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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission File No.:
JUNE 30, 1996 000-28198
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CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
DELAWARE 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
82 BETHANY ROAD, SUITE 6
HAZLET, NEW JERSEY 07730
(Address of principal executive offices) (Zip Code)
(908) 888-3828
(Issuer's telephone number including area code)
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Redeemable Class A Warrants and Redeemable Class B Warrants
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
---
Issuer's revenues for the fiscal year ended June 30, 1996 were $2,679,987.
The aggregate market value of voting stock held by non-affiliates of registrant
was $17,925,517 as of September 20, 1996, based upon the closing sale price of
the issuer's Common Stock on The Nasdaq SmallCap Market on such date.
As of September 20, 1996, the issuer had outstanding 5,449,745 shares of Common
Stock, 4,639,550 Redeemable Class A Warrants and 3,527,050 Redeemable Class B
Warrants.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement to be filed pursuant to
Regulation 14(a) not later than October 28, 1996 are incorporated by reference
into Part III of this Report on Form 10-KSB.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Conversion Technologies International, Inc. (the "Company") is an early-stage
specialty materials company producing as its flagship product an alumino-
silicate glass marketed as ALUMAGLASS-TM-. ALUMAGLASS is manufactured in a
patented process utilizing select industrial wastes from the aluminum,
electronics, ceramics products and other industries as raw materials, together
with certain virgin materials. ALUMAGLASS is marketed primarily as an
industrial abrasive for surface cleaning and surface preparation applications
and as an aggregate for non-skid flooring and construction materials. The
Company is also engaged in the business of recycling cathode ray tube (CRT)
glass used in televisions for sale to the original manufacturers of such glass
and others. In addition, the Company utilizes its manufacturing equipment to
convert certain types of CRT glass and certain other manufacturing by-products
and industrial wastes into manufacturing raw materials for use by the Company in
its production of ALUMAGLASS and for sale to others.
The Company was incorporated in June 1993 for the purpose of acquiring its
wholly-owned subsidiary, Dunkirk International Glass and Ceramics Corporation
("Dunkirk"), and conducted no business activities prior to such acquisition.
Dunkirk was acquired by the Company in August 1994 pursuant to a merger in which
holders of Dunkirk Common Stock received Common Stock of the Company. Prior to
such acquisition, Dunkirk was in the development stage, principally engaged in
the construction of its manufacturing facilities and initial CRT glass recycling
efforts.
In May 1996, the Company consummated its initial public offering (the "IPO") of
3,527,050 shares of Common Stock and an equal number of Class A Redeemable
Warrants and Class B Redeemable Warrants. The Common Stock was sold at $4.40
per share and the Class A Redeemable Warrants and Class B Redeemable Warrants
were sold at $0.05 each. The Class A Redeemable Warrants and Class B
Redeemable Warrants have exercise prices of $5.85 and $7.80, respectively,
per share, and may be redeemed by the Company at any time after the first
anniversary of the effective date of the IPO if the closing bid price of the
Common Stock averages in excess of $8.20 and $10.95, respectively, for 30
consecutive trading days ending within 15 days of the notice of redemption.
In July 1996, the Company entered into a joint venture with VANGKOE
Industries, Inc. ("VANGKOE"), of St. Augustine, Florida, to manufacture
coated particles for use as components in a variety of construction
materials, including swimming pool plasters, commercial flooring and roofing.
VANGKOE is a newly organized company, formed by the principals of Cytech
Laboratories, Inc., a privately-held industrial products and research
corporation.
In August 1996, the Company entered into a Letter of Intent with Octagon,
Inc. ("Octagon"), of Altamonte Springs, Florida, contemplating the merger of
Octagon into a subsidiary of the Company, with Octagon surviving the merger
as a wholly-owned
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subsidiary of the Company. Pursuant to the terms of the proposed merger, the
holders of Octagon Common Stock will receive one share of the Company's
Common Stock for every 10 shares of Octagon Common Stock. Octagon is a
technical services firm primarily engaged in the business of providing
radiological control and operations and maintenance services to nuclear
utilities and the Departments of Energy and Defense. The consummation of the
merger is subject to customary conditions. No assurance can be given that the
merger will be consummated.
PRODUCTS AND SERVICES
ALUMAGLASS
The Company's initial product line is ALUMAGLASS. ALUMAGLASS is an
alumino-silicate glass, produced in a patented process utilizing commercially
available melting technologies customized for the Company's manufacturing
processes. As a loose grain abrasive, ALUMAGLASS can be applied with blasting
equipment for industrial cleaning and maintenance and manufacturing operations.
Potential purchasers include military and defense agencies, entities engaged in
the electronics, aerospace, automotive, glass products and construction
industries and entities engaged in surface finishing, coating removal and
maintenance of manufacturing and processing equipment, buildings, highways,
bridges and commercial vehicles and vessels. ALUMAGLASS is also marketed as an
aggregate for direct incorporation into products such as non-skid flooring,
plasters, tiles and other construction materials.
ALUMAGLASS is manufactured using various alumina, silica and certain other metal
or calcia-enriched manufacturing by-products and wastes of the electronics,
aluminum, specialty steel and automotive industries, together with virgin
materials. In many cases, the Company is paid to take the waste feedstocks or
receives them at little or no cost. The Company has entered into supply
agreements for certain of these materials and obtains others on a purchase order
basis. The Company believes that adequate supplies of such materials exist from
multiple sources.
RECYCLING OF CRT GLASS
The Company is also engaged in recycling CRT glass used in televisions. The
Company's CRT glass recycling customers include electronics manufacturers such
as Techneglas, Inc., Thomson Consumer Electronics, Inc., Toshiba Display
Devices, Inc. and Hitachi Electronic Devices, U.S.A., Inc. In the Company's CRT
recycling operations, waste CRT glass, or "dirty cullet," is shipped to the
Company by its customers pursuant to agreements with the Company. The Company
receives both funnel glass (the back of a television screen, which is relatively
thin and tubular in shape) and panel glass (the front of a television screen,
which is relatively thick and flat in shape). The funnel glass is cleaned,
separated and sold back to the original manufacturers and others. The panel
glass is cleaned, separated and sold as a raw material to the original
manufacturers and others, used as a raw material by the Company in the
production of ALUMAGLASS or further processed for sale as an aggregate for
construction materials.
Through June 30, 1996, CRT glass recycling has accounted for substantially all
of the Company's revenues. The Company's initial sources of CRT glass for
recycling have been television manufacturers. However, the Company is also
seeking to receive CRT glass from manufacturers of computers and plans to take
in whole computer monitors and displays on a pilot basis to evaluate the
commercial viability of commencing disassembly operations where all components
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of the monitors and displays would be beneficially reused in accordance with
applicable regulatory requirements. There can be no assurance that the
Company will be able to successfully recycle computer CRT glass.
MECHANICAL CONVERSION
The Company also utilizes its manufacturing equipment and know-how to convert
manufacturing by-products and waste glass and ceramics into raw materials for
use by the Company in its manufacture of ALUMAGLASS and for sale to others.
Examples include the cleaning, sorting and grinding of waste bisque otherwise
used for china as a source of alumina for the manufacture of ALUMAGLASS or for
sale to others as a raw material, and the cleaning, sorting and grinding of CRT
glass as a raw material for ALUMAGLASS or other manufacturers.
POTENTIAL FUTURE PRODUCTS
Future products the Company may develop include (i) glass beads for highway
signage and pavement marking made from CRT panel glass, (ii) specialty glasses
such as electrical resistance glass, radioactive shielding glass and high
density glass, (iii) other abrasive products made from materials received by the
Company, whether blended with ALUMAGLASS or other products or as a single
constituent product, and (iv) construction materials such as specialty roofing
or flooring materials. No assurance can be given, however, that the Company
will be successful in developing any future products, or that it will be able
to market any such products successfully.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are conducted principally through
the Company's internal staff, the Center for Advanced Ceramic Technology
("CACT") at Alfred University and the Company's Scientific Advisory Board. The
Company currently employs five individuals principally devoted to research and
development, and maintains an on-site laboratory at its Dunkirk facility where
various analyses, tests and other research and development activities are
conducted. CACT is the Company's primary outside research and development
partner, and works on various matters from time to time as directed by the
Company. The Company also utilizes its Scientific Advisory Board for research
and development activities such as advising as to potential product
applications, the feasibility of new product formulations and the impact of
process modifications on product characteristics.
MARKETS FOR PRODUCTS AND SERVICES
ALUMAGLASS
A variety of media and methodologies have traditionally been used in the broad
market of industrial equipment and facilities cleaning and maintenance. In
particular, sand used in blasting applications and chemical solvents have held a
significant share of the market. In recent years, however, increased regulations
relating to the environment and worker health and safety have resulted in a
dramatic decline in the use of sand, which is known to contribute to the lung
disease silicosis. In addition, given the greater demand for reclaimable
abrasives, which reduce the amount of spent abrasive material subject to
landfill and potential environmental liability, the Company believes that
non-reclaimable abrasives, such as sand and metal slags, are competitively
disadvantaged. Chemical solvents have also decreased in use with
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respect to many applications due to such regulatory changes, particularly
regulations which have resulted in increased disposal costs. Products such as
ALUMAGLASS, glass beads and mineral, metallic and plastic abrasives are
affected to a lesser extent by such regulations due to the nature of their
composition and the fact that they are reclaimable for multiple uses and have
a lower quantity for disposal. ALUMAGLASS, for example, contains no free
silica, which causes silicosis, and, depending on the application, can be
recycled by the Company at its Dunkirk facility rather than disposed of after
use. Other approaches such as high pressure water and dry ice blasting are
also gaining acceptance.
Loose grain abrasives, typically applied with blasting equipment, are used in
numerous industries throughout the world for equipment and facilities
maintenance. Applications include cleaning, stripping and other surface
treatment or surface preparation applications, such as industrial metal
finishing, coating removal, structural steel and commercial vehicle cleaning,
paint removal and the cleaning and preparation of surface substrates. Potential
purchasers of ALUMAGLASS as an abrasive include utilities, military and defense
agencies, entities engaged in the electronics, aerospace, automotive, glass
products and construction industries and entities engaged in surface finishing,
coating removal and the maintenance of manufacturing and process industries
equipment and facilities, buildings, highways, bridges and commercial vehicles
and vessels.
ALUMAGLASS can also be directly incorporated into other products such as
non-skid flooring, roofing materials, plasters, tiles, grouts and other
construction materials. ALUMAGLASS can also be used for applications such as
softening leather, stonewashing denim and shot peening to prevent metal fatigue
in aircraft parts.
