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, 1997 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)
3452 Lake Lynda Drive, Suite 280
Orlando, Florida 32817
(Address of principal executive offices)
(407) 207-5900
(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 October 20, 1997, the
Issuer had outstanding 5,539,745 shares of Common Stock, 414,500 shares of
Series A Convertible Preferred Stock, 4,639,550 Redeemable Class A Warrants and
3,527,050 Redeemable Class B Warrants.
Transactional Small Business Disclosure Format
Yes No X
----- -----
<PAGE>
Contents
Page
No.
----
Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of September
30, 1997 and June 30, 1997.................................... 3
Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three month
periods ended September 30, 1997 and 1996..................... 4
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the three month
periods ended September 30, 1997 and 1996..................... 5
Notes to Consolidated Financial Statements....................... 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 10
Part II - Other Information......................................... 13
2
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, June 30,
1997 1997
------------- -----------
(Unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 637,506 $ 325,092
Accounts receivable, less allowance for
doubtful accounts of $18,000 at September
30, 1997 and June 30, 1997 212,319 146,225
Inventories 627,539 521,060
Prepaid expenses and other current assets 161,409 188,525
----------- -----------
Total current assets 1,638,773 1,180,902
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 1,578,293 1,578,293
Machinery and equipment 6,798,419 6,713,599
Construction in progress 29,500 29,500
----------- -----------
8,481,212 8,396,392
Less accumulated depreciation (1,654,274) (1,456,610)
----------- -----------
6,826,938 6,939,782
Deferred finance charges, less accumulated
amortization of $79,483 and $135,786
at September 30, 1997 and June 30, 1997
respectively 106,821 443,829
Other noncurrent assets 10,191 3,100
Restricted assets
Project fund 158
Debt service reserve funds 454,924 869,153
----------- -----------
$ 9,037,647 $ 9,436,924
=========== ===========
Liabilities and stockholders' equity (deficiency)
Accounts payable $ 1,377,967 $ 1,711,212
Deferred revenue 439,948 491,944
Reserve for disposal 651,550 713,100
Accrued expenses 873,350 858,447
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 35,098 35,495
Current portion of long-term debt 673,487 530,258
----------- -----------
Total current liabilities 4,286,400 4,575,456
Capital lease obligations, less current portion 33,265 39,414
Long-term debt, less current portion 2,613,539 10,784,343
Stockholders' equity (deficiency):
Series A Convertible Preferred Stock,
$.001 par value, authorized 880,000
shares, issued and outstanding 414,500
shares at September 30, 1997 415
Common Stock, $.00025 par value, authorized
25,000,000 shares, issued and outstanding
5,539,745 shares at September 30, 1997 and June
30, 1997 1,385 1,385
Additional paid-in capital 27,688,234 24,186,932
Unearned stock compensation (58,185) (116,369)
Accumulated deficit (25,527,406) (30,034,237)
----------- -----------
Total stockholders' equity (deficiency) 2,104,443 (5,962,289)
----------- -----------
$ 9,037,647 $ 9,436,924
=========== ===========
See Accompanying Notes
</TABLE>
3
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
For the three months ended
September 30,
1997 1996
---------------- ----------------
<S> <C> <C>
Revenue $ 325,142 $ 344,273
Cost of goods sold 685,776 1,206,908
---------------- ----------------
Gross loss on sales (360,634) (862,635)
Selling, general and administrative 685,562 557,379
---------------- ----------------
Loss from operations (1,046,196) (1,420,014)
Interest expense, net 308,991 230,771
---------------- ----------------
Loss before extraordinary item (1,355,187) (1,650,785)
Extraordinary item - Gain on
debt retirement 5,862,018
---------------- ----------------
Net income (loss) $ 4,506,831 $ (1,650,785)
================ ================
Loss per common share before
extraordinary item $ (0.28) $ (0.35)
================ ================
Net income (loss) per common share $ 0.92 $ (0.35)
Net income per common share assuming full
dilution $ 0.76 $ --
================ ================
See Accompanying Notes.
