SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10- KSB/A2
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, 1997 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)
3452 Lake Lynda Drive
Orlando, Florida 32817
(Address of principal executive offices) (Zip Code)
(407) 207-5900
(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.
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Issuer's revenues for the fiscal year ended June 30, 1997 were $1,429,008.
The aggregate market value of voting stock held by non-affiliates of registrant
was $11,941,310 as of September 19, 1997, based on the average of the closing
bid and closing ask price of the Common Stock on the Nasdaq SmallCap Market on
such date, and assuming the conversion of all outstanding shares of Series A
Convertible Preferred Stock held by non-affiliates of registrant into Common
Stock.
As of September 19, 1997, the issuer had outstanding 5,539,745 shares of Common
Stock, $.00025 par value.
Part I
Item 1. Business
Overview
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Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing, recycling and processing various substrates and
advanced materials. These substrates and materials include (i) industrial
abrasives which can be used for surface cleaning and surface preparation
applications such as in cleaning steel structures, railcars, aircraft parts, and
equipment in loose grain blasting operations; (ii) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (iii) performance aggregates which can be
used as structural and textural enhancers, fillers and additives and to
strengthen and add consistency to materials such as cements, plasters, grouts,
roofing and flooring and glass and ceramic materials. The Company is also
engaged in the business of recycling cathode ray tube ("CRT") glass produced in
the manufacture of televisions for resale to such manufactures and others.
Although substantially all of the Company's revenues to date have been derived
from its CRT recycling operations, the Company intends to focus its efforts on
its substrates and advanced materials products.
The Company's industrial abrasives and construction material substrates include
ALUMAGLASS(R), an alumino-silicate glass produced in a patented process
utilizing industrial waste streams and certain virgin materials, as well as
other glass and fired ceramic materials produced utilizing the Company's
manufacturing equipment. ALUMAGLASS was introduced in 1995, but has generated
only minimal sales to date. Although the Company intends to continue to market
ALUMAGLASS, the Company has shut-down the melter used to
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manufacture ALUMAGLASS at its Dunkirk, New York, facility and is currently
satisfying limited orders through inventory of ALUMAGLASS. The Company does not
intend to restart the melter in the foreseeable future. If warranted by market
demand for ALUMAGLASS, the Company intends to pursue opportunities to license
its ALUMAGLASS patents to third parties. The Company would then purchase the raw
ALUMAGLASS particles from such manufacturers and process the material for resale
to is customers. Although the Company is currently in discussions with one such
potential licensee, there can be no assurance that such arrangements will be
consummated on terms satisfactory to the Company, or at all, or that there will
ever be significant sales of ALUMAGLASS.
The Company was incorporated in June 1993 for the purpose of acquiring its
Dunkirk International Glass and Ceramics Corporation ("Dunkirk") subsidiary, 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 the
common stock of Dunkirk received Common Stock of the Company. Prior to such
acquisition, Dunkirk was a development stage company, principally engaged in the
construction of its manufacturing facilities and initial CRT glass recycling
efforts. In June 1997, the Company purchased the remaining 50% interest in
Advanced Particle Technologies, Inc. ("APT"), a corporation formed in October
1996 by the Company and a former joint venture partner for the purpose of
applying color coatings to particles, as a result of which APT became a
wholly-owned subsidiary of the Company.
The Company recently relocated its executive offices to 3452 Lake Lynda Drive,
Suite 280, Orlando, Florida 32817. The Company's telephone number is (407)
207-5900.
This Form 10- KSB/A2 contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's efforts to increase sales
of its abrasives, manufacture and sell, on a commercial scale, its decorative
particles and the possibility of outsourcing ALUMAGLASS production. 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
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applicable environmental laws and regulations and (x) the risk that the Company
will not be able to continue to satisfy the minimum maintenance requirements for
continued listing which were recently adopted by the Nasdaq SmallCap Market .
Certain Recent Events
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Termination of Merger With Octagon
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In November 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with Octagon, Inc. ("Octagon") pursuant
to which a wholly-owned subsidiary of the Company would be merged with and into
Octagon (the "Merger"), whereby Octagon would become a wholly-owned subsidiary
of the Company. In July 1997, the Company and Octagon announced that they had
mutually terminated the Merger Agreement. Pursuant to the terms of the
Termination Agreement, Octagon agreed to provide certain support services to the
Company on an interim basis and the Company agreed to forgive bridge loans in
the approximate amount of $630,000 it made to Octagon in payment for certain
services provided by Octagon to the Company prior to the termination of the
Merger. The Company also hired certain employees of Octagon who had been hired
by Octagon in anticipation of the Merger, including Jack D. Hays, Jr., the
Company's Executive Vice President Operations and Marketing, and Richard H.