CRT GLASS RECYCLING
The Company currently recycles waste CRT glass generated by television
manufacturers located in the United States. There are several manufacturers from
which the Company does not receive glass and it does not receive all of the
waste glass produced by its current customers. Such manufacturers typically seek
more than one outlet for their CRT glass, in order to avoid dependence on any
one source. In some cases, manufacturers ship their waste CRT glass to smelters
or landfills. Therefore, the Company believes that there is some growth
potential for its CRT recycling operations. However, such market, as narrowly
defined, is limited by the relatively few manufacturers located in the United
States, the relatively low percentage of CRT glass which becomes waste prior to
being incorporated into televisions and shipping costs associated with doing
business with manufacturers located at significant distances from the Company.
The Company plans to expand its CRT glass recycling business by recycling waste
CRT glass generated by manufacturers of computer monitors and post-consumer CRT
glass obtained from entities engaged in television or computer disassembly.
Although, the Company does not currently have commitments to take such glass,
the Company has begun to receive such glass on a pilot basis and has obtained
the regulatory exemptions for such recycling. No assurance can be given,
however, that the Company will be able to enter this market on commercially
acceptable terms.
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MECHANICAL CONVERSION
The Company believes that demand for the Company's waste conversion services as
part of its manufacturing process will be driven by industries' needs to reduce
the costs of waste management and remove and manage manufacturing by-products
and industrial wastes in compliance with various federal, state and local
environmental statutes and regulations. Other industrialized countries around
the world are also proposing or enforcing similar, and in some cases, more
stringent environmental legislation. Consequently, the Company believes that
demand for the Company's waste conversion services may increase because of
anticipated, increasingly stringent environmental regulations and the concerns
of waste generators over accompanying waste disposal liabilities in the U.S. and
abroad. The Company's competitive advantage and successful market penetration
will depend on its ability to provide low-cost waste conversion services while
also minimizing the waste generators' liabilities by providing the beneficial
reuse of such waste.
DEPENDENCE ON CERTAIN CUSTOMERS
For the fiscal year ended June 30, 1996, three of the Company's CRT glass
recycling customers, Techneglas, Inc., Thomson Consumer Electronics, Inc. and
Toshiba Display Devices, Inc., each accounted for more than 10% of the Company's
revenues and, in the aggregate, accounted for approximately 87.5% of the
Company's revenues. Accordingly, the Company is currently dependent on these
customers for substantially all of its revenues.
SALES AND MARKETING
ALUMAGLASS is marketed and distributed in the United States through distributors
and the Company's direct sales efforts. N.T. Ruddock & Company, Fusco Abrasive
Systems, Inc. and Omni Finishing Systems, Inc. are initial regional distributors
of the Company's abrasives and are large-volume distributors of loose grain
abrasives in the United States. Other distributors include Porter Warner
Industries Inc., Standard Sand & Silica Co., Corrosion Specialties Incorporated,
Carpenter Brothers Inc., Grand Northern Products, Inc., MJD Enterprises Inc.,
Dawson MacDonald Company, Metal Preparations Co., Inc. and W. H. Shurtleff
Company. In addition, Midvale Industries, Air Power Equipment Corp. and Ryan
Equipment Co., Inc. are among the regional sub-distributors served by N.T.
Ruddock & Company. The Company has also established relationships with
distributors in the United Kingdom, Canada, Mexico and Israel. The Company's
marketing strategies include, among others, telemarketing, direct mail and
trade journal advertising, product sampling programs and customer support
programs such as technical assistance programs and testing support.
The Company is a party to an agreement, with its joint venture partner, VANGKOE,
relating to the sale of ALUMAGLASS and certain other materials for use as
aggregates in swimming pool plasters, tiles and other construction materials.
The VANGKOE agreement contains a guaranteed minimum purchase commitment of
approximately 350 tons of ALUMAGLASS per month over a twelve-month period
commencing, absent certain specified contingencies, October 1996. At VANGKOE's
option, VANGKOE may satisfy its minimum purchase commitment by substituting
one-third of such commitment with crushed specialty glass provided by the
Company. If the guaranteed minimum purchase commitment is purchased, the Company
will receive approximately $1,560,000 in revenue (or approximately
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$1,240,000 if VANGKOE substitutes crushed specialty glass for one-third of such
commitment). VANGKOE is a newly-formed entity with nominal assets. Accordingly,
there can be no assurance that VANGKOE will meet such minimum purchase
commitments. Pursuant to the Company's joint venture with VANGKOE, the parties
will form a new corporation, Advanced Particle Technologies, Inc. ("APT"), which
will apply color coatings at cost to particles supplied by the Company. The
Company will provide the start-up capital for APT's operations and VANGKOE will
grant to APT an exclusive, perpetual royalty free license of its proprietary
color coating technology. The Company and VANGKOE will share equally in the
profits generated by sales of the material coated by APT and other materials
supplied by the Company and sold through VANGKOE.
The Company currently has six individuals dedicated principally to sales and
marketing and several others who support the sales and marketing effort on a
regular basis.
INTELLECTUAL PROPERTY
The Company has been issued two United States patents relating to ALUMAGLASS and
has a third ALUMAGLASS patent application pending. In addition, the Company,
together with a third party, has filed for a patent on technology used in the
Company's CRT glass recycling operations. The Company also has a patent
application on file relating to the Company's planned glass bead product and
other patent applications in development.
The Company's logo is a registered trademark. In addition, the Company has filed
a trademark application for ALUMAGLASS with the Patent and Trademark Office.
COMPETITION
The Company's products and services are subject to substantial competition. As
an abrasive, ALUMAGLASS competes with product offerings of other companies,
principally aluminum oxide, glass beads, plastic abrasives, garnet, steel grit,
coal slag and, with respect to certain applications, sand or water blasting
techniques. Many of the companies offering such products are large corporations
with substantially greater financial resources than the Company. Large
international competitors of manufactured metallic abrasives include:
Exolon-ESK, General Abrasives Triebacher, Inc., Washington Mills Electro
Minerals Corp., Irvin Industries, Inc. and others. Various other manufacturers
produce mined, plastic, glass bead and mineral abrasives, as well as high
pressure water jet spray abrasive systems.
As a construction material, ALUMAGLASS will compete with various mined and
manufactured substrates such as quartz, sand and aluminum oxide. Producers of
such materials include the competitors named above, as well as 3M Corporation
and privately-held entities.
The Company also competes for certain of its raw materials for ALUMAGLASS and
its waste conversion services in the hazardous and non-hazardous waste and
industrial by-products treatment and disposal markets, which are characterized
by several large companies and numerous small companies and publicly-owned
landfills that charge for the disposal of waste. International waste disposal
competitors include, among others, WMX Technologies, Inc. Laidlaw Waste
Systems, Inc., Browning-Ferris Industries, Inc., Mid-American Waste Systems,
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Inc., Allied Waste Industries, Inc. and Strategic Materials, Inc. and a
number of large European-based companies.
With respect to its CRT glass recycling operations, the Company competes with
several other companies who accept waste CRT glass for recycling or other
purposes, each of which may deal with customers of the Company and satisfy their
recycling, beneficial reuse or disposal needs. In addition, under certain
conditions, CRT glass might also be disposed of by smelting to recapture
certain metals.
ENVIRONMENTAL MATTERS
The federal environmental legislation and policies that the Company believes are
applicable to its manufacturing operations include the Comprehensive
Environmental Response, Compensation and Liability Act of 1978, as amended
("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), the Clean Air Act of 1970, as amended, the Federal Water Pollution
control Act of 1976, as amended, the Superfund Amendments and Reauthorization
Act ("SARA") and the Pollution Prevention Act of 1990. The Company is also
subject to state air, water and solid and hazardous waste laws and regulations
that affect its manufacturing operations.
To maximize market acceptance of the Company's manufacturing technology, the
Company has chosen to focus its initial efforts on the development of
recycling processes, materials and products which are most likely to qualify
for exemptions or favorable regulatory treatment. For example, the Company
uses materials that are not solid wastes and are not subject to RCRA
permitting requirements (for example, reclaimed characteristically hazardous
by-products or sludges). The Company handles secondary materials in a way to
qualify such materials for exclusions under state or federal RCRA regulations
(for example, use of materials as effective substitutes for other products in
a manufacturing process), and the Company stores materials in an
environmentally sound manner (for example, within the manufacturing building
or on a concrete slab).
The New York State Department of Environmental Conservation ("NYSDEC") has been
delegated authority to administer the RCRA program in New York, and has adopted
regulations governing the treatment, storage and disposal of solid and hazardous
wastes. NYSDEC regulations require the Company to obtain regulatory exemptions
and/or beneficial use determinations for each hazardous waste material it
accepts for recycling purposes. Without these regulatory exemptions and/or
beneficial use determinations, the Company would be required to obtain a State
RCRA permit to operate its facility, and would become subject to onerous RCRA
regulatory requirements.
The Company presently has obtained regulatory determinations and beneficial use
determinations from NYSDEC concluding that the materials and processes that it
uses and the products that it produces at its Dunkirk facility are not subject
to permits under the New York State solid and hazardous waste laws. The Company
has also obtained all necessary air and sewage permits for the Dunkirk facility.
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CERCLA and subsequent amendments under SARA impose continuing liability upon
generators of hazardous substances and owners and operators of facilities where
hazardous waste is released or threatened to be released, as well as upon
parties who arrange for the transportation of hazardous substances to such
facilities. CERCLA effectively imposes strict, joint and several liability upon
these parties. Accordingly, although the Company strives to operate its
facilities in compliance with regulatory requirements, there can be no assurance
that the Company will not incur liability as an owner or operator for releases
of hazardous substances, or possibly as a hazardous waste generator. In
addition, the Company plans to own and operate other production units and
installations, and may be exposed to potential liability under CERCLA for
releases of hazardous substances into the environment at those sites.
EMPLOYEES
As of September 20, 1996, the Company had 82 full time employees and one part
time employee. The Company also uses temporary employees from time to time to
meet its requirements.
In February 1996, a majority of the employees at the Company's Dunkirk
subsidiary elected the United Steelworkers of America to act as their bargaining
representative pursuant to the National Labor Relations Act (the "NLRA").
Dunkirk is obligated under the NLRA to bargain with the Union in good faith and
is currently engaged in such negotiations. The outcome of such bargaining
cannot be determined at this time. The Company has not experienced any work
stoppages and considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company owns its 230,000 square foot manufacturing facility in Dunkirk, New
York. Such facility is subject to a first mortgage held by the New York Job
Development Authority securing a promissory note issued to the Chautauqua
Regional Industrial Development Corporation, with respect to which approximately
$337,000 principal amount was outstanding at June 30, 1996. In addition, such
facility is subject to a second mortgage securing a promissory note issued to
the former owner of the property as part of the purchase price therefor, with
respect to which approximately $318,000 principal amount was outstanding on June
30, 1996.
The Company leases approximately 3,000 square feet of executive office space in
Hazlet, New Jersey, pursuant to a lease expiring December 31, 1997.