</TABLE>
4
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
For the three months
ended
September 30,
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Loss before extraordinary item $(1,355,187) $(1,650,785)
Adjustments to reconcile loss to net cash
provided by
(used in) operating activities: 197,644 339,821
Depreciation expense 11,302 13,628
Amortization of deferred financing costs
Accrued interest income on marketable
securities (26,718)
Stock compensation expense 58,184
Changes is operating assets and liabilities:
Increase in accounts receivable (66,094) (39,463)
Increase in inventories (106,479) (86,945)
Decrease (increase) in other current
assets 27,116 (116,225)
Increase in other noncurrent assets (7,091) (59,723)
Increase(decrease)in deferred revenue (51,996) 10,073
Decrease in accounts payable, reserve
for disposal and other accrued expenses (379,892) (327,749)
----------- -----------
Net cash used in operating activities (1,672,473) (1,944,086)
Investing activities
Issuance of notes receivable (250,000)
Capital expenditures (84,820) (706,569)
----------- -----------
Net cash used in investing activities (84,820) (956,569)
Financing activities
Decrease in deferred finance charges 1,750
Issuance of notes payable 500,000
Issuance of long-term debt 8,282
Payment of notes payable (500,000)
Decrease in restricted assets 220,361 56,686
Principal payments on long-term debt (1,647,575) (112,751)
Principal payments under capital lease
obligations (6,546) (39,939)
Issuance of Series A Preferred Stock 3,501,717
----------- -----------
Net cash provided by (used in) financing
activities 2,069,707 (87,722)
----------- -----------
Increase (decrease) in cash and cash
equivalents 312,414 (2,988,377)
Cash and cash equivalents at beginning of
period 325,092 4,539,464
------------ -----------
Cash and cash equivalents at end of period $ 637,506 $1,551,087
============ ============
Supplemental disclosure of cash flow
information
Interest paid $ 270,323 $ 470,765
============ ============
See Accompanying Notes.
</TABLE>
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997
(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, 1997 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, 1997 June 30, 1997
------------------ -------------
Raw materials $ 86,954 $ 61,949
Work-in-process 94,295 111,961
Finished goods 446,290 347,150
------- -------
$ 627,539 $ 521,060
======= =======
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, 1997, 89.6% of the Company's revenue
was derived from four major customers. Revenue generated from each of these
customers amounted to $160,856, $52,266, $41,607, and $36,442 which represents
49.5%, 16.1%, 12.8%, and 11.2% of total revenue, respectively. 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.
6
<PAGE>
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, 1996 to September 30, 1996, the Company increased the
reserve by approximately $14,000. From July 1, 1997 to September 30, 1997, the
Company decreased the reserve by approximately $62,000. 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 Income (Loss) Per Common Share
The net income (loss) per common share is based on the net income (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 included when their effect is not anti-dilutive. The weighted average number
of common shares outstanding at September 30, 1997 and 1996 was 4,874,695 and
4,709,186, respectively. The weighted average number of fully diluted common
shares outstanding at September 30, 1997 was 5,961,498.
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 was a part of the
Company's 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 there will be a material adverse outcome in the foregoing
dispute.
7
<PAGE>
7. Capital Stock
In August and September 1997, the Company sold 414,500 shares of Series A
Preferred Stock (the "Preferred Stock") under a placement agency agreement for
the private placement of the Preferred Stock. The net proceeds to the Company
were $3,501,717 after deducting the placement agent commissions and expenses and
other transaction expenses. The private placement consists of a minimum of
300,000 and a maximum of 500,000 shares of stock with an option for the
placement agent to sell up to an additional 300,000 shares to cover
over-allotments, if any, with a par value of $.001 per share and a stated value
of $10 per share. Each share of Preferred Stock is initially convertible into
eight shares of common stock at a conversion price of $1.25 per share, subject
to adjustment based on the lesser of $1.25 and the prevailing average market
price of the common stock immediately preceding any subsequent closing, if any.
Commencing 12 months from the final closing of the private placement, the
holders of the Preferred Stock are entitled to receive dividends payable in
cash, or at the option of the Company, in additional shares of Preferred Stock
at the rate of 10% per annum. The placement agent is entitled to receive a cash
commission of 9% and a non-accountable expense allowance of 4% of the gross
proceeds. The placement agent is also entitled to receive warrants to purchase
shares of the Company's Preferred Stock equal to 10% of the total shares issued
at an exercise price equal to 110% of the offering price of such shares.
In July and August 1997, the Company borrowed and repaid a total of $500,000 for
working capital purposes, and in connection therewith, issued warrants to
purchase 100,000 shares of Common Stock at an exercise price equal to $1 5/16.