Hughes, Vice President - Sales and Marketing. William L. Amt, Octagon's former
President and Chief Executive Officer also joined the Company on August 1, 1997.
New Management
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The Company has obtained new management. On August 1, 1997, William L. Amt,
previously the President and Chief Executive Officer of Octagon, joined the
Company as President and Chief Executive Officer. In July 1997, Jack D. Hays,
Jr., and Richard H. Hughes, who had previously joined Octagon in anticipation of
the closing of the Merger, became Executive Vice President Operations and
Marketing and Vice President - Sales and Marketing, respectively, of the
Company. With the exception of Robert Dejaiffe, who remains the Company's Vice
President - Technology, the former executive officers of the Company, including
Harvey Goldman, the Company's former Vice-Chairman, President and Chief
Executive Officer, ceased to be employees of the Company in June 1997. Eckardt
C. Beck, who remains as the Company's Chairman of the Board, served as acting
President and Chief Executive Officer of the Company from June 1997 until August
1, 1997.
Write-Down of Non-Productive Assets and Related Charges to Earnings
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The Company has shutdown its melter and certain other equipment not currently
being used by the Company. Accordingly, in the quarter ended June 30, 1997, the
Company has recorded a $5,712,000 write-down in the value of such assets to
reflect that such assets are no longer productive, which write down has resulted
in a $5,712,000 charge to earnings for such quarter, increasing the Company's
loss for such quarter by an equal amount.
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Redemption of IDA Bonds
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In 1995, the Company's subsidiary, Dunkirk, financed certain equipment purchases
and manufacturing improvements through the issuance of $8,000,000 in Solid Waste
Disposal Facility Bonds, Series 1995 (the "IDA Bonds"), by the County of
Chatauqua Industrial Development Agency (the "Agency") pursuant to a Trust
Indenture dated as of March 1, 1995 between the Agency and United States Trust
Company of New York, as trustee. Pursuant to agreements among the parties, in
September 1997, the 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
$190,000).
Termination of VANGKOE Joint Venture
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In June 1997, the Company terminated its joint venture with VANGKOE Industries,
Inc. ("VANGKOE") by purchasing for nominal consideration VANGKOE's 50% interest
in APT, located in St. Augustine, Florida. APT was organized by the Company and
VANGKOE for the purpose of applying color coatings in a proprietary process to
create decorative particles. Pursuant to the termination of such joint venture,
APT became a wholly-owned subsidiary of the Company, APT purchased the
proprietary color coating process used to manufacture the particles from VANGKOE
for $135,000 (and a contingent payment of $30,000 based on certain milestones),
and VANGKOE agreed to sell the particles in certain markets as APT's exclusive
distributor. The Company recently commenced manufacturing such particles and the
parties are in the process of creating inventory and conducting customer
sampling and sales efforts. There can be no assurance, however, that the Company
will be able to manufacture such particles consistently or that sales of such
particles will occur.
Preferred Stock Financing
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In August and September 1997, the Company raised aggregate gross proceeds of
$4,145,000 in a private placement of Series A Convertible Preferred Stock (the
"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.
Repayment of Bridge Loan
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In July and August 1997, the Company borrowed an aggregate of $500,000 (the
"1997 Bridge Loan") for general working capital purposes from Aries Domestic
Fund, L.P. and The Aries Trust (collectively, the "Aries Funds"). In connection
with the 1997 Bridge Loan, the Company issued warrants to purchase 100,000
shares of Common Stock to the Aries Funds at an exercise price equal to $1 5/16.
The 1997 Bridge Loan, together with 12% interest thereon, was repaid on
September 8, 1997.
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Other Changes to Indebtedness
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Dunkirk 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 July 1997, ESDC
agreed to honor its guarantee of such loans and Key Bank and ESDC are in the
process of assigning such loans from Key Bank to ESDC. ESDC has agreed to defer
all interest and principal payments due under the loans through January 1, 1998
until the maturity date of the notes, 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 (with a balance as of June 30, 1997 of approximately $449,190) that
will be forfeited by Dunkirk.
Products
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Abrasives
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The Company produces several products which can be used as industrial abrasives.
These products currently include ALUMAGLASS, which has achieved only limited
sales to date, and other glass and ceramic formulation materials, marketed as
VISIGRIT(TM) and GREAT WHITE(TM). Such glass and ceramic products have only
recently been produced by the Company in limited amounts. As loose grain
abrasives, these products 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.