The Company believes that its existing facilities are adequate to meet its
current and currently foreseeable requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation commenced by the Company in the Supreme
Court of New York, County of Chautauqua, against a general contractor hired to
construct the Company's abrasives finishing area. The contractor commenced work
in April 1995, but was asked to stop work in November 1995 following significant
cost overruns, problems and delays in construction and disputes with the Company
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over the scope of the work to be performed by the contractor. The Company has
served the contractor with its complaint, alleging, among other things, breach
of contract, fraud and defamation, and seeks damages in excess of $1,000,000.
The contractor has counterclaimed damages of approximately $483,000, and has
filed a mechanic's lien with respect to such claim. The Company does not
believe that an adverse outcome in such dispute would have a material adverse
effect on the Company.
The Company is not involved in any other material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq SmallCap Market on May
16, 1996, the date of the IPO. The high and low bid prices for the Common Stock
during the period from May 16, 1996 through June 30, 1996 were $7 1/4 and $5,
respectively. (Source: Nasdaq monthly Summary of Activity-TM-).
No dividends have ever been declared or paid on the Company's Common Stock, and
the Company does not anticipate declaring or paying dividends in the foreseeable
future. As of August 28, 1996, the Company had approximately 1,478 holders of
record of Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since inception through June 30, 1996, the Company has sustained cumulative
losses of approximately $17,179,000. Such amount includes (i) a one-time,
non-cash charge to operations relating to the write-off in conjunction with the
acquisition of approximately $6,232,000 for purchased research and development
(in-process) technologies that had not reached technological feasibility and, in
the opinion of management, had no alternative use, (ii) approximately $2,528,000
expensed as process development costs related to research and development of the
Company's CRT glass processing and ALUMAGLASS product line and (iii) other
expenses, net of revenue, of approximately $8,419,000. The Company will continue
to incur losses until such time as revenues are sufficient to fund its
continuing operations.
The IPO resulted in net cash proceeds to the Company of approximately
$13,500,000 (after deducting underwriters' discounts and commissions and
offering expenses). Following the closing of the IPO, through June 30, 1996,
the Company spent approximately $2,324,000 on repayment of bridge notes
placed through the underwriter (the "Bridge Notes"), $1,480,000 on the
repayment of other indebtedness, $2,187,000 on the repayment of accounts
payable, $220,000 in capital expenditures and $740,000 for general working
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capital purposes. As of June 30, 1996, the Company had cash and marketable
securities of approximately $6,549,000.
As discussed below, the Company has experienced decreased revenues in July and
August 1996, and anticipates that revenues for the quarter ending September 30,
1996 will be lower than revenues for the quarter ended June 30, 1996. These
lower revenues (together with operations spending to build ALUMAGLASS
inventories that were curtailed prior to the IPO due to cash constraints) have
resulted in negative cash flow from operations estimated by the Company to be
approximately $500,000 for each of July and August 1996, which, together with
capital expenditures and certain other non-recurring expenses, resulted in a
reduction in the balance of the Company's cash and marketable securities to
approximately $4,770,000 as of August 31, 1996. Based on the Company's
estimates of revenue and cash requirements during the month of September,
including a $250,000 secured Bridge Loan to Octagon for working capital
purposes, the Company anticipates that it will have approximately $3,500,000
in available cash and marketable securities at September 30, 1996.
Although the Company's revenues increased to $603,093 for the quarter ended June
30, 1996 compared to $445,961 for the quarter ended March 31, 1996, the Company
anticipates a decline in revenues for the quarter ending September 30, 1996,
based on anticipated revenues for July and August of approximately $100,000 and
$120,000, respectively. This decline is primarily due to interruptions in CRT
glass receipts and shipments caused by retooling activities and slow downs due
to vacation schedules at the facilities of the Company's CRT glass customers.
Since these activities have concluded or are near conclusion, the Company
anticipates that during the quarter ending December 31, 1996 its CRT recycling
revenues will return to the levels experienced during the quarter ended
June 30, 1996, assuming no incremental increase in revenues resulting from
further sales efforts by the Company.
The Company's revenues will be limited, however, until such time as the Company
obtains additional CRT glass customers or increased sales of ALUMAGLASS or other
products. With respect to CRT glass recycling, the Company faces substantial
competition in obtaining such glass which may result in downward pressure on the
fees the Company charges to accept such glass. In addition, obtaining such
glass solely from the relatively few manufacturers of television CRT glass in
the United States limits the supply of such glass to the factory breakage
produced by such manufacturers.
The Company is currently in discussions with Thomson Consumer Electronics
Corporation, one of the Company's current primary CRT customers, regarding
volumes of CRT glass to be received from Thomson and certain changes to the fee
structure for the Company's recycling services. Inasmuch as Thomson utilizes
more than one source for its CRT glass, there can be no assurance that the
Company will be able to obtain historical levels of CRT glass from Thomson,
although the Company anticipates that any potential reduction would not occur in
any case until the quarter ending March 31, 1997.
The Company has taken several steps in order to increase its CRT recycling
revenues. First, the Company has entered into discussions with one of its
existing customers regarding arrangements to obtain additional glass for
processing. Second, the Company is in discussions with a major U.S.
manufacturer of televisions who is not currently a customer regarding recycling
services for such customer, which may also satisfy the purchase requirements of
an existing customer for clean material. Third, the Company has entered into
discussions with several computer manufacturers regarding the recycling of
computer CRT tubes and the disassembly of whole computer monitors and displays.
The company has already begun to take in such tubes and monitors on a pilot
basis and has obtained the
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requisite regulatory approvals for beneficial reuse of the components. The
Company believes that it is well positioned to become a leading recycler of
computer glass and monitors and that large volumes of this glass will be
accessible. Subject to successful testing, the Company anticipates that it will
begin to generate revenues from computer glass recycling late in the quarter
ending December 31, 1996. Finally, the Company plans to increase CRT glass
recycling revenues by developing high value end uses for such glass. Examples
include processing certain types of CRT glass for sale as aggregates for
construction materials and manufacture of the Company's planned high
retroflective glass bead. No assurance can be given that the Company's
efforts to increase its CRT recycling revenues will be successful.
The Company's revenues from ALUMAGLASS have been relatively steady, ranging from
$20,000 to $35,000 per month over the last six months. However, the Company
believes that the reinitiation of marketing efforts curtailed prior to the IPO
due to cash constraints will have a positive effect on sales, and the Company
continues to enter into discussions with potential large volume purchasers
regarding on-site facilities or the co-venture of facilities overseas. The
Company is also near completion of its finishing equipment required for the fine
grit sizes of ALUMAGLASS, which the Company believes will be the product of
choice for several applications and which offer the highest gross margins for
ALUMAGLASS sales. The Company also anticipates that sales of ALUMAGLASS will
increase significantly as the Company's joint venture with VANGKOE commences
operations. The Company currently anticipates that APT, the joint venture
company, will commence test runs in October and production in November 1996.
The Company plans to take several steps in order to preserve its cash
resources and achieve break even cash flow. First, the Company will implement
several cost saving measures at the Dunkirk facility, including reducing
melting and other operations as inventories of ALUMAGLASS achieve
satisfactory levels, reducing overhead and effecting other operating expense
reductions. In addition, the Company will refrain from making discretionary
capital expenditures, including refraining from constructing a second melter
until the Company has sufficient positive cash flow from operations (and then
only if warranted by demand after pursuing other less capital intensive
methods to increase melting production). The Company anticipates that these
cost saving measures will reduce the level of revenue required to achieve
break-even to less than $500,000 per month, and will position the company to
have sufficient cash and marketable securities to fund its operations for at
least a 12-month period. The Company also plans to aggressively pursue its
marketing efforts and technical applications activities for CRT glass
recycling and sales of ALUMAGLASS and other materials to increase monthly
revenue and attempt to achieve the highest possible value for its
products. The Company has not identified additional sources of funds at this
time, but it may seek a working capital credit facility or other equity or
debt financing to satisfy future working capital requirements,
if necessary.
The Company's workforce recently elected the United Steelworkers of America to
act as its bargaining representative with respect to their terms of employment
with the Company. The Company believes that it currently offers competitive
wages and benefits and does not anticipate that negotiations will have a
material adverse effect on the Company. However, there can be no assurance that
the election of the Union will not result in higher labor costs, work
stoppages or strikes.
The foregoing discussion contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in such forward-looking statements.
13
<PAGE>
RESULTS OF OPERATIONS
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
The Company's consolidated results of operations for the fiscal year ended June
30, 1995 ("fiscal 1995") include only 10 months of Dunkirk operations since the
merger occurred effective August 31, 1994. However, for purposes of the
following presentation, the Company's results of operations for fiscal 1995
include the operations of Dunkirk for both the ten-month period following the
effective date of the Merger and the two-month period immediately preceding the
effective date of the Merger.
Consolidated revenues for the year ended June 30, 1996 ("fiscal 1996") were
approximately $2,680,000, consisting primarily of CRT glass recycling fees and
approximately $214,000 of ALUMAGLASS sales. For fiscal 1995, the Company had
consolidated revenues of approximately $1,236,000, of which approximately
$78,000 was from sales of ALUMAGLASS and the remainder was CRT recycling fees.
This increase in revenue during fiscal 1996 primarily reflects completion of the
Company's CRT glass recycling operations and the corresponding increase in the
Company's CRT glass recycling capacity.
Cost of goods sold was approximately $3,094,000 for fiscal 1996, as compared to
approximately $3,168,000 for the prior fiscal year. This decrease reflects a
$623,000 reduction in the Company's reserve for potential disposal costs of raw
materials as a result of a decrease in the Company's raw materials inventory as
compared to a $1,070,000 increase in the reserve for fiscal 1995 during which
inventories were being built up in anticipation of production needs. Excluding
the effect of the change in the Company's reserve for disposal during fiscal
1996 and fiscal 1995, cost of goods sold increased approximately $1,619,000 in
fiscal 1996 versus fiscal 1995. This adjusted cost increase reflects higher
depreciation costs due to increased equipment purchases and higher personnel,
energy, repairs and maintenance and freight costs, all of which are attributable
to increased production during fiscal 1996.
The Company's gross loss on sales of approximately $(414,000) during fiscal 1996
compares with a loss of approximately $(1,933,000) for the prior fiscal year.
The increase in revenues allowed for better overall utilization of production
capacity and resulted in attendant economies of scale.
Selling, general and administrative expenses for fiscal 1996 decreased to
approximately $1,821,000 from $2,827,000 for fiscal 1995. This decrease resulted
from substantially lower legal, consulting and travel costs, together with a
$99,000 settlement received from a former officer of Dunkirk during fiscal 1996.