In August 1997, the Company's Board of Directors authorized an increase of the
authorized number of common shares of up to a minimum of 40 million shares and a
maximum of 60 million shares, subject to the approval of the Company's
stockholders.
8
<PAGE>
8. Extraordinary Item
In September 1997, the holders of Dunkirk's $8,000,000 Chautauqua County
Industrial Development Agency Solid Waste Disposal Facility Bonds (the "IDA
Bonds") retired the IDA Bonds in exchange for a cash payment of $1,620,000 and
the balance of the related debt service reserve fund of $194,000. The cash
payment was made utilizing proceeds from the private placement discussed in Note
7 above. This retirement results in a net pretax gain to the Company of
approximately $5,862,000 which is reported as an Extraordinary Item. To the
extent that Dunkirk is deemed to be insolvent immediately prior to such
repayment by an amount which equals or exceeds the amount of debt forgiveness,
the Company will not recognize taxable income from such repayment; however,
certain of Dunkirk's tax attributes (such as net operating loss carryforwards
("NOLs")) would be subject to reduction and would not be available to offset
future income from operations, if any. For this purpose, the amount of
insolvency is defined to be the excess of Dunkirk's liabilities over the fair
value of its assets. An independent appraisal of the fair value of Dunkirk's
assets has not been completed at this time to determine Dunkirk's solvency;
however, the Company believes that Dunkirk was insolvent at the time of
repayment, and accordingly has not recorded a tax provision on the Extraordinary
Item. If Dunkirk is deemed to be solvent immediately prior to the time of the
repayment, the Company will recognize taxable income for the debt forgiveness in
its tax year ending June 30, 1998. The amount of such income may be offset by
NOLs, subject to possible limitations as discussed below. Even if sufficient
NOLs were available to offset such taxable income after such limitations, the
Company may still be subject to alternative minimum tax.
The Company has federal NOLs that amounted to approximately $20.6 million at
June 30, 1997, which expire between 2006 and 2012. Pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"), utilization of NOLs
is limited if there has been a change in control (ownership) of the Company.
Although a comprehensive evaluation has not yet been performed, it is likely
that due to prior shifts in ownership (the Dunkirk merger and the completion of
the IPO) and the current shifts in ownership (the Preferred Stock offering), the
Company's ability to utilize its NOLs could be severely limited.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Consolidated revenues for the three months ended September 30, 1997 were
approximately $325,000, consisting primarily of CRT glass recycling fees and
approximately $67,000 of ALUMAGLASS(TM) sales. For the same three-month period
of 1996, the Company's consolidated revenues were approximately $344,000, of
which approximately $65,000 was from sales of ALUMAGLASS and the remainder was
CRT recycling fees.
The net change in cost of goods sold for the three months ended September 30,
1997 versus the same prior year period, a decrease of $521,000 despite the
almost same sales volume, reflects a number of factors, including (i) a $76,000
net decrease in the non-cash charge associated with the reserve for potential
disposal costs of raw materials (a $62,000 decrease in the reserve for the three
months ended September 30, 1997 as a result of a decrease in certain raw
material inventories as compared with a $14,000 increase in the reserve for the
three months ended September 30, 1996, during which such inventories increased),
(ii) a decrease of $470,000 as a result of discontinuing the melter operations
and writing-off the assets associated therewith during the fourth quarter of
Fiscal 1997, (iii) a decrease of $105,000 due to the reduced level of operations
in the abrasives finishing department, and (iv) an increase of $168,000 from the
start-up of the decorative particles operations.
As a consequence of the above revenue and cost changes, the Company's gross
margin improved to a loss of approximately $361,000 for the three months ended
September 30, 1997 from a loss of approximately $863,000 for the same period of
1996.
Selling, general and administrative expenses of approximately $686,000 for the
three months ended September 30, 1997 compare with approximately $557,000 for
the same 1996 period. This increase reflects approximately $63,000 in
compensation expenses relating to capital stock and approximately $60,000 in
higher accounting and audit costs.
Net interest expense increased to approximately $309,000 for the three months
ended September 30, 1997 from approximately $231,000 for the same prior year
period. This cost increase reflects an approximate $78,000 decrease in interest
income on cash received from the Company's initial public offering.
