,778,549 5,400 58,265
David H. Russell 15,783,899 50 58,265
Stanley G. Tate 15,776,049 7,900 58,265
The following votes were cast by shareholders with respect to the
ratification of PricewaterhouseCoopers LLP as the Company's independent
accountant for the year ending December 31, 2000:
Shares Voted For Shares Voted Against Shares Abstained
PricewaterhouseCoopers 15,794,614 36,700 10,900
LLP
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
For electronic filing purposes only, this report contains Exhibit 27,
Financial Data Schedule.
(B) REPORTS ON FORM 8-K
During the quarter ended June 30, 2000, the Company did not file any
Current Reports on Form 8-K.
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: AUGUST 15, 2000