The Company incurred process development costs of approximately $996,000 for
fiscal 1996 as compared with approximately $1,614,000 for fiscal 1995. A
decrease in developmental activity directed at the Company's ALUMAGLASS
abrasives product during the last half of fiscal 1996 and the completion of the
Company's CRT glass recycling operation accounted for this entire cost
reduction.
During fiscal 1995 the Company incurred a one-time, non-cash charge to
operations relating to a write-off of approximately $6,232,000, which
represented purchased research and development technologies in conjunction with
the Dunkirk merger that had not reached technological feasibility and, in the
opinion of management, had no alternative use.
Net interest expense increased to approximately $962,000 for fiscal 1996 from
approximately $387,000 for fiscal 1995, reflecting increased indebtedness of the
Company, partially offset by capitalized interest costs of $439,932 and
$63,499 for fiscal 1996 and fiscal 1995, respectively.
14
<PAGE>
The fiscal 1996 Statement of Operations includes an extraordinary item amounting
to $442,000. This charge includes underwriting, debt discount, legal and
accounting costs relating to Bridge Notes issued in December, 1995 to provide
interim working capital until the initial public offering could be closed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive. The Company has funded its
operations principally from debt financing, the private placement of
preferred stock (converted into Common Stock at the closing of the IPO)
and the proceeds of the IPO. At June 30, 1996, the Company had
approximately $11,719,000 in principal amount of long-term indebtedness
(excluding capital lease obligations) and net working capital of
approximately $3,573,000.
The Company estimates that its negative cash flow from operations for
each of July and August was approximately $500,000 (which is anticipated
to increase for September due to quarterly interest payments on long-term
indebtedness). This level of negative cash flow represents an increase
from levels experienced during the quarter ended June 30, 1996, and is
principally due to lower monthly revenue for July and August (and
anticipated for September) and efforts to build inventories of ALUMAGLASS
that had been curtailed prior to the IPO due to cash constraints. The
lower monthly revenues experienced in July and August (and anticipated
for September) were primarily the result of decreased receipts and
shipments of CRT glass caused by retooling activities and vacation
related slowdowns at the facilities of the Company's CRT customers. As
discussed above, the Company anticipates that revenues from CRT recycling
will return to the levels experienced during the quarter ended June 30,
1996 since the retooling activities and vacation slowdowns have been
largely completed. In addition, as discussed above, the Company has
taken a number of steps to increase its CRT recycling revenues through
additional sales efforts and the recycling of computer CRT glass and monitors.
The Company anticipates that as of September 30, 1996, it will have
approximately $3,500,000 in available cash and marketable securities.
The Company plans to initiate a number of cost saving measures so that
it will be able to fund its operations from its existing resources for
at least an additional 12-month period, and so that it will be able to
reduce the revenue required to achieve break even cash flow. Such
measures will include reducing melting and other operations as inventories of
ALUMAGLASS reach satisfactory levels, making reductions in overhead and other
operating expenses and refraining from making discretionary capital
expenditures. The Company will also aggressively pursue its marketing efforts
and product application activities to increase revenues and attempt to
achieve the highest possible value for its products. The Company's capital
expenditure program is now substantially complete. The Company estimates
that it will require modest near-term capital expenditures at its
facility, principally to complete certain elements of its mechanical
conversion area and computer recycling operations, although additional
discretionary expenditures could be made if additional financing or cash from
operations becomes available. The Company also anticipates capital outlays of
approximately $250,000 in connection with its joint venture with VANGKOE, 50%
of which is required to be reimbursed to the Company by VANGKOE in accordance
with the terms of the joint venture.
The foregoing discussion contains certain forward-looking statements which
involves risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in such forward-looking statements.
The Company's long-term indebtedness consists principally of (i) $8
million outstanding principal amount of industrial development bonds
issued through the Chautauqua County Industrial Development Agency,
which bear interest at 11.5% with principal repayments commencing in
1998 over a 12-year period, (ii) $2,192,379 outstanding principal amount
under term loans provided by Key Bank of New York and guaranteed by the
New York Job Development Authority, which loans bear interest at the prime
rate and are payable in monthly installments through January 2002 and
(iii) various mortgage loans and subordinated indebtedness from
certain of the Company's CRT glass customers who provided financial
and technical assistance to the Company during its start-up phase. The
Company's debt service requirements are currently
15
<PAGE>
approximately $412,000 per quarter (excluding capital lease obligations). The
Company's long-term indebtedness is secured by liens on substantially all of
its fixed assets. The Company's long-term indebtedness has been used to
finance its facility, equipment and related capital expenditures. Certain of
the agreements related to such long-term indebtedness contain a limited number
of customary covenants and default provisions.
During the period commencing August 1994 and ending May 1995, the Company
raised approximately $6 million in net proceeds from the sale of preferred
stock, which was converted into Common Stock at the closing of the IPO. Such
proceeds were used for working capital and general corporate purposes.
In December 1995, the Company consummated a bridge financing placed by
the underwriter of the IPO, pursuant to which it raised net proceeds of
approximately $1.85 million through the issuance of bridge notes and bridge
warrants (which were converted into Redeemable Class A Warrants at the
closing of the IPO). The proceeds of such bridge financing were used
for certain capital expenditures related to the Company's abrasives finishing
area and working capital. The principal of and accrued interest on the bridge
notes was repaid at the closing of the IPO. A charge of approximately
$442,000 occurred in the quarter ended June 30, 1996 as a result of the
unamortized debt discount and debt issuance costs incurred in connection with
such bridge financing.
Prior to the IPO, the Company also relied on bridge loans from certain
stockholders and directors from time to time to satisfy its working capital
requirements.
The Company's capital lease payments were approximately $115,000 for the
year ended June 30, 1996 and are estimated to be approximately $84,000,
$41,000 and $27,000 for the fiscal years ending June 30, 1997, 1998 and 1999,
respectively, under current commitments. The Company's utility expenses
average approximately $75,000 per month at its current level of operations.
The Company may also seek opportunities within the United States and
abroad to construct and operate additional abrasives manufacturing
facilities, which may include CRT glass recycling operations, either
independently or through joint ventures or other collaborative arrangements
with strategic partners. The Company expects that future abrasives
manufacturing facilities, if any, will be financed through debt issuances
such as the capital equipment loans described above and, in the case of
on-site facilities, capital provided in part by strategic partners. There can
be no assurance that such debt financing or other collaborative arrangements
will be available on terms favorable to the Company or at all.
The Company's base annual fixed expenses include approximately $484,000
in aggregate annual base compensation for the current executive officers of
the Company and debt service obligations relating to the Company's
outstanding indebtedness, which are estimated to aggregate approximately
$1,647,000 for fiscal 1997 (excluding capital lease obligations).
The Company has federal net operating loss carryforwards that amounted
to approximately $11.5 million at June 30, 1996 which expire between 2006 and
2011. Pursuant to Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), utilization of net operating loss carryforwards is
limited if there has been a change in control (ownership) of the Company.
Although a comprehensive evaluation has not yet been performed, it appears
that upon the merger transaction with Dunkirk, effective August 31, 1994, and
upon the IPO (effective May 16, 1996) such changes in control (ownership) had
occurred. As a result of such changes, it appears that the Company's ability
to utilize its net operating loss carryforwards generated by Dunkirk prior
to August 31, 1994 (approximately $1.5 million) is limited by Section 382
and is further limited to the use of these loss carryforwards against future
Dunkirk earnings only. In addition, the consolidated losses incurred through
the effective date of the IPO (approximately $8.2 million) may be limited to
as low as approximately $1 million on an annual basis.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements annexed.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Portions of the Company's Definitive Proxy Statement, which the Company will
file with the Securities and Exchange Commission on or before October 28, 1996,
are incorporated herein by reference as items 9 through 12 of Part III.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Schedules
See Financial Statements annexed.
2. Exhibits
See Exhibits annexed.
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15 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.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
Dated: September 30, 1996 /s/ Harvey Goldman
-----------------------------
Harvey Goldman, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Dated: September 30, 1996 /s/ Harvey Goldman
-----------------------------
Harvey Goldman
Chief Executive Officer
President and Chairman
Dated: September 30, 1996 /s/ David L. Sanders
-----------------------------
David L. Sanders
Chief Accounting Officer
(Principal Financial Officer)
Dated: September 30, 1996 /s/ Eckardt C. Beck
-----------------------------
Eckardt C. Beck,
Director
Dated: September 30, 1996 /s/ Peter H. Gardner
-----------------------------
Peter H. Gardner,
Director
Dated: September 30, 1996 /s/ Alexander P. Haig
-----------------------------
Alexander P. Haig,
Director
Dated: September 30, 1996 /s/ Scott A. Katzmann
-----------------------------
Scott A. Katzmann,
Director
18
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets of Conversion Technologies International,
Inc. and Subsidiary as of June 30, 1996 and June 30, 1995. . . . . . . . F-3
Consolidated Statements of Operations of Conversion Technologies International,
Inc. and Subsidiary for the years ended June 30, 1996 and
June 30, 1995 and Statement of Operations of Dunkirk
International Glass and Ceramics Corporation (Predecessor)
for the two months ended August 31, 1994 . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity of Conversion
Technologies International, Inc. and Subsidiary for the
years ended June 30, 1996 and June 30, 1995. . . . . . . . . . . . . . . F-5
Statement of Stockholders' Deficiency of Dunkirk International Glass and
Ceramics Corporation (Predecessor) for the two months ended
August 31, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiary for the years ended
June 30, 1996 and June 30, 1995 and Statement of Cash
Flows of Dunkirk International Glass and Ceramics
Corporation (Predecessor) for the two months ended
August 31, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-9
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Conversion Technologies International, Inc.
We have audited the accompanying consolidated balance sheets of Conversion
Technologies International, Inc. and Subsidiary (Company) at June 30, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. We have also audited the
accompanying statements of operations, stockholders' deficiency and cash flows
of Dunkirk International Glass and Ceramics Corporation (Predecessor) for the
two months ended August 31, 1994. These financial statements are the
responsibility of the Companies' managements. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Conversion
Technologies International, Inc. and Subsidiary at June 30, 1996 and 1995, and
the consolidated results of their operations and cash flows for the years then
ended and Dunkirk International Glass and Ceramics Corporation's results of
operations and cash flows for the two months ended August 31, 1994 in conformity
with generally accepted accounting principles.