10
<PAGE>
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 shares of
Series A Convertible Preferred Stock (the "Preferred Stock") and the proceeds of
the Company's initial public offering. At September 30, 1997, the Company had
approximately $3,287,000 in principal amount of long-term indebtedness
(excluding capital lease obligations) and net working capital deficiency of
approximately $2,648,000. As of September 30, 1997, the Company had cash and
cash equivalents of approximately $637,500.
In August and September 1997, the Company raised aggregate gross proceeds of
$4,145,000 in a private placement of Preferred Stock. An aggregate of 414,500
shares of Preferred Stock were issued. Each share of Preferred Stock is
initially convertible into eight shares of Common Stock at a conversion price of
$1.25 per share, subject to adjustment based on the lesser of $1.25 and the
prevailing average market price of the Common Stock immediately preceding any
subsequent closing, if any. The maximum amount of such offering, including gross
proceeds received to date, would result in gross proceeds of $5,000,000
($8,000,000 if the Placement Agent's over-allotment option is exercised in
full), although there can be no assurance that any additional closings under the
offering will occur.
The Company received net proceeds of $3,501,717 from the placement of the
Preferred Stock (after deducting the placement agent's commissions and
non-accountable expense allowance and other transaction expenses). Of such net
proceeds, $1,620,000 was used to redeem the IDA Bonds and $500,000 plus accrued
interest was used to repay the 1997 Bridge Loan, with the remainder to be used
for general working capital purposes, including accrued payables.
In July and August 1997, the Company borrowed an aggregate of $500,000 which was
used for general working capital purposes (the "1997 Bridge Loan"). On September
8, 1997, the 1997 Bridge Loan was repaid, together with accrued interest at the
rate of 12% per annum, out of the proceeds of the Preferred Stock placement. In
connection with the 1997 Bridge Loan, the Company issued warrants to purchase
100,000 shares of Common Stock at an exercise price equal to $1 5/16 per share.
In September 1997, the $8,000,000 principal amount of IDA Bonds were redeemed in
full in exchange for a cash payment of $1,620,000 and Dunkirk's forfeiture of
its interest in a related debt service reserve fund (which had a then current
balance of approximately $194,000).
In July 1997, ESDC agreed to honor its guarantee of approximately $1,888,000
outstanding principal amount of term loans owing by the Company's Dunkirk
subsidiary to Key Bank, and ESDC is in the process of assuming from Key Bank,
and Key Bank is assigning to ESDC, such loans. ESDC has agreed to defer all
interest and principal payments due under the loans through January 1, 1998
until the maturity date of the loans, with interest continuing to accrue on such
deferred amounts payable at maturity. ESDC has also agreed to allow Dunkirk to
reduce the principal amount of such loans by the amount of a debt service
reserve fund (the balance at September 30, 1997 was $454,924) that will be
forfeited by Dunkirk.
As of September 30, 1997, the Company had approximately $3,287,000 in principal
amount of long-term indebtedness (excluding capital lease obligations),
consisting of (i) approximately $1,888,000 outstanding principal amount under
the Key Bank term loans guaranteed by ESDC, which loans bear
11
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interest at the prime rate and are payable in monthly installments through
December 2001 (subject to the deferral through January 1, 1998 described above),
(ii) approximately $695,000 aggregate outstanding principal amount under various
mortgage and secured equipment loans and (iii) approximately $704,000 aggregate
outstanding principal amount under subordinated indebtedness from certain of the
Company's CRT glass customers who provided financial assistance to the Company
during its start-up phase. The Company's long-term indebtedness is secured by
liens on 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 customary covenants
and default provisions.
The Company's capital lease payments were approximately $7,000 for the three
months ended September 30, 1997 and are estimated to be approximately $41,000,
$27,000 and $23,000 for the fiscal years ending June 30, 1998, 1999 and 2000,
respectively, under current commitments. The Company's utility expenses average
approximately $35,000 per month at its current level of operations.
The Company's base annual fixed expenses include approximately $447,000 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 $489,000 for the
fiscal year ending June 30, 1998, excluding capital lease obligations.
The Company has federal net operating loss carryforwards that amounted to
approximately $20.6 million at June 30, 1997, which expire between 2006 and
2012. 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 is likely that due to
prior shifts in ownership (the Dunkirk merger and the completion of the IPO) and
the current shifts in ownership (the Preferred Stock offering), the Company's
ability to utilize its net operating loss carryforwards could be severely
limited.