The Company has shut down the melter used to manufacture ALUMAGLASS and is
currently satisfying limited orders through inventory of ALUMAGLASS. The Company
does not currently intend to restart the melter. If market demand for ALUMAGLASS
warrants further ALUMAGLASS production, the Company intends to pursue
opportunities to license its ALUMAGLASS patents to third parties. The Company
could then purchase the raw ALUMAGLASS particles from such manufacturers and
process the material for resale to its customers. The Company expects this
process to provide a lower cost of production.
Decorative Particles
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The Company's facility in St. Augustine, Florida color coats various glass
substrates to produce decorative particles. Decorative particles are widely used
in the construction industry to visually enhance structural materials such as
plasters, tiles, grouts, wall systems and roofing and flooring. Colored
particles are also incorporated into countertops and cabinetry. The substrates
currently being coated in St. Augustine are produced at the Company's Dunkirk,
New York facility, however, locally sourced substrates, including ceramic or
mined mineral substrates, will also be used. The Company believes that the
proprietary color coating process it employs in St. Augustine
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yields a coating of superior visual quality and endurance compared to competing
products and believes that there is a potential market for these products. There
can be no assurance, however, that the Company will ever achieve significant
sales of these products. The Company recently commenced commercial production of
these products and has been working with VANGKOE to initiate customer sampling
and testing in the swimming pool plaster market in the southeast, which will be
the initial marketing focal point for these products.
Performance Aggregates
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ALUMAGLASS and the Company's other glass and ceramic products, individually or
in blended combinations, can also be used as structural or textural enhancers,
fillers and additives. These products, which can be sized according to industry
standards, can be used to strengthen and add consistency to materials such as
cements, plasters, grouts, mortars, roofing and flooring and other glass and
ceramic materials.
Recycled CRT Glass
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The Company is also engaged in recycling CRT glass used in televisions. The
Company's current CRT glass recycling customers include electronics
manufacturers such as Techneglas, Inc. ("Techneglas"), Toshiba Display Devices,
Inc. ("Toshiba") and Hitachi Electronic Devices, U.S.A., Inc. Thomson Consumer
Electronics, Inc. ("Thomson"), which had been a significant CRT customer of the
Company, ceased shipping CRT glass to, and purchasing recycled CRT glass from,
the Company in March 1997.
In the Company's CRT recycling operations, waste CRT glass 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 abrasives or further processed for sale as an aggregate for
construction materials.
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Manufacturing and Recycling Processes
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The Company utilizes the crushing, sizing and packaging equipment at its
Dunkirk, New York facility to manufacture its abrasives, uncoated decorative
particle substrates and performance aggregate products. The Company has
identified several waste streams which it receives, including post-consumer
bottle glass, waste ceramics and CRT panel glass, which can be used as a
manufacturing raw material for these products. The Company identifies the
chemical or other valuable properties of these materials and identifies third
parties that can utilize the materials in their manufacturing or other
operations. Then, depending on the customer's needs, the Company utilizes its
equipment, principally its recycling lines and post-melting, abrasives finishing
equipment, to sort, clean and/or grind and crush the material into the desired
form. The material is then packaged and shipped to customers.
The Company's St. Augustine, Florida, facility is utilized to color-coat and
package particles for pool plasters and other construction materials. The
proprietary manufacturing process consists of applying various pigments and
other coating materials at the St. Augustine facility to particles produced at
the Company's Dunkirk, New York facility in a thermodynamic process. The
material is then bagged on-site in St. Augustine and shipped to customers.
The Company recycles CRT glass through two processing lines. The process
involves extracting pieces of CRT glass of less than a specified size,
separating panel glass from funnel glass on a primary processing line, cleaning
and removing coatings on the glass and batching the funnel glass and panel glass
for resale back to customers. This process is repeated for CRT glass fragments
too small for the primary line by identical processing through a second line
designed to handle smaller pieces of glass. Generally, CRT glass fragments
received by the Company of approximately one inch or less in diameter have not
been recycled by the Company due to limitations of its technology. Although the
Company has recently initiated a process to recycle this material, there can be
no assurance the Company will in fact sell such material on a profitable basis
or at all. In the event the Company is unable to sell such glass, it believes it
can dispose of such glass by smelting at prevailing rates.
Research and Development
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The Company's research and development efforts have been conducted principally
through the Company's internal staff and the Center for Advanced Ceramic
Technology ("CACT") at Alfred University. The Company currently employs one
individual 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 requested by the Company.