Metro Park, New Jersey ERNST & YOUNG LLP
August 13, 1996, except for Note 9, as to
which the date is September 20, 1996
F-2
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,539,464 $ 733,843
Marketable securities 2,009,632 -
Accounts receivable, less allowance for doubtful accounts
of $25,000 and $0 at June 30, 1996 and
1995 respectively 343,214 283,571
Inventories 337,736 227,724
Prepaid expenses and other current assets 205,984 133,032
------------ ------------
Total current assets 7,436,030 1,378,170
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 1,609,832 1,184,344
Machinery and equipment 11,573,933 6,298,912
Construction in progress 1,008,480 2,393,829
------------ ------------
14,267,245 9,952,085
Less accumulated depreciation (1,630,639) (824,632)
------------ ------------
12,636,606 9,127,453
Deferred finance charges, less accumulated amortization
of $81,272 and $26,970 at June 30, 1996 and
1995 respectively 494,843 508,718
Other noncurrent assets 38,304 31,266
Restricted assets
Project Fund 72,859 78,772
Debt service reserve funds 1,268,457 915,136
------------ ------------
$21,947,099 $12,039,515
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Notes Payable $ - $ 386,500
Accounts payable 1,279,280 1,077,714
Deferred revenue 557,907 944,230
Reserve for Disposal 737,000 1,360,000
Accrued expenses 778,306 1,168,696
Current portion of capital lease obligations 72,914 94,130
Current portion of long-term debt 437,285 404,387
------------ ------------
Total current liabilities 3,862,692 5,435,657
Capital lease obligations, less current portion 74,693 147,227
Long-term debt, less current portion 11,281,715 8,657,582
Stockholders' equity (deficiency):
Preferred stock, $.001 par value, authorized
15,000,000 shares, issued and outstanding 0 and
2,958,000 shares at June 30, 1996 and 1995
respectively - 2,958
Class A common stock, $.00025 par value, authorized
25,000,000 shares, issued and outstanding 5,449,745
and 909,404 shares at June 30, 1996 and 1995
respectively 1,362 227
Additional paid-in capital 23,905,705 10,421,981
Accumulated deficit (17,179,068) (12,626,117)
------------ ------------
Total stockholders' equity (deficiency) 6,727,999 (2,200,951)
------------ ------------
$21,947,099 $12,039,515
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
------------------------------ ---------------
TWO MONTHS
YEAR ENDED JUNE 30, ENDED
1996 1995 AUGUST 31, 1994
------------- --------------- ---------------
<S> <C> <C> <C>
Revenue $ 2,679,987 $ 1,173,264 $ 62,452
Cost of goods sold 3,093,560 2,788,599 379,661
------------- --------------- ---------------
Gross loss on sales (413,573) (1,615,335) (317,209)
Selling, general and administrative 1,821,179 2,529,263 297,792
Process development costs 996,259 1,531,955 82,427
Write-off of in-process technology - 6,232,459 -
------------- --------------- ---------------
Loss from operations (3,231,011) (11,909,012) (697,428)
Interest expense, net 961,751 345,690 40,999
Other income 81,811 - -
------------- --------------- ---------------
Loss before extraordinary item (4,110,951) (12,254,702) (738,427)
Extraordinary item 442,000 - -
------------- --------------- ---------------
Net loss $ (4,552,951) $(12,254,702) $ (738,427)
------------- --------------- ---------------
------------- --------------- ---------------
Net loss per common share
before extraordinary item $ (2.64) $ (16.68)
------------- ---------------
------------- ---------------
Net loss per common share $ (2.92) $ (16.68)
------------- ---------------
------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996 AND JUNE 30, 1995
<TABLE>
<CAPTION>
PREFERRED STOCK CLASS A COMMON STOCK
------------------------------------------- -------------------------------------------------
ADDITIONAL ADDITIONAL
NUMBER PAID-IN NUMBER PAID-IN
OF SHARES AMOUNT CAPITAL OF SHARES AMOUNT SUBSCRIPTIONS CAPITAL
------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 - - - 586,246 $ 147 $ (131) $ 6,055
Issuance of Class A common stock 323,158 80 4,421,655
Issuance of preferred stock 2,958,000 $ 2,958 $5,994,271
Payment received for Class A
common stock subscriptions 131
Net Loss
------------------------------------------- -------------------------------------------------
Balance at June 30, 1995 2,958,000 2,958 5,994,271 909,404 227 - 4,427,710
Issuance of Class A common stock 3,527,050 882 13,526,159
Converted to Common Stock (2,958,000) (2,958) (5,994,271) 1,023,054 255 5,996,974
Surrendered and canceled (7,308) (1) (98,999)
Repurchased and canceled (2,455) (1) (12,889)
Debt discount on bridge notes 66,750
Net Loss
------------------------------------------- -------------------------------------------------
Balance at June 30, 1996 - $ - $ - 5,449,745 $ 1,362 $ - $23,905,705
------------------------------------------- -------------------------------------------------
------------------------------------------- -------------------------------------------------
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIENCY)
-----------------------------
<S> <C> <C>
Balance at June 30, 1994 $ (371,415) $ (365,344)
Issuance of Class A common stock 4,421,735
Issuance of preferred stock 5,997,229
Payment received for Class A
common stock subscriptions 131
Net Loss (12,254,702) (12,254,702)
-----------------------------
Balance at June 30, 1995 (12,626,117) (2,200,951)
Issuance of Class A common stock 13,527,041
Converted to Common Stock -
Surrendered and canceled (99,000)
Repurchased and canceled (12,890)
Debt discount on bridge notes 66,750
Net Loss (4,552,951) (4,552,951)
-----------------------------
Balance at June 30, 1996 $(17,179,068) $ 6,727,999
-----------------------------
-----------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
DUNKIRK INTERNATIONAL GLASS AND CERAMICS CORPORATION
(PREDECESSOR COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE TWO MONTHS ENDED AUGUST 31, 1994
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ------------------ Additional Total
Number Number Paid-In Accumulated Stockholders'
of Shares Amount of Shares Amount Capital Deficit Deficiency
--------- ------- --------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 35 $ - 5,250 $ 5 $ 105,055 $ (2,106,546) $ (2,001,486)
Capital contribution of parent company
upon merger at August 31, 1994 1,500,000 1,500,000
Cancellation of preferred stock
upon merger (35) -
Net loss (738,427) (738,427)
------------------ ------------------ ------------ ------------- -------------
Balance at August 31, 1994 - $ - 5,250 $ 5 $ 1,605,055 $ (2,844,973) $ (1,239,913)
------------------ ------------------ ------------ ------------- -------------
------------------ ------------------ ------------ ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
COMPANY TWO MONTHS
------- ENDED
YEAR ENDED JUNE 30, AUGUST 31,
-------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,552,951) $(12,254,702) $ (738,427)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation expense 886,863 742,090 33,607
Amortization of deferred financing and patent costs 54,302 39,568
Interest expense converted to equity - 13,767
Write-off of in-process technology - 6,232,459
Settlement with former officer (99,000) -
Debt discount on Bridge Notes 66,750
Changes in operating assets and liabilities:
Increase in accounts receivable (59,643) (115,478) (48,299)
Increase in inventories (110,012) (227,724)
(Increase) decrease in other current assets (72,952) 173,623 44
Increase in other noncurrent assets (7,038) (29,165)
Increase (decrease) in deferred revenue (386,323) 504,010 136,754
Increase (decrease) in accounts payable, reserve for
disposal and other accrued expenses (811,824) 1,418,150 (314,051)
------------ ------------ -----------
Net cash used in operating activities (5,091,828) (3,503,402) (930,372)
INVESTING ACTIVITIES
Purchase of marketable securities (2,009,632) -
Capital expenditures (4,396,016) (6,986,377) (559,149)
Net cash impact from acquistion of Dunkirk International
Glass and Ceramics Corporation - (1,328,338)
------------ ------------ -----------
Net cash used in investing activities (6,405,648) (8,314,715) (559,149)
FINANCING ACTIVITIES
Due to Conversion Technologies International, Inc. 9,670
Increase in deferred finance and registration costs (40,427) (424,228) (30,425)
Issuance of notes payable 2,675,000 320,000
Payment of notes payable (3,061,500) (195,430)
Issuance of long-term debt 3,056,476 7,938,455 191,193
Increase in restricted assets (347,408) (993,908)
Principal payments on long-term debt (399,445) (259,476) (6,397)
Principal payments under capital lease obligations (93,750) (81,690) (23,794)
Issuance of common stock 13,514,151 7,631
Issuance of preferred stock - 5,997,229
Capital contribution 1,500,000
------------ ------------ -----------
Net cash provided by financing activities 15,303,097 12,308,583 1,640,247
------------ ------------ -----------
Increase in cash and cash equivalents 3,805,621 490,466 150,726
Cash and cash equivalents at beginning of period 733,843 243,377 20,935
------------ ------------ -----------
Cash and cash equivalents at end of period $ 4,539,464 $ 733,843 $ 171,661
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
COMPANY -------
------- TWO MONTHS
YEAR ENDED JUNE 30, ENDED
1996 1995 AUGUST 31, 1994
------------- ------------ ---------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid, net of amount capitalized $ 1,009,746 $ 470,765 $ 12,040
------------- ------------ ---------------
------------- ------------ ---------------
Tax refund $ (81,628)
------------- ------------ ---------------
------------- ------------ ---------------
SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS
Purchase of equipment through capital lease agreements $ 129,791 $ 16,220
Debt assumed by Conversion Technologies
International, Inc. 270,028
Common stock/paid-in capital
Debt converted to common stock
Long term debt 969,928
Interest expense on long term debt 13,767
Accounts payable 31,225
Write-off of investment in Dunkirk International Glass
and Ceramics Corporation (5,040)
Issuance of shares to stockholders of Dunkirk
International Glass and Ceramics Corporation 3,492,547
Write-off of deferred finance costs, net of amortization (88,192)
Surrender and cancellation of Common Stock $ (99,000)
Issuance of warrants in connection with bridge notes 66,750
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
June 30, 1996
1. ORGANIZATION
Conversion Technologies International, Inc. (the "Company" or "CTI") is a
specialty materials company (i) manufacturing industrial abrasives marketed
under the name ALUMAGLASS-TM-, (ii) processing certain glass and ceramic
materials, such as cathode ray tube (CRT) glass, for resale to original
manufacturers or others or converting such materials into manufacturing raw
materials for the Company and others and (iii) developing certain other
technologies. The Company has developed products and services to meet the needs
of a number of its strategic industrial partners and to potentially serve large
international markets. The Company's revenue streams are a combination of waste
conversion fees and manufactured product sales.
Effective August 31, 1994, Conversion Technologies International, Inc. and
Dunkirk International Glass and Ceramics Corporation ("Dunkirk") completed a
merger whereby the common shareholders of Dunkirk exchanged their common shares
for 257,808 shares of the Company's common stock valued at $13.55 per share
(each common share of Dunkirk was converted to 49.107 common shares of CTI).
Prior to this transaction, Conversion Technologies International, Inc. had
owned 35 shares of Dunkirk's Convertible Series A Preferred Stock, which were
canceled upon the merger transaction. The Company contributed $1.5 million to
Dunkirk as a condition of the closing. This transaction has been accounted for
as a purchase. In conjunction with this merger transaction, the Company
recorded a charge against earnings of $6,232,459 relating to the write-off of
purchased research and development (in process) technology that had not reached
technological feasibility and, in management's opinion, had no alternative
future use at the merger date. The in-process technology was expensed on the
date of acquisition. As part of this merger transaction, a portion of Dunkirk's
debt was converted into 13,281 shares of the Company's common stock at an
exercise price of $20.32 per share.