This Form 10-QSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include risks and uncertainties, including, but not
limited to: (i) the risk that the Company's marketing efforts with respect to
its abrasives, decorative particles and other products will not result in
increased sales and that the Company will continue to experience substantial
losses from operations, (ii) the risk that the Company will require additional
financing prior to achieving positive cash flow from operations and that it may
not be able to obtain such financing on terms acceptable to the Company or at
all, (iii) the risk that the redemption of the IDA Bonds or removal of
non-productive assets from service will result in taxable income to the Company
or otherwise create tax or tax-related obligations of the Company the result of
which could reduce the Company's net operating loss carry-forwards and/or,
depending on the amount of such taxable income, if any, result in the Company
being required to satisfy such obligations out of its available cash, at a time
when such obligations could exceed the Company's available cash, (iv) the risk
that the Company will experience interruptions in its manufacturing operations
which will delay shipments or result in lost business, (v) risks associated with
retaining and attracting key personnel, (vi) the risk that the Company will lose
key CRT customers prior to obtaining increased sales of its abrasives and other
products, (vii) risks associated with being able to obtain requisite supplies of
raw materials for its products, (viii) risks associated with its ability to
protect its intellectual property and proprietary rights, (ix) risks associated
with the failure to comply with applicable environmental laws
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and regulations and (x) the risk that the Company will not be able to continue
to satisfy the minimum maintenance requirements for continued listing on the
Nasdaq SmallCap Market .
Part II - Other Information
Item 1. Legal Proceedings
See Note 6 of Notes to Consolidated Financial Statements above.
Item 2. Changes in Securities and Use of Proceeds
As previously disclosed by the Company in a Report on Form 8-K, dated September
8, 1997, on August 29, 1997 and September 8, 1997, the Company sold, pursuant to
a private placement, an aggregate 414,500 shares of Preferred Stock for
aggregate gross proceeds of $4,145,000 (the "Private Placement"). The Preferred
Stock was sold pursuant to an exemption from registration pursuant to Regulation
D, promulgated under the Securities Act of 1933, as amended (the "Securities
Act"). In connection with the sale of the Preferred Stock, the Company did not
conduct any general advertisement or solicitation; each purchaser of the
Preferred Stock represented that, among other things, the purchaser was an
"accredited investor" as that term is defined in Regulation D and the purchaser
was purchasing the shares of Preferred Stock for investment and not with a view
to distribution. Appropriate legends were affixed to the certificates
representing the Preferred Stock. Paramount Capital, Inc. acted as a placement
agent in the Private Placement and received an aggregate placement fee of
$373,050, and an expense reimbursement of $165,800.
Each share of Preferred Stock is initially convertible into eight shares of
Common Stock at a conversion price of $1.25 per share, subject to adjustment
based on the lesser of $1.25 and the prevailing average market price of the
Common Stock immediately preceding any subsequent sale of Preferred Stock, if
any. The holders of the Preferred Stock are entitled to the number of votes
equal to the number of shares of Common Stock of the Company into which such
shares of Preferred Stock are convertible, and are entitled to vote together
with the holders of the Common Stock.
The holders of the Preferred Stock are also entitled to certain voting rights
not shared by the holders of the Common Stock, so long as a majority of the
Preferred Stock sold in the Private Placement remain outstanding. The
affirmative vote of the holders of at least two-thirds of the Preferred Stock
will be required for (i) the issuance of securities senior to or on a parity
with the Preferred Stock with respect to dividends, voting or liquidation, (ii)
any alterations to the rights of the Preferred Stock, (iii) a liquidation,
dissolution or sale of substantially all of the assets of the Company, (iv) the
incurrence of over $100,000 of indebtedness (other than borrowings under working
capital lines of credit), and (v) the repurchase of any of the securities of the
Company. In addition, the holders of the Preferred Stock are entitled to a
liquidation preference in an amount per share equal to $13.50 plus declared
and/or accrued but unpaid dividends, if any. Finally, the holders of the
preferred stock are entitled to dividends, payable in cash or in kind, at an
annual rate of 10% beginning one year after the final closing of the Private
Placement. The Company must pay such dividend prior to any dividend declared on
the Common Stock (For a detailed description of the terms of the Preferred
Stock, see the Certificate of Designation of
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<PAGE>
Series A Convertible Preferred Stock, which was filed as an exhibit to the
Company's Annual Report on Form 10-KSB for the year ended June 30, 1997).
Item 3. Defaults Upon Senior Securities.