Although the Company's research and development activities are presently
limited, the Company plans to continue to engage in research and development
activities from time to time. It is
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anticipated that such efforts will be focused in the near term on ALUMAGLASS
licensing possibilities and expanding color coating offerings for its decorative
particles.
Markets for Products and Services
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Abrasives
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A variety of media and methodologies have traditionally been used as industrial
abrasives. 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 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, could potentially be recycled 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 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.
Decorative Particles
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The Company believes that there is a large market for decorative particles, of
which 3M holds a significant share. End users for decorative substrates or
particles include ceramic tile manufacturers, producers of swimming pool
plasters, decorative roofing and wall systems, pottery and porcelain producers
and others.
The production of plasters, mortars, terrazzo, and ceramic tiles requires large
quantities of fillers and expanders. Crushed marble, white sand, kaolin or
similar low cost white calcium based material have traditionally been used as
fillers and expanders. Because of the high cost of coloring agents, pigments and
the process to coat substrates, it is not economical to color coat large volumes
of these fillers. Instead, the construction industry adds into the filler small
quantities of particles
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that have been previously color coated. The resulting mixture, when viewed over
a large surface area and from a distance, will appear to have a consistent color
or hue.
The Company believes that market acceptance of colored particles is largely a
function of the brilliance and endurance of the color, which results from the
level of translucence or reflectivity of the substrate. Because in most
applications the coated surface of a particle is subject to erosion, colored
substrates must have translucent properties to maintain their color
characteristics with a translucent or clear particle, as the color is eroded
from the exposed surface of the particle embedded in the mortar or plaster, the
color on the back side of the particle will remain visible, thereby extending
the life of the color system significantly. Traditionally quartz and high
quality silica sands have been employed as substrates to produce translucent
colored particles. The Company believes, however, that its glass formulation
substrates provide superior translucence and clarity compared to these
materials, and may have a lower cost of production. In addition, the Company
believes that its proprietary coating process will produce a coating of superior
endurance and visual appeal. There can be no assurance, however, that the
Company will be able to successfully manufacture and sell its color coated
substrates.
Performance Aggregates
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The Company also believes that there is a large market for performance
aggregates. Materials such as plasters, mortars, terrazzo, flooring tiles, and
other ceramic or cement based mixtures require fillers, expanders or
particulates that will add consistency or texture for functional purposes. If
needed, the Company has the ability to size its aggregates within narrow
specifications for specialty applications. Although the Company has only
recently begun to explore the use of its various substrates for this market, the
Company's ALUMAGLASS product has been purchased in limited quantities as an
additive for non-slip epoxy flooring systems. The Company believes that its
fired ceramic substrates will also have applicability in these markets,
particularly as filler for tiles and plasters. The Company further believes
that, since many of its substrates are produced from waste material, it may have
production cost advantages over certain materials traditionally used in this
market, such as mined substrates.
Recycled CRT Glass
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The Company currently recycles waste CRT glass generated by television
manufacturers located in the United States. The Company's potential sales
revenue from such customers is therefore 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, which
such manufacturers continually strive to reduce further, and shipping costs
associated with doing business with manufacturers located at significant
distances from the Company. In addition, the Company has recently experienced
increased competition with respect to CRT glass recycling services. Thomson,
historically a significant CRT customer, ceased doing business with the Company
in March 1997.
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Dependence on Certain Customers
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For the year ended June 30, 1997, two of the Company's CRT glass recycling
customers, Techneglas and Thomson each accounted for more than 10% of the
Company's revenues and, in the aggregate, accounted for approximately 61.2% of
the Company's revenues. Thomson ceased shipping CRT glass to, and purchasing
recycled CRT glass from, the Company as of March 1997. Although the Company has
a limited number of customers for ALUMAGLASS and other materials, the Company is
currently dependent on its CRT customers for substantially all of its revenues.
The Company sells its recycled glass to Techneglas pursuant to a Clean Cullet
Sale Agreement (the "Cullet Agreement") and an open purchase order arrangement.
The Cullet Agreement had an initial term of three years expiring August 1998 and
automatically renews for additional one year terms unless either party gives the
other written notice of termination at least 120 days prior to the end of any
term. The Cullet Agreement includes provisions relating to specifications,
delivery and acceptance of processed CRT glass. The Cullet Agreement also
requires the Company to sell, and Techneglas to purchase, various amounts of the
CRT glass processed by the Company. The Cullet Agreement also contains pricing
and other customary terms. Techneglas has been purchasing substantially all of
the CRT glass processed by the Company since the loss of Thomsen as a customer.