If this merger transaction had occurred on July 1, 1994, the Company's
consolidated revenue, net loss and pro forma net loss per common share for the
year ended June 30, 1995 would have been $1,235,716, ($12,974,814) and ($17.24),
respectively.
As of the date of the merger transaction, Dunkirk was in the developmental
stage. Dunkirk was incorporated on July 3, 1990, for the purpose of recycling
and beneficially reusing industrial waste cathode ray tube (CRT) glass and
converting other industrial waste materials into high value specialty abrasives
and other glass-ceramic materials. Dunkirk started developing its patented
processes in 1991. CRT glass processing commenced in the summer of 1994 and
Dunkirk commenced production of its ALUMAGLASS-TM- family of abrasives in the
spring of 1995 and accordingly, the Company has exited the development stage.
Product application testing and initial marketing of ALUMAGLASS-TM- is currently
underway. Dunkirk incurred cumulative net losses of approximately $2,845,000
from its inception, July 3, 1990 to August 31, 1994. In addition, as of
August 31, 1994, Dunkirk had a working capital deficiency of
F-9
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
1. ORGANIZATION (CONTINUED)
approximately $2,728,000 and a shareholders' deficiency of approximately
$1,240,000 which includes the above mentioned $1.5 million capital contribution
from the Company.
On November 9, 1995, the Board of Directors approved an approximate
0.1218-for-one reverse split of its common stock. The accompanying consolidated
financial statements have been retroactively restated to reflect this reverse
stock split.
On May 16, 1996 the Company completed its initial public offering ("IPO"). The
funds generated by this offering became available at the closing on May 21,
1996, and included the proceeds from 3,067,000 shares of common stock sold at
$4.40 per share, 3,067,000 Class A Warrants sold at $0.05 each and 3,067,000
Class B Warrants sold at $0.05 each. On June 7, the Company closed on the
underwriter's over-allotment option for sales of 460,050 of each of the
foregoing securities at identical pricing. (See Note 7).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of Conversion Technologies International, Inc. and its wholly-owned
subsidiary, Dunkirk International Glass and Ceramics Corporation. The
consolidated statement of operations and cash flows for the year ended June 30,
1995 include the results of Dunkirk from August 31, 1994 (date of merger).
Intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
which affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company derives most of its revenue from a combination of fees charged to
accept waste materials and from the sale of its products. Revenue recognition
of the fees charged to accept the waste material is deferred until the material
is placed through the conversion process.
For the year ended June 30, 1996, 87.5% of the Company's revenue was derived
from three major customers. Revenue generated from each of these customers
amounted to $1,395,568, $677,648 and $273,709 which represents 52.1%, 25.3% and
10.2% of total revenue, respectively. For the year ended June 30, 1995, 90.8% of
the Company's revenue was derived from three major customers. Revenue generated
F-10
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from each of these customers amounted to $436,246, $387,752 and $241,838 which
represents 37.2%, 33.0% and 20.6% of total revenue, respectively.
RESERVE FOR DISPOSAL
Dunkirk began accepting waste materials (primarily CRT glass) in early 1994.
Upon accepting the waste materials, Dunkirk established a reserve for the
potential disposal costs for the waste materials accepted, in the event that the
conversion processes being developed were not successful. For the two months
ended August 31, 1994, Dunkirk recorded additions of $135,000 to this reserve.
From August 31, 1994 (date of merger) to June 30, 1995, the Company recorded an
addition of $935,000 to this reserve. From July 1, 1995 to June 30, 1996, the
Company reduced the reserve by approximately $623,000. The increases/decreases
in the reserve, which substantially resulted from changes in the volume of
inventory, have been charged/credited against operations. The Company intends to
adjust the reserve when the conversion processes prove commercially successful.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.
Inventories consisted of the following:
JUNE 30,
1996 1995
------- -------
Raw materials $ 79,237 $ 48,015
Work-in-process 135,536 109,168
Finished goods 122,963 70,541
------- -------
$337,736 $227,724
------- -------
------- -------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. The Company capitalized
interest costs of $439,932 in the year ended June 30, 1996 and $63,499 in the
year ended June 30, 1995 with respect to the construction of certain long-term
assets. Depreciation and amortization is computed on the straight-line method
over the estimated useful lives of the assets. Amortization on assets under
capital leases is provided on a straight-line basis over the lesser of the
useful lives of the related assets or the terms of the leases.
F-11
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Company considers all marketable securities to be available for sale. These
securities are carried at cost which approximated fair value at June 30, 1996.
DEFERRED FINANCING COSTS
Deferred costs include costs related to obtaining debt financing, and are being
amortized under the interest method of accounting.
INCOME TAXES
Deferred income tax assets and liabilities are recorded for differences between
the financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is the tax payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
PROCESS DEVELOPMENT COSTS
Process development costs represent research and development associated with the
Company's CRT glass processing and ALUMAGLASS-TM- product lines (technologies)
since the date of the merger transaction.
EXTRAORDINARY ITEM
The consolidated statement of operations for the fiscal year ended June 30, 1996
includes an extraordinary charge of $442,000, representing the costs of
obtaining bridge financing in the form of Bridge Notes totaling $2,225,000 (see
Note 4).
F-12
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
The net loss per common share is based on the net loss for the year, divided by
the weighted average number of common shares outstanding during the year
(excluding the common shares that were deposited into escrow in connection with
the Company's initial public offering -- see Note 7). Common Stock equivalents
such as stock options and warrants are not included as their effect is
anti-dilutive. However, immediately prior to the closing of the Company's
initial public offering, the Company's Series A Preferred Stock was converted
into 1,023,054 shares of common stock (see Note 7). The weighted average number
of these converted shares, at June 30, 1996 and 1995 were 1,023,054 and 587,742
respectively, and they have been included in the related net loss per common
share calculation. Therefore, the weighted average number of common shares
outstanding at June 30, 1996 and 1995 were 1,559,908 and 734,754, respectively.
EMPLOYEE STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting for its employee stock options. Under APB 25, when
the exercise price of the Company's employee stock options equals or is greater
than the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
PENDING ACCOUNTING PRONOUNCEMENTS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", proscribes new rules for recognizing
impairments to property, plant and equipment. The standard is effective for the
Company beginning fiscal 1997. Management believes this standard will have no
impact on the Company.
F-13
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
3. DEBT
Long-term debt consists of the following obligations as of June 30, 1996 and
1995:
JUNE 30,
1996 1995
---- ----
Dunkirk--Chautauqua Region Industrial
Development Corporation (CRIDA) mortgage
note (collaterized by a mortgage on real
property having a carrying value of
approximately $1,593,500 at June 30, 1996)
payable in monthly installments of $4,285
including interest at a variable rate
(6% at June 30, 1996) through October 1,
2004. $ 336,529 $ 366,762
Dunkirk--Term loans with a bank payable in
84 monthly installments of $40,944
including principal and interest at the
prime rate (8.25% at June 30, 1996)
through December 27, 2001. Collateral
for this loan is a first purchase money
lien on the Company's machinery and
equipment, and repayment is guaranteed
by the former Dunkirk president and the
New York State Job Development Authority
(JDA). 2,192,379 2,492,767
Dunkirk--Subordinated mortgage note
(collateralized by a mortgage on real
property having a carrying value of
approximately $1,593,500 at June 30, 1996)
payable in monthly installments of
$4,956 including interest at 10%
through January 21, 2004. 317,517 343,806
Dunkirk--Chautauqua County Industrial
Development Agency (CCIDA) subordinated
note payable in monthly payments of
$1,485 including interest at 7% through
June 1, 1999. The note contains various
restrictive covenants, is guaranteed by
the former Dunkirk president and is
collateralized by a subordinated security
interest in certain machinery and
equipment having a carrying value of
approximately $11,683,500. 49,295 64,295
F-14
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
3. DEBT (CONTINUED)
JUNE 30,
1996 1995
---- ----
Dunkirk--Southern Tier Enterprise
Development Organization (STEDO)
subordinated note payable in monthly
payments of $1,169 including interest
at 8% through July 1, 2002. The note
contains various restrictive covenants,
is guaranteed by the former Dunkirk
president and is collateralized by a
subordinated security interest in certain
equipment having a carrying value of
approximately $11,683,500. 59,974 68,816
Dunkirk--New York Job Development
Authority (Al Tech) subordinated note
payable in monthly payments of $1,887
including interest at 5% through
September 1, 1999. The note contains
various restrictive covenants, is
guaranteed by the former Dunkirk
president and is collateralized by a
subordinated security interest in
certain equipment having a carrying
value of approximately $11,683,500. 67,799 86,543
Dunkirk--Chautauqua County Industrial
Development Agency solid waste disposal
facility bonds payable in quarterly
payments of interest only through
September 1, 1998 at a rate of 11.5%
subject to adjustment upon the
achievement of stated debt service
coverage ratio. Beginning December 1,
1998 and annually through December 1,
2010 principal payments which increase
from $325,000 to $1,025,000 are payable
with interest continuing to be paid
quarterly. The bond security agreement
contains various restrictive covenants and
is collateralized by a security interest
in the equipment acquired with the
proceeds (see Note 5, Restricted Assets). 8,000,000 5,000,000
F-15
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
3. DEBT (CONTINUED)
JUNE 30,
1996 1995
---- ----
Dunkirk--Subordinated unsecured debt
from various electronic companies; OI-NEG
TV Products, Inc. (Techneglas), Thomson
Consumer Electronics, Sanyo Manufacturing
Corp., Toshiba Display Devices and Hitachi
Electronic Devices (USA), begin with
quarterly payments of interest only at
prime plus 2% (10.25% at June 30, 1996)
through a range of dates ending January 1,
1999. Beginning between March 31, 1998
and April 1, 1999 and going through a
range of dates with the final subordinate
debt issue ending January 1, 2004
quarterly installments of principal plus
interest at prime plus 2% are payable.
The first five quarterly interest payments
for a portion of the debt has been
converted by the Company into subordinated
notes ($43,789 converted at June 30, 1996)
payable in quarterly payments of interest
only at 8% for nineteen quarters and the
principal amount plus interest being due
between April 1, 1999 through April 1, 2000.
695,507 639,030
---------- ---------
Total Debt 11,719,000 9,061,969
Less current maturities 437,285 404,387
---------- ---------
$ 11,281,715 $ 8,657,582
---------- ---------
---------- ---------
The Company has agreed to indemnify and hold harmless the former Dunkirk
president with respect to guarantees made by him for obligations of Dunkirk. In
addition, the Company has agreed to use its reasonable efforts to cause the
release of such guarantees.
