SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission File No.:
September 30, 1996 000-28198
----------------------
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)
-------------------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
As of November 14, 1996, the Issuer had outstanding 5,539,745 shares of Common
Stock, 4,639,550 Redeemable Class A Warrants and 3,527,050 Redeemable Class B
Warrants.
<PAGE>
Contents
Page
No.
----
Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies International,
Inc. and Subsidiary as of September 30, 1996 and June 30, 1996.......... 3
Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiary for the three month periods
ended September 30, 1996 and 1995 ...................................... 4
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiary for the three month periods
ended September 30, 1996 and 1995 ...................................... 5
Notes to Consolidated Financial Statements............................... 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 9
Part II - Other Information................................................. 12
2
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Consolidated Balance Sheets
September 30, June 30,
1996 1996
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,551,087 $ 4,539,464
Marketable securities 2,036,350 2,009,632
Notes receivable 250,000 --
Accounts receivable, less allowance for doubtful
accounts of $25,000 at September 30, 1996 and
June 30, 1996 382,677 343,214
Inventories 424,681 337,736
Prepaid expenses and other current assets 322,209 205,984
------------ ------------
Total current assets 4,967,004 7,436,030
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 1,609,832 1,609,832
Machinery and equipment 11,643,802 11,573,933
Construction in progress 1,645,180 1,008,480
------------ ------------
14,973,814 14,267,245
Less accumulated depreciation (1,970,460) (1,630,639)
------------ ------------
13,003,354 12,636,606
Deferred finance charges, less accumulated
amortization of $94,900 and $81,272
at September 30, 1996 and June 30, 1996
respectively 481,215 494,843
Other noncurrent assets 98,027 38,304
Restricted assets
Project Fund 154 72,859
Debt service reserve funds 1,284,476 1,268,457
------------ ------------
$ 19,834,230 $ 21,947,099
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,109,483 $ 1,279,280
Deferred revenue 567,980 557,907
Reserve for Disposal 750,900 737,000
Accrued expenses 606,454 778,306
Current portion of capital lease obligations 46,761 72,914
Current portion of long-term debt 437,093 437,285
------------ ------------
Total current liabilities 3,518,671 3,862,692
Capital lease obligations, less current portion 60,907 74,693
Long-term debt, less current portion 11,177,438 11,281,715
Stockholders' equity:
Class A common stock, $.00025 par value,
authorized 25,000,000 shares,
issued and outstanding 5,449,745 shares at
September 30, 1996 and June 30, 1996 1,362 1,362
Additional paid-in capital 23,905,705 23,905,705
Accumulated deficit (18,829,853) (17,179,068)
------------ ------------
Total stockholders' equity 5,077,214 6,727,999
------------ ------------
$ 19,834,230 $ 21,947,099
============ ============
See accompanying notes.
3
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Three months ended
September 30,
1996 1995
----------- ---------
Revenue $ 344,273 $ 792,129
Cost of goods sold 1,206,908 633,394
----------- ---------
Gross (loss)/profit on sales (862,635) 158,735
Selling, general and administrative 557,379 288,305
Process development costs -- 250,986
----------- ---------
Loss from operations (1,420,014) (380,556)
Interest expense, net 230,771 178,827
----------- ---------
Net loss $(1,650,785) $(559,383)
=========== =========
Net loss per common share $ (0.35) $ (0.47)
=========== =========
See accompanying notes.
4
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
September 30,
1996 1995
----------- -----------
Operating activities
Net loss $(1,650,785) $ (559,383)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation expense 339,821 214,331
Amortization of deferred financing and patent
costs 13,628 13,423
Accrued interest income on marketable
securities 26,718 --
Settlement with former officer (99,000)
Changes in operating assets and liabilities:
Increase in accounts receivable (39,463) (77,255)
Increase in inventories (86,945) (75,829)
Increase in other current assets (116,225) (61,267)
Increase in other noncurrent assets (59,723) (4,714)
Increase (decrease) in deferred revenue 10,073 (136,885)
Increase (decrease) in accounts payable,
reserve for disposal and other
accrued expenses (327,749) 293,136
----------- -----------
Net cash used in operating activities (1,944,086) (493,443)
Investing activities
Issuance of notes receivable (250,000) --
Capital expenditures (706,569) (2,559,026)
----------- -----------
Net cash used in investing activities (956,569) (2,559,026)
Financing activities
Increase in deferred finance and registration
costs -- (36,485)
Issuance of notes payable -- 200,000
Issuance of long-term debt 8,282 3,015,211
Decrease (increase) in restricted assets 56,686 (671,624)
Principal payments on long-term debt (112,751) (90,983)
Principal payments under capital lease
obligations (39,939) (23,768)
----------- -----------
Net cash (used in) provided by
financing activities (87,722) 2,392,351
----------- -----------
(Decrease) increase in cash and cash equivalents (2,988,377) (660,118)
Cash and cash equivalents at beginning of period 4,539,464 733,843
----------- -----------
Cash and cash equivalents at end of period $ 1,551,087 $ 73,725
=========== ===========
See accompanying notes.