Sales and Marketing
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To date, the Company's products have been marketed and distributed in the United
States primarily through distributors and limited direct sales efforts by the
Company and only limited sales have been achieved. N.T. Ruddock & Company, Fusco
Abrasive Systems, Inc., Standard Sand & Silica Co. and Porter Warner Industries,
Inc. are regional distributors of the Company's abrasives and are large-volume
distributors of loose grain abrasives in the United States. The Company has also
established relationships with distributors in the United Kingdom, Canada,
Mexico, China 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.
To date, the Company's efforts through distributors have failed to generate
significant sales of ALUMAGLASS. Accordingly, the Company plans to explore joint
ventures and other corporate teaming efforts to increase outlets for its
products, which may include product bundling or composite production. The
Company also intends to review and evaluate its distributor relationships and
incentives as well as its direct sales initiatives. There can be no assurance,
however, that such efforts will be successful.
In connection with the termination of the Company's joint venture with VANGKOE,
the parties entered into a Distributor Agreement, pursuant to which VANGKOE will
purchase the colored particles from APT and sell the particles to distributors
and others. The Distributor Agreement provides that VANGKOE will be APT's
exclusive distributor of colored particles for the swimming pool and other
pool-related markets, and that VANGKOE will purchase colored
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particles for such markets exclusively from APT, subject to APT's ability to
supply such particles. VANGKOE must meet certain sales targets to maintain its
exclusivity as a distributor, although VANGKOE is under no obligation to meet
such sales targets. VANGKOE has been released from its previous minimum purchase
commitment of approximately $1.2 million of ALUMAGLASS and other materials.
VANGKOE is a new company without significant assets or experience in marketing
aggregates and, therefore, there can be no assurance that it will be successful
in marketing the Company's products.
The Company currently has three individuals dedicated principally to sales and
marketing and several others who support the sales and marketing effort on a
regular basis.
Intellectual Property
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The Company has been awarded two United States patents. The first patent was
issued in December 1993 and relates to the Company's process for manufacturing
abrasive particles from inorganic waste materials, including sludges from
various industrial processes and waste water treatment, emission control dusts
from high-temperature industrial processes, fly ash from incineration of
industrial and residential wastes and certain other process-specific effluents.
Examples of such inorganic wastes are spent pot liner from the aluminum
industry, refractory wastes from smelting, melting or refining furnaces, various
types of slags and precipitants related to metal recovery operations, foundry
sands, glass wastes, including television and computer monitor CRT glass, and
certain wastes from the manufacture of ceramic products. The second patent was
issued in October 1995 and relates to the pre-melting batching process involved
in the manufacture of the Company's abrasives. In addition, the Company has
filed jointly with another party an application for a U.S. patent on the X-ray
fluorescence technology that has been used in the Company's CRT glass recycling
operations. The Company has three additional patent applications on file. One
relates to ALUMAGLASS, one relates to the Company's potential glass bead product
and one relates to the use of the Company's products as aggregates in
construction materials. The Company's logo and ALUMAGLASS are registered
trademarks.
Competition
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The Company's products and services are subject to substantial competition. The
Company's abrasives compete 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., Norton/St. Gobain and others. Various
other manufacturers produce mined, plastic, glass bead and mineral abrasives, as
well as high speed water jet spray abrasive systems. The Company's ability to
effectively compete against these companies could be adversely affected by the
ability of these competitors to offer their products at lower prices than the
Company's products and to devote greater resources to the marketing and
promotion of their products than are available to the Company.
-12-
<PAGE>
The Company's decorative particles and performance aggregates will also face
substantial competitive pressures. The Company believes that 3M has a
significant share of the market for decorative particles. 3M has available to it
financial, technical and other resources far superior to those of the Company.
In addition, certain customers of other products may be unwilling to switch to
the Company's particles due to factors such as personal preferences for a
competitor's color selections, consistency with colors previously sold,
performance concerns or satisfaction with its current products. The Company's
performance aggregates will face similar competitive pressures from producers of
mined minerals, aluminum oxide and others. These producers include 3M and
Norton/St. Gobain, each with resources superior to those of the Company.
With respect to its industrial 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 melting it to
recapture the residuals. The Company has recently experienced increased
competition from companies offering to take CRT glass from sources free of
charge. In general, the Company has received revenue both when it receives and
when it sells recycled CRT glass. There can be no assurance that the Company
will be able to recycle CRT glass on a profitable basis if it is required to
eliminate the fee it receives upon receipt of such glass from customers in order
to maintain or attract additional sources of CRT glass. In addition, Thomson, a
significant CRT recycling customer, ceased doing business with the Company in
March 1997.