Maturities on long-term debt for the next five years are as follows:
June 30,
1997 $ 437,285
1998 511,964
1999 1,044,540
2000 1,109,491
2001 993,617
Thereafter 7,622,103
----------
$ 11,719,000
----------
----------
F-16
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONSL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. DEBT (CONTINUED)
The carrying amounts and fair values of long-term borrowings consisted of the
following at June 30, 1996:
CARRYING AMOUNT FAIR VALUE
--------------- ----------
5% subordinated note $ 67,799 $ 62,370
6% mortgage note 336,529 287,336
7% subordinated note 49,295 46,942
8% subordinated note 59,974 56,771
8.25% secured bank loan 2,192,379 2,192,379
10% subordinated mortgage note 317,517 314,882
Variable rate debt 695,507 695,507
11.5% solid waste disposal bonds 8,000,000 8,000,000
----------- -----------
Total Long-Term Borrowings $ 11,719,000 $ 11,656,187
=========== ===========
The fair values of fixed long-term borrowings were calculated as the present
value of future cash flows discounted at the Company's estimated current
borrowing rate of the respective issues ranging from prime plus 2% to prime plus
3.25%.
4. NOTES PAYABLE
During fiscal 1996 Dunkirk repaid a $262,500 balance plus accrued interest to
close a $300,000 line of credit arrangement with a bank.
In June, 1996 Dunkirk repaid a $124,000 demand note plus accrued interest
payable to a bank. The balance outstanding on this note was $124,000 at June 30,
1995.
During the period commencing September 1995 and ending November 1995, the
Company issued $700,000 of 6% convertible promissory notes, in anticipation of
additional equity financing, of which $50,000 was paid during the year (see
below).
During the period commencing December 7, 1995 and ending December 15, 1995, the
Company obtained additional bridge financing ("bridge loan") in the principal
amount of $2,225,000, (recorded, net of the value assigned to the attached
warrants, at $2,158,250) which includes the conversion of $650,000 of the
$700,000 convertible promissory notes discussed above. The bridge loan was
issued through a private placement arranged by the underwriter of the Company's
IPO. This bridge loan was comprised of bridge units, each consisting of a bridge
note in the principal amount of $50,000 bearing interest at the rate of 10% per
annum, and warrants to purchase 25,000 shares of the Company's common stock at
an exercise price of $4.00 per share commencing one year from the date of
issuance and expiring three years after the initial closing date of the bridge
loan offering.
F-17
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONSL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES PAYABLE (CONTINUED)
In March 1996, the Company issued $200,000 of promissory notes, due upon the
earlier of the closing of the IPO and six months from the date issued, to
certain directors, officers and security holders which bore interest at 10% per
annum. In May 1996, the Company issued an additional $200,000 of promissory
notes to a securityholder with identical terms to the notes issued in March
1996.
All of the outstanding bridge notes and promissory notes were repaid at the
closing of the IPO from the proceeds thereof. Concurrent with the closing of
the offering, the common stock warrants issued to the bridge note holders were
converted into an equivalent number (1,112,500) of Class A warrants, each of
which entitles the holder to purchase, at an exercise price of $5.85, subject to
adjustment, one share of common stock and one Class B warrant. Each Class B
warrant entitles the holder to purchase one share of common stock at an exercise
price, subject to adjustment, of $7.80 (see Note 7).
5. RESTRICTED ASSETS
Dunkirk has $72,859 and $78,772 of project funds available at June 30, 1996 and
June 30, 1995, respectively, for the acquisition of qualified machinery and
equipment from the unexpended balance on the sale of the solid waste disposal
facility bonds. In addition, a debt service reserve fund equivalent to 10% of
the bonds plus interest is required to be deposited in escrow ($840,442 at
June 30, 1996 and $508,291 at June 30, 1995), and may be released under certain
conditions.
Dunkirk also has a debt service reserve fund of $428,015 at June 30, 1996 and
$406,845 at June 30, 1995, including interest, deposited in escrow as required
by the JDA for payment of the final installments due on the related debt.
6. COMMITMENTS AND CONTINGENCIES
The Company is a party to litigation commenced by the Company in the Supreme
Court of New York, County of Chautauqua, against a general contractor hired to
construct the improved abrasives finishing area, which is a part of the
Company's current capital expansion program. The contractor commenced work in
April 1995, but was asked to stop work in November 1995 following significant
cost overruns, problems and delays in construction and disputes with the Company
over the scope of the work to be performed by the contractor. The Company has
served the contractor with its complaint, alleging, among other things, breach
of contract, fraud and defamation, and seeks damages in excess of $1,000,000.
The contractor has served an answer with affirmative defenses and counterclaims
against the Company for breach of contract. The aggregate amount of the claims
by the contractor against the Company is $483,000 plus interest.
The Company does not believe that an adverse outcome in the foregoing dispute
would have a material adverse effect on the Company.
F-18
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONSL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company is currently negotiating a union contract with its employees at the
Dunkirk facility.
The Company has entered into capital leases for machinery and equipment that may
be purchased on expiration of the leases on various dates through 2000. The net
asset value of property under capitalized leases, included in property, plant
and equipment, is as follows:
JUNE 30,
1996 1995
---- ----
Machinery and equipment $ 354,352 $ 351,224
Less accumulated amortization 217,375 116,844
------- -------
$ 136,977 $ 234,380
======= =======
Lease amortization of $101,531 and $80,424 for the years ended June 30, 1996 and
1995, respectively, is included in cost of goods sold. Lease amoritization of
$12,414 is included in cost of goods sold of Dunkirk for the two months ended
August 31, 1994.
Future minimum lease payments under capitalized leases together with the present
value of the net minimum lease payments as of June 30, 1996 is as follows:
June 30,
1997 $ 84,051
1998 40,973
1999 27,179
2000 15,879
2001 -
-------
Total net minimum lease payments 168,082
Less amount representing interest 20,475
-------
Present value of net minimum lease payments $147,607
=======
Total rent expense of the Company for the periods ended June 30, 1996 and 1995
was $99,530 and $76,886, respectively. All non-cancelable operating lease
agreements expire during fiscal 1997.
F-19
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONSL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CAPITAL STOCK
During fiscal 1995, the Company issued 2,958,000 shares of Series A Preferred
Stock, par value $.001, at $2.50 per share through private equity placements.
The Series A Preferred Stock was convertible into the Company's common stock on
an approximate 0.1218-to-one basis subject to certain anti-dilution provisions.
As part of the merger transaction described in Note 1, the Company's 7%,
$600,000 convertible bridge notes, issued in fiscal 1994 to related parties,
were converted into the Company's common stock (at $13.55 per share). All
related deferred finance charges were charged to equity upon the conversion.
On May 16, 1996, the Company completed an initial public offering of the
Company's common stock, Class A warrants and Class B warrants. Concurrent with
the closing of the IPO, the Series A Preferred Stock was converted into
1,023,054 shares of common stock as a result of the restatement of the Company's
Certificate of Incorporation which adjusted the Series A Preferred Stock
conversion ratio due to anti-dilution provisions. In addition, preferred stock
warrants became exercisable for common stock (adjusted for a 0.1218-for-one
reverse common stock split -- see Note 1) and the number of common shares into
which certain common stock warrants and all preferred stock warrants are
convertible increased by a factor of approximately 2.84 upon the effective date
of the IPO due to the fact that those warrants had protection against the
dilutive effect of the valuation placed on the Company upon the IPO. Also, upon
the effective date of the IPO, the Company adjusted the exercise price of all
the options and warrants outstanding prior to the IPO to $4.40 with some
warrants having an exercise price equal to $4.40 plus a premium in certain
circumstances. All amounts disclosed related to options and warrants have been
restated to reflect the adjusted exercise prices.
In connection with the IPO, 740,559 shares of the Company's common stock and
options to purchase 71,923 shares of Common Stock (the "Escrow Securities") were
deposited into escrow by the holders thereof. The Escrow Securities will only be
released from escrow when the Company attains certain earnings levels or the
market price of the Company's common stock achieves certain levels. These Escrow
Securities are subject to cancellation if such conditions are not achieved.
In conjunction with the issuance of the Company's 7%, $600,000 convertible
bridge notes in fiscal 1994, the private equity placement, as well as for other
business reasons, the Company has issued the following common stock purchase
warrants, all of which expire between the fifth and seventh anniversary of the
date of grant:
F-20
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONSL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CAPITAL STOCK (CONTINUED)
NUMBER OF EXERCISE
SHARES PRICE
------ -----
Outstanding at June 30, 1994 146,536 $4.77
Granted October 19, 1994 through June 30, 1995 173,158 4.40-5.28
Exercised (608) 20.53
Canceled (2,315) 4.40
-----
Outstanding at June 30, 1995 316,771 4.77-5.28
Granted July 21, 1995 through December 15, 1995 1,114,933 4.00-4.40
Canceled (1,112,500) 4.00
---------
Outstanding at June 30, 1996 319,204 4.40-5.28
=======
In conjunction with its initial public offering, the Company has issued the
following Class A and Class B warrants, all of which expire on the fifth
anniversary of the date issued:
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at June 30, 1995 - - - -
Issued May 16, 1996 and June 7, 1996 4,639,550 $5.85 3,527,050 $7.80
--------- ---------
Outstanding at June 30, 1996 4,639,550 3,527,050
========= =========
</TABLE>
The Company maintains an Employee Stock Option Plan (the "Employee Plan") and a
Non-Employee Director Stock Option Plan (the "Non-Employee Plan"). Stock options
may be granted at the discretion of the Board of Directors. The Company has
reserved 440,000 and 70,400 shares of its common stock for issuance upon the
exercise of options granted under the Employee and Non-Employee Plans,
respectively. The Non-Employee Plan options are exercisable in full one year
after the date of grant and expire ten years from the date of grant. The
Employee Plan options primarily vest one-third on each of the first three
anniversaries of the date of grant and expire on the seventh anniversary of the
date of grant. The Company grants stock options at exercise prices equal to or
greater than the fair market value of the Company's common stock on the date of
grant.
On April 21, 1996, the Company granted, effective as of the effective date of
the IPO, non-qualified options to purchase 50,000 shares of its common stock at
an exercise price of $4.40 per share to an executive officer and director.
These options are not part of the Employee Plan and Non-Employee Plan.