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods presented have been
included. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes for the fiscal year
ended June 30, 1996 included in the Company's annual report on Form 10-KSB.
2. 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:
September 30, 1996 June 30, 1996
------------------ -------------
Raw materials $ 71,805 $ 79,237
Work-in-process 160,592 135,536
Finished goods 192,284 122,963
------- -------
$ 424,681 $ 337,736
======= =======
3. 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 three months ended September 30, 1996, 70.4% of the Company's revenue
was derived from three major customers. Revenue generated from each of these
customers amounted to $145,343, $62,039 and $34,979 which represents 42.2%,
18.0% and 10.2% of total revenue, respectively. For the three months ended
September 30, 1995, 89.9% of the Company's revenue was derived from three major
customers. Revenue generated from each of these customers amounted to $391,130,
$258,098 and $63,011 which represents 49.4%, 32.6% and 7.9% of total revenue,
respectively.
6
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
4. Reserve for Disposal
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), the wholly-
owned subsidiary of the company, 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.
From July 1, 1995 to September 30, 1995, the Company reduced the reserve by
$205,000. From July 1, 1996 to September 30, 1996, the Company increased the
reserve by approximately $14,000. 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.
5. Net Loss Per Common Share
The net loss per common share is based on the net loss for the three-month
period, divided by the weighted average number of common shares outstanding
during the period (excluding 740,559 common shares that were deposited into
escrow in connection with the Company's initial public offering, and including
1,023,054 shares of the Company's common stock into which the Company's Series A
Preferred Stock was converted upon the closing of the initial public offering).
Common Stock equivalents such as stock options and warrants are not included as
their effect is anti-dilutive. The weighted average number of common shares
outstanding at September 30, 1996 and 1995 was 4,709,186 and 1,187,003,
respectively.
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 an 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.
The Company is currently negotiating a union contract with its employees at the
Dunkirk facility.
7
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
7. Proposed Merger
On August 26, 1996, the Company announced that it had entered into a Letter of
Intent relating to a merger of a subsidiary 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. The consummation of the merger is subject to
customary conditions.
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.
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Consolidated revenues for the three months ended September 30, 1996 were
approximately $344,000, consisting primarily of CRT glass recycling fees and
approximately $65,000 of ALUMAGLASS(TM) sales. For the same three-month period
of 1995, the Company's consolidated revenues were approximately $792,000, of
which approximately $49,000 was from sales of ALUMAGLASS and the remainder was
CRT recycling fees. This decrease in revenues primarily reflects reduced
inventory of unprocessed CRT glass, improvements in CRT manufacturing processes
which have resulted in lower levels of glass breakage at the Company's CRT
customers' facilities and increased competition in the form of additional CRT
glass recycling vendors, in each case as compared to the prior year period.
The net change in cost of goods sold for the three months ended September 30,
1996 versus the same prior year period, an increase of $574,000 despite lower
sales volume, reflects a number of factors, including (i) a $219,000 net
increase in the non-cash charge associated with the reserve for potential
disposal costs of raw materials (an approximately $14,000 increase in the
reserve for the three months ended September 30, 1996 as a result of a modest
increase in certain raw material inventories as compared with a $205,000
decrease in the reserve for the three months ended September 30, 1995, during
which such inventories decreased significantly), (ii) a portion of the three
months ended September 30, 1995 process development costs, which were fixed in
nature, are now included in cost of goods sold since the specific processes have
since become operational, (iii) an increase of $195,000 in the non-cash charge
for depreciation, reflecting completion of the major components of the abrasives
finishing area and (iv) the expensing of production inefficiencies incurred
during modifications to the abrasives and other processing systems during the
three months ended September 30, 1996.
As a consequence of the above revenue and cost changes, the Company's gross
margin declined to a loss of approximately $863,000 for the three months ended
September 30, 1996 from a profit of approximately $159,000 for the same period
of 1995.