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
-13-
<PAGE>
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.
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.
Employees
- ---------
At September 19, 1997, the Company had 38 full-time employees consisting of 30
employees in manufacturing, one employee in research and product applications
development, three employees in sales and marketing and four employees in
finance and administration. The Company also has one part-time employee. None of
the Company's employees are subject to a collective bargaining agreement and the
Company has not experienced any work stoppages.
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 Region
Industrial Development Corporation, with respect to which approximately $304,432
principal amount was outstanding at June 30, 1997. 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 $288,516 principal amount was outstanding on June 30, 1997.
The Company recently relocated its headquarters to Orlando, Florida, and has
entered into a three-year lease for approximately 4,700 square feet of executive
office space and rent is approximately $7,000 per month.
The Company has terminated its lease on approximately 3,000 square feet of
office space in Hazlet, New Jersey, effective September 30, 1997.
APT currently leases approximately 10,000 square feet of manufacturing space in
St. Augustine, Florida. The lease will expire in February 2000 and rent is
approximately $6,000 per month.
Item 3. Legal Proceedings
- --------------------------
The Company is a party to litigation, Conversion Technologies International,
Inc. v. R.E. Williams and Company, Inc., commenced by the Company on October 26,
1995 in the Supreme Court of
-14-
<PAGE>
New York, County of Chautauqua, against a general contractor hired to construct
the improved abrasives finishing area at the Dunkirk facility. 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 counterclaimed damages of
approximately $483,000, and has filed a mechanic's lien with respect to such
claim. The case is currently in the discovery phase. The Company does not
believe that there will be a material adverse outcome in this dispute. 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 Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The Company's Common Stock has been quoted on the Nasdaq SmallCap Market (the
"SmallCap Market") under the symbol "CTIX" since May 16, 1996, the effective
date of the Company's registration statement relating to its initial public
offering of Common Stock (the "IPO"). The following table sets forth, for each
of the quarters indicated, the high and low bid prices per share of Common Stock
as quoted on the SmallCap Market (source, the Nasdaq Stock Market). The prices
shown represent quotations among securities dealers, do not include retail
markups, markdowns or commissions and may not represent actual transactions.
Quarter Ended High Low
- -------------------------- -------------------- --------------------
June 30, 1996 $7.25 $5.00
September 30, 1996 $5.00 $3.375
December 31, 1996 $3.375 $2.25
March 31, 1997 $2.625 $1.375
June 30, 1997 $3.00 $1.00
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 September 19, 1997, the Company had approximately 114 holders of record of
Common Stock.
-15-
<PAGE>
On October 11, 1996, pursuant to the Company's 1996 Long-Term Incentive Plan,
the Company sold 80,000 shares of restricted Common Stock to Harvey Goldman, the
Company's former President and Chief Executive Officer, and 10,000 shares of
restricted Common Stock to Perry A. Pappas, the Company's former Vice President
and General Counsel. Such shares were sold at a purchase price of $0.00025 per
share (or aggregate consideration of $22.50) and will vest on January 1, 1998.
The Company claims that the issuance and sale of all such securities were exempt
from registration under Section 4(2) of the Securities Act as transactions not
involving a public offering. Appropriate legends will be affixed to the
certificates evidencing such securities. All recipients had adequate access to
information relating to the Company. There were no other unregistered securities
sold by the Company during the fiscal year ended June 30, 1997.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ---------------------------------------------------------------------
Overview
- --------
Since inception through June 30, 1997, the Company has sustained cumulative
losses of approximately $30,034,000. Such amount includes (i) a one-time,
non-cash charge to operations of approximately $6,232,000 relating to the
write-off of research and development (in-process) technologies that had not
reached technological feasibility and, in the opinion of management, had no
alternative use, which were purchased in conjunction with the Company's
acquisition of Dunkirk in 1994, (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 lines, (iii) a non-cash charge to
operations of approximately $5,712,000 relating to the write-off of
non-productive fixed assets during the quarter ended June 30, 1997 and (iv)
other expenses, net of revenue, of approximately $15,562,000. The Company will
continue to incur losses until such time as revenues are sufficient to fund its
continuing operations.