F-21
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONSL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. CAPITAL STOCK (CONTINUED)
The following table summarizes the activity in options under the Employee and
Non-Employee Plans, plus options granted on a non-qualified basis:
NUMBER EXERCISE
OF SHARES PRICE
--------- -----
EMPLOYEE PLAN OPTIONS
Outstanding at June 30, 1994 3,896 $4.40
Granted 39,630 4.40
Canceled (5,443) 4.40
-----
Outstanding at June 30, 1995 38,083 4.40
Granted 38,424 4.40
Canceled and expired (6,884) 4.40
-----
Outstanding at June 30, 1996 69,623 4.40
======
NON-EMPLOYEE PLAN OPTIONS
Outstanding at June 30, 1994 1,397 4.40
Granted 4,869 4.40
-----
Outstanding at June 30, 1995 6,266 4.40
Granted 1,217 4.40
-----
Outstanding at June 30, 1996 7,483 4.40
=====
NON-QUALIFIED OPTIONS
Outstanding at June 30, 1995 - -
Granted 50,000 4.40
------
Outstanding at June 30, 1996 50,000 4.40
======
8. INCOME TAXES
There was no income tax expense/benefit for the Company for the years ended June
30, 1996 and 1995. Nor was there any tax expense/benefit for Dunkirk for the
two months ended August 31, 1994.
F-22
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONSL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
Following is a reconciliation of income tax expense (credit) to the amount based
on the U.S. statutory rate of 34% for the years ended June 30, 1996 and 1995:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
------- -------
FOR THE YEAR ENDED TWO MONTHS
JUNE 30, ENDED
1996 1995 AUGUST 31, 1994
---- ---- ---------------
<S> <C> <C> <C>
Income tax benefit based on U.S. statutory rate $(1,548,003) $(4,166,599) $ (251,065)
Write-off of in-process technology with no
tax deduction 2,119,036
Valuation allowance for losses 1,548,003 2,047,563 251,065
--------- --------- -------
$ -- $ -- $ --
========== ========= =======
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
JUNE 30,
1996 1995
---- ----
Deferred tax assets:
Deferred revenue $ 223,163 $ 377,692
Reserve for disposal 294,800 544,000
Start-up costs 86,000 114,667
Tax loss carryforward 4,584,808 2,351,232
--------- ---------
Total deferred tax assets 5,188,771 3,387,591
Valuation allowance 5,188,771 3,387,591
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
The above net deferred tax assets have been reserved because it is not more
likely than not that they would be recognized.
At June 30, 1996, the Company has approximately $11.5 million of tax loss
carryforwards available to offset future taxable income, which expire between
2006 and 2011. The Tax Reform Act of 1986 enacted a complex set of rules
(Section 382) limiting the potential utilization of net operating loss
carryforwards in periods following a corporate "ownership change". In
general, for federal income tax purposes, an ownership change is deemed to
occur if the percentage of stock of a loss corporation owned (actually,
constructively and, in some cases, deemed) by one or more "5% shareholders"
has increased by more
F-23
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONSL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
than 50 percentage points over the lowest percentage of such stock owned
during a three year testing period. Although a comprehensive evaluation has
not yet been performed, it appears that on August 31, 1994 (Dunkirk merger)
and May 16, 1996 (completion of IPO) such changes in ownership had occurred.
As a result of such changes, it appears the Company's ability to utilize its
net operating loss carryforwards generated by Dunkirk prior to August 31,
1994 (approximately $1.5 million) is limited by Section 382 and is further
limited to the use of these loss carryforwards against future Dunkirk
earnings only. In addition, the consolidated losses incurred through the IPO
date (approximately $8.2 million) may be limited to as low as approximately
$1 million on an annual basis.
9. SUBSEQUENT EVENTS
On August 26, 1996, the Company announced that they had entered into a Letter of
Intent relating to a merger of Conversion Technologies International, Inc. and
Octagon, Inc., a technical services firm providing radiological control and
operations and maintenance services to nuclear utilities and the Departments of
Energy and Defense. Octagon Inc.'s revenue and net loss was $28,779,075 and
$(527,768), respectively, for the year ended December 31, 1995.
Under the terms of the proposed merger, the holders of Octagon Inc. common stock
will receive one share of the Company's stock for every ten shares of Octagon
Inc. common stock, and Octagon Inc. will become a wholly-owned subsidiary of the
Company.
On September 20, 1996, the Company advanced $250,000 to Octagon Inc. under a
secured promissory note. The note is secured by a second lien on Octagon Inc.'s
assets and interest is charged at 8.25%. The note is due on demand on or after
February 13, 1997.
Effective as of August 26, 1996 ("Effective Date"), the Company approved and
adopted the 1996 Long-Term Employee Incentive Plan (the "Plan"). Under the
Plan, payment of awards may be in cash or the common stock of the Company or a
combination of both, at the option of the Company. The maximum number of shares
of the Company's common stock available for awards under the Plan is 200,000,
subject to adjustments as provided in the Plan. The Plan will terminate without
further action of the board of directors on the tenth anniversary of the
Effective Date. No shares have been granted under the Plan.
F-24
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
- ------ ---------------------- --------
2.1 Agreement and Plan of Reorganization dated August 16, 1994, *
among the Registrant, CTI Acquisition Corporation, Dunkirk
International Glass and Ceramics Corporation ("Dunkirk")
and certain shareholders of Dunkirk listed on the signature
pages thereto
3.1 Amended and Restated Certificate of Incorporation of the *
Registrant
3.2 By-laws of the Registrant *
4.1 Form of Warrant Agreement, including Form of Class A and *
Class B Warrant Certificates
4.2 Form of Underwriter's Unit Purchase Option *
4.3 Term Note No. 2 dated as of January 27, 1995, between Key *
Bank of New York and Dunkirk
4.4 Security Agreement dated as of January 27, 1995, between *
Key Bank of New York and Dunkirk
4.5 Debt Service Reserve Agreement dated as of January 27, 1995, *
between Key Bank of New York and Dunkirk
10.1 Conversion Technologies International, Inc. 1994 Employee *
Stock Option Plan, As Amended
10.2 Conversion Technologies International, Inc. 1994 Stock *
Option Plan for Non-Employee Directors, As Amended
10.3 Amended and Restated Employment Agreement dated as of *
June 9, 1994, between the Registrant and Harvey Goldman
10.4 Employment Agreement dated as of September 1, 1995, between *
the Registrant and Perry A. Pappas
10.5 Form of Indemnification Agreement *
10.6 Lease dated as of March 1, 1995, between County of *
Chautauqua Industrial Development Agency and Dunkirk
10.7 Sludge and Mixed Cullet Purchase Agreement dated *
January 1994, between Toshiba Display Devices, Inc.
and Dunkirk
10.8 Clean Cullet Sale Agreement dated as of August 27, 1993, *
between OI-Neg TV Products, Inc. and Dunkirk
10.9 Raw Materials Purchase and Clean Cullet Sale Agreement *
dated November 4, 1993, between Thomson Consumer
Electronics Inc. and Dunkirk
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
- ------ ---------------------- --------
10.10 Project Development Assistance Agreement dated as of *
April 20, 1995, between the Registrant and Paramount
Capital, Inc.
10.11 Consulting Agreement dated as of May 5, 1995, among the *
Registrant, Technology Funding Partners III, L.P. and
Technology Funding Venture Partners V, An Aggressive
Growth Fund, L.P.
10.12 Project Development Assistance Agreement dated July 13, 1995, *
among the Registrant, Technology Funding Partners III, L.P.
and Technology Funding Venture Partners V, An Aggressive
Growth Fund, L.P.
10.13 Consulting Agreement dated March 1, 1995, between the *
Registrant and Eckardt C. Beck
10.14 Consulting Agreement dated July 5, 1995, between the *
Registrant and Palmetto Partners, Ltd.
10.15 Registration Rights Agreement dated as of May 5, 1995, *
among the Registrant, Technology Funding Partners III,
L.P. and Technology Funding Venture Partners V, An
Aggressive Growth Fund, L.P.
10.16 Registration Rights Agreement dated as of April 21, 1994, *
among the Registrant, Palmetto Partners, Ltd., Harvey
Goldman and Donald R. Kendall, Jr.
10.17 Registration Rights Agreement dated as of August 19, 1994, *
among the Registrant and certain former Dunkirk stockholders
10.18 Warrant for the Purchase of Shares of Series A Convertible *
Preferred Stock issued to Paramount Capital, Inc. by the
Registrant
10.19 Research Agreement dated December 1994, between Dunkirk *
and Alfred University
10.20 Note and Warrant Purchase Agreement dated as of April 21, *
1994 among the Registrant and each of the investors listed
on Schedule I thereto
10.21 Series A Preferred Stock Purchase Agreement dated as of *
May 5, 1995, among the Registrant, Technology Funding
Partners III, L.P. and Technology Funding Venture
Partners V, An Aggressive Growth Fund, L.P.
10.22 Business Lease dated as of December 31, 1995, between the *
Registrant and Bethany Road Associates
11.0 Statement of Computation of Net Loss Per Share
_________________________
* INCORPORATED BY REFERENCE TO THE EXHIBITS TO THE REGISTRANT'S
REGISTRATION STATEMENT ON FORM SB-2, REGISTRATION NO. 333-00756.
<PAGE>
Exhibit 11
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
STATEMENT OF COMPUTATION OF NET (LOSS) PER SHARE
For the years ended June 30, 1996 and June 30, 1995
Year Ended Year Ended
June 30, 1996 June 30, 1995
------------- -------------
Net (loss) before extraordinary item $ (4,110,951) $(12,254,702)
============== =============
Net (loss) as reported $ (4,552,951) $(12,254,702)
============== =============
Weighted average number of
common shares outstanding 1,559,908 734,754
-------------- -------------
Shares used in the computation 1,559,908 734,754
============== =============
Net (loss) per common share
before extraordinary item(1) $ (2.64) $ (16.68)
============== =============
Net (loss) as reported per
common share(1) $ (2.92) $ (16.68)
============== =============
(1) Calculations of fully diluted and primary
earnings per share are identical.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 4,539,464
<SECURITIES> 2,009,632
<RECEIVABLES> 368,214
<ALLOWANCES> 25,000
<INVENTORY> 337,736
<CURRENT-ASSETS> 7,436,030
<PP&E> 14,267,245
<DEPRECIATION> 1,630,639
<TOTAL-ASSETS> 21,947,099
<CURRENT-LIABILITIES> 3,862,692
<BONDS> 8,000,000
0
0
<COMMON> 1,362
<OTHER-SE> 6,726,637
<TOTAL-LIABILITY-AND-EQUITY> 21,947,099
<SALES> 2,679,987
<TOTAL-REVENUES> 2,679,987
<CGS> 3,093,560
<TOTAL-COSTS> 5,910,998
<OTHER-EXPENSES> 81,811
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 961,751
<INCOME-PRETAX> (4,110,951)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,110,951)
<DISCONTINUED> 0
<EXTRAORDINARY> (442,000)
<CHANGES> 0
<NET-INCOME> (4,552,951)
<EPS-PRIMARY> (2.92)
<EPS-DILUTED> (2.92)
</TABLE>