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), a wholly-owned
subsidiary of the Company, is obligated with respect to $1,888,000 outstanding
aggregate principal amount of equipment term notes issued in December 1994 and
January 1995 to Key Bank of New York ("Key Bank"), which were guaranteed by the
Empire State Development Corporation/Job Development Authority ("ESDC"). In June
1997, Key Bank and ESDC commenced discussions relating to ESDC's guarantee and
assumption of such loans from Key Bank. In July 1997, ESDC agreed to honor its
guarantee of such loans and assume such loans from ESDC. Dunkirk was in payment
default in the amount of approximately $113,000 under the Key Bank loan during
the period from July 1997 through August 1997, which default was waived by Key
Bank on August 28, 1997. Such amount, together with all interest and principal
payments due under the loans through January 1, 1998, have been deferred by ESDC
until the maturity date of the notes, with interest continuing to accrue on such
deferred amounts payable at maturity. Accordingly, Dunkirk is not currently in
arrears with respect to such loan.
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
Exhibits
--------
11 Computation of per share earnings.
27 Financial Data Schedule.
Form 8-K
--------
The Company filed a Report on Form 8-K, dated September 8, 1997, with
respect to Item 5 therein.
14
<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: October 24, 1997 /s/ William L. Amt
-------------------------------------------
William L. Amt
President and Chief
Executive Officer
(principal executive officer)
Dated: October 24, 1997 /s/ John G. Murchie
-------------------------------------------
John G. Murchie
Controller (principal accounting officer)
15
Exhibit 11
<TABLE>
<CAPTION>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
STATEMENT OF COMPUTATION OF PRIMARY NET INCOME (LOSS) PER SHARE
For the three months ended September 30, 1997 and 1996
Three months ended September 30,
1997 1996
---- ----
<S> <C> <C>
Net (loss) before extraordinary item $ (1,355,187) $ (1,650,785)
================= =================
Net income (loss) as reported $ 4,506,831 $ (1,650,785)
================= =================
Weighted average number of common
shares outstanding 4,799,186 4,709,186
Assumed exercise of stock options and
warrants using the treasury stock
method 75,509 --
------------------ -----------------
Shares used in the computation 4,874,695 4,709,186
================= =================
Net (loss) per common share
before extraordinary item $ (0.28) $ (0.35)
================= =================
Net income (loss) as reported per
common share $ 0.92 $ (0.35)
================= =================
</TABLE>
<PAGE>
Exhibit 11
<TABLE>
<CAPTION>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
STATEMENT OF COMPUTATION OF FULLY DILUTED NET INCOME (LOSS) PER SHARE
For the three months ended September 30, 1997 and 1996
Three months ended September 30,
1997 1996
---- ----
<S> <C> <C>
Net (loss) before extraordinary item $ (1,355,187) $ (1,650,785)
================= =================
Net income (loss) as reported $ 4,506,831 $ (1,650,785)
================= =================
Weighted average number of common
shares outstanding 4,799,186 4,709,186
Assumed exercise of stock options and
warrants using the treasury stock
method 82,399 --
Weighted average number of common shares
representing assumed conversion of
Series A Convertible Preferred Stock 1,079,913 --
----------------- -----------------
Shares used in the computation 5,961,498 4,709,186
================= =================
Net (loss) per common share
before extraordinary item $ (0.23) $ (0.35)
================= =================
Net income (loss) as reported per
common share $ 0.76 $ (0.35)
================= =================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000923978
<NAME> Conversion Technologies International, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 637,506
<SECURITIES> 0
<RECEIVABLES> 212,319
<ALLOWANCES> 18,000
<INVENTORY> 627,539
<CURRENT-ASSETS> 1,638,773
<PP&E> 8,481,212
<DEPRECIATION> 1,654,274
<TOTAL-ASSETS> 9,037,647
<CURRENT-LIABILITIES> 4,286,400
<BONDS> 2,646,804
0
415
<COMMON> 1,385
<OTHER-SE> 2,102,643
<TOTAL-LIABILITY-AND-EQUITY> 9,037,647
<SALES> 325,142
<TOTAL-REVENUES> 325,142
<CGS> 685,776
<TOTAL-COSTS> 1,371,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 308,991
<INCOME-PRETAX> (1,355,187)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,355,187)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,862,018
<CHANGES> 0
<NET-INCOME> 4,506,831
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.76
</TABLE>