Selling, general and administrative expenses of approximately $557,000 for the
three months ended September 30, 1996 compare with approximately $288,000 for
the same 1995 period. This increase reflects approximately $70,000 higher
consulting costs, approximately $61,000 higher legal expenses and approximately
$32,000 higher personnel costs, together with a $99,000 settlement received in
the three months ended September 30, 1995 from a former officer of Dunkirk.
During the three months ended September 30, 1995, the Company incurred process
development costs of approximately $251,000, representing development activity,
completed during the fiscal year ended June 30, 1996, which was directed at the
Company's ALUMAGLASS abrasives product and its CRT glass recycling operation. No
such costs were incurred during the three-month period ended September 30, 1996.
9
<PAGE>
Net interest expense increased to approximately $231,000 for the three months
ended September 30, 1996 from approximately $179,000 for the same prior year
period. This cost increase reflects increased indebtedness of the Company and
approximately $89,000 of capitalized interest during the three months ended
September 30, 1995, which were partially offset by an approximately $80,000
increase in interest income on cash received from the Company's initial public
offering.
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 (subsequently converted into Common Stock) and the proceeds of the
Company's initial public offering in May, 1996 ("IPO"). At September 30, 1996,
the Company had approximately $11,615,000 in principal amount of long-term
indebtedness (excluding capital lease obligations) and net working capital of
approximately $1,448,000.
The Company's negative cash flow from operations for the three months ended
September 30, 1996 was approximately $1,944,000. This level of negative cash
flow represents an increase from levels experienced during the three months
ended September 30, 1995, and is principally due to lower monthly revenue and
increased production efforts to build inventories of ALUMAGLASS that had been
curtailed prior to the IPO due to cash constraints.
At September 30, 1996 the Company had approximately $3,587,000 in available cash
and marketable securities. In late September and October, 1996 the Company
effected a number of cost saving measures to enable it to continue to fund its
operations from its existing resources, and to reduce the revenue required to
achieve break even cash flow, although there can be no assurance that the
Company will achieve such break even cash flow. Such measures included reducing
melting and other operations since inventories of ALUMAGLASS have reached
satisfactory levels, making reductions in overhead and other operating expenses
and refraining from making discretionary capital expenditures. The Company is
also aggressively pursuing its marketing efforts and product application
activities to increase ALUMAGLASS revenues and to 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 anticipates
remaining capital outlays of approximately $140,000 in connection with its joint
venture with VANGKOE Industries, Inc. ("VANGKOE"), 50% of which is required to
be reimbursed to the Company by VANGKOE in accordance with the terms of the
joint venture, although there can be no assurance that such amount will be
reimbursed.
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)
$2,109,230 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
10
<PAGE>
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 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.
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'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.
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.
11
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
See Note 6 of Notes to Consolidated Financial Statements above.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
(11) Statement re: computation of earnings per share
The Company did not file any reports on Form 8-K during the three months ended
September 30, 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
Dated: November 14, 1996 /s/ Harvey Goldman
-----------------------------------
Harvey Goldman
Chief Executive Officer,
President and Chairman
Dated: November 14, 1996 /s/ David L. Sanders
------------------------------------
David L. Sanders
Chief Accounting Officer
(Principal Financial Officer)
13
Exhibit 11
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
STATEMENT OF COMPUTATION OF NET (LOSS) PER SHARE
For the three months ended September 30, 1996 and 1995
Three months ended
September 30,
1996 1995
---- ----
Net (loss) as reported $(1,650,785) $ (559,383)
=========== ===========
Weighted average number of
common shares outstanding 4,709,186 1,187,003
----------- -----------
Shares used in the computation 4,709,186 1,187,003
=========== ===========
Net (loss) as reported per
common share(1) $ (0.35) $ (0.47)
=========== ===========
(1) Calculations of fully diluted and primary
earnings per share are identical.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,551,087
<SECURITIES> 2,036,350
<RECEIVABLES> 382,677
<ALLOWANCES> 25,000
<INVENTORY> 424,681
<CURRENT-ASSETS> 4,967,004
<PP&E> 14,973,814
<DEPRECIATION> 1,970,460
<TOTAL-ASSETS> 19,834,230
<CURRENT-LIABILITIES> 3,518,671
<BONDS> 8,000,000
0
0
<COMMON> 1,362
<OTHER-SE> 5,077,214
<TOTAL-LIABILITY-AND-EQUITY> 19,834,230
<SALES> 344,273
<TOTAL-REVENUES> 344,273
<CGS> 1,206,908
<TOTAL-COSTS> 1,764,287
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 230,771
<INCOME-PRETAX> (1,650,785)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,650,785)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,650,785)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