Although the Company has not yet achieved profitability, the Company has taken a
number of recent steps in an effort to preserve cash, reduce its costs and
increase revenues. In late fiscal 1997 and early fiscal 1998, the Company
obtained a new management team that includes senior executives with significant
experience in the engineering, construction and marketing fields. As discussed
elsewhere, the Company's long-term debt has been reduced through the redemption,
at a discount, of the IDA Bonds, reducing interest expense and cash required for
principal repayments significantly and, with respect to the Key Bank loans,
renegotiated debt to defer payments until maturity which defers the required
cash outlays. Raw material costs will be reduced through the use of third party
tollers and the application of lower cost alternative substrates. Investments in
product development have been curtailed and investments in sales and marketing
will be increased. Manufacturing and operating overheads have also been reduced
through payroll reductions and savings associated with non-productive equipment
and processes that have been shut-down, such as the Company's melter. The
Company has begun to sell limited amounts of the decorative particles produced
by its APT subsidiary and hopes to increase revenue from this product line. The
Company will also strive to increase sales of other abrasives and aggregates as
new marketing efforts are implemented. Although management believes these
-16-
<PAGE>
steps will allow the Company to continue as a going concern for at least 12
months, there can be no assurance that the foregoing steps will result in the
Company ever achieving profitability.
The Company has continued to experience limited revenue and negative cash flow
from operations. The Company had revenues of approximately $277,000 for the
quarter ended June 30, 1997 and expects revenues to be approximately $300,000
for the quarter ending September 30, 1997. In general, revenues have been
reduced from prior periods due to the loss of Thomson as a CRT customer in March
1997. The Company has recently begun to sell increased amounts of certain
recycled glass and hopes to obtain modest increases in CRT revenue as a result.
In addition, the Company has recently begun sales of limited amounts of
decorative particles manufactured by its APT subsidiary. Although the Company
plans to maintain its CRT recycling revenue, the Company will focus its efforts
on sales of decorative particles, abrasives and other substrates. The Company
anticipates that these efforts will result in increased revenue for the quarter
ending December 31, 1997 as compared to the quarter ending September 30, 1997,
however, there can be no assurance that such results will actually be achieved.
Since the Company has had limited revenue and has incurred significant losses
which has resulted in a working capital deficiency and a stockholders'
deficiency at June 30, 1997, the Report of Independent Auditors includes an
explanatory paragraph indicating there is substantial doubt as to the Company's
ability to continue as a going concern. See Report of Independent Auditors.
Results of Operations
- ---------------------
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Consolidated revenues for the year ended June 30, 1997 ("fiscal 1997") were
approximately $1,429,000, consisting primarily of CRT glass recycling fees and
approximately $248,000 of ALUMAGLASS sales. For fiscal 1996, the Company had
consolidated revenues of approximately $2,680,000, of which approximately
$214,000 was from sales of ALUMAGLASS and the remainder was CRT recycling fees.
This decrease in revenue during fiscal 1997 primarily reflects reduced beginning
inventory of unprocessed CRT glass and the loss of Thomson as a CRT customer.
Cost of goods sold was approximately $3,952,000 for fiscal 1997 versus
approximately $3,094,000 for the prior fiscal year. Included in the fiscal 1997
cost was a $24,000 decrease in the Company's reserve for potential disposal
costs of raw materials, as compared to a $623,000 decrease in the reserve for
fiscal 1996 reflecting a significantly larger decrease in the Company's
beginning raw materials inventory, plus approximately $392,000 of costs for
starting up operations at the Company's particle coating facility in St.
Augustine, Florida. Excluding the effect of the change in the Company's reserve
for disposal during fiscal 1997 and fiscal 1996, and the St. Augustine start-up
costs, cost of goods sold decreased only approximately $133,000 in fiscal 1997
versus fiscal 1996, despite the over 40% decrease in revenues noted above. Major
factors contributing to the higher relative fiscal 1997 cost as compared to
sales were higher depreciation costs due to increased equipment purchases, an
approximately $97,000 write-off of raw material and in-process
-17-
<PAGE>
inventories related to discontinued processes and the fact that under the
prevailing operating conditions in both periods a significant portion of the
cost of production was fixed in nature. Some savings were realized as a result
of lower freight costs, resulting from a change in product pricing policy
whereby customers now pay freight on most shipments.
The Company's gross loss on sales of approximately $(2,523,000) during fiscal
1997 compares with a loss of approximately $(414,000) for the prior fiscal year
and reflects the lower revenue and higher costs detailed above.
Selling, general and administrative expenses for fiscal 1997 increased to
approximately $3,919,000 from $1,821,000 for fiscal 1996. This increase includes
(i) approximately $988,000 in higher consulting costs of which approximately
$705,000 was directly related to the terminated merger with Octagon and $90,000
was an accrued severance payment to the former President and Chief Executive
Officer of the Company, (ii) approximately $369,000 in higher legal costs and
approximately $181,000 in outside service costs (primarily financial printing)
both of which also relate to the terminated merger activities, (iii)
approximately $165,000 in compensation expenses relating to capital stock, (iv)
approximately $135,000 for the purchase of the APT particle coating technology
that had not reached technological feasibility at the time of purchase, (v) a
$99,000 settlement received in fiscal 1996 from a former officer of Dunkirk and
(vi) approximately $93,000 in higher insurance costs.
A charge against operations of approximately $5,712,000 was recorded in the
fourth quarter of fiscal 1997 to write down fixed assets to their estimated fair
market value for processes which have been shut down and no longer appear to be
viable for the forseeable future. Most of these processes relate to the
manufacture of ALUMAGLASS. There had been no comparable expense in fiscal 1996.
The shut-down of the melter used to manufacture ALUMAGLASS and its related
processing equipment is expected to improve the operating results and liquidity
of the Company by reducing its operating expenses. The expenses estimated to be
associated with the melter operations were approximately $1,100,000 for the year
ended June 30, 1997. The revenues included for that year were approximately
$248,000 for the sale of products produced by the melter. The Company has
located a source of material that is comparable to that produced by the melter
which can be obtained at a significantly lower cost which is expected to improve
future operating results and liquidity.
The Company incurred process development costs of approximately $996,000 for
fiscal 1996. There were no similar charges in fiscal 1997.
Interest expense increased to approximately $1,277,000 for fiscal 1997 from
approximately $1,077,000 for fiscal 1996, reflecting the capitalization of
approximately $440,000 in interest during fiscal 1996. No interest expense was
capitalized during fiscal 1997. Partially offsetting this cost increase was
approximately $240,000 in lower interest expense in fiscal 1997 as a result of
reductions in debt principal.
-18-
<PAGE>
Interest income of approximately $227,000 in fiscal 1997 compares with
approximately $114,000 in fiscal 1996. The increase reflects higher earnings on
cash received from the Company's initial public offering in May 1996.
Other income of approximately $349,000 in fiscal 1997 was approximately $267,000
higher than fiscal 1996, due entirely to a $331,547 New York State net
investment tax credit recognized in June 1997. (A cash refund of $566,547 was
received, but provision has been made for the return of an estimated $235,000 of
this to the State as a result of the shut down of related fixed assets.)
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 and the proceeds of the IPO. At June 30, 1997, the Company had
approximately $11,315,000 in principal amount of long-term indebtedness
(excluding capital lease obligations) and net working capital deficiency of
approximately $(3,394,554). As of June 30, 1997, the Company had cash and
marketable securities of approximately $325,000.
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 $3,606,150 from the placement of the
Preferred Stock (after deducting the placement agent's commissions and
non-accountable expense allowance). 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 transaction expenses
estimated at $150,000 and general working capital purposes, including accrued
payables.
In July and August 1997, the 1997 Bridge Loan provided the Company with an
aggregate of $500,000 which was used for general working capital purposes. The
1997 Bridge Loan was repaid, together with accrued interest at the rate of 12%
per annum, on September 8, 1997 out of the proceeds of the Preferred Stock
placement. In connection with such 1997 Bridge Loan, the
-19-
<PAGE>
Company issued warrants to purchase 100,000 shares of Common Stock to the Aries
Funds 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 $190,000).
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 June 30, 1997 was $449,190) that will be forfeited
by Dunkirk.
As of September 19, 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 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 following unaudited pro forma balance sheet data reflects the following
transactions as if they had occurred as of June 30, 1997: (i) the private
placement of 414,500 shares of Preferred Stock resulting in gross proceeds of
$4,145,000 less commissions and a non-accountable expense allowance totaling
$538,850 and placement expenses estimated at $150,000 (of which $60,000 was paid
from the proceeds and $32,522 had been recorded by the Company at June 30,
1997), and (ii) retirement of the $8,000,000 principal amount of IDA Bonds for a
payment of $1,620,000 plus $190,000 representing debt service reserve funds
forfeited by Dunkirk upon such retirement in September 1997 plus $230,000
removed from the debt service fund on September 1, 1997 for payment of interest
(with the assumption that there was no related tax on the gain), and (iii)
write-off of $330,361 of deferred finance charges related to the $8,000,000
retired IDA Bonds.
-20-
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------
Pro Forma
Actual Adjustments As Adjusted
------------ ------------- ------------
(unaudited) (unaudited)
ASSETS
<S> <C> <C> <C>
Cash .............................................................. $ 325,092 $ 1,868,672(1) $ 2,193,764
Other current assets .............................................. 855,810 (32,522) 823,288
------------ ------------ ------------
Total current assets ......................................... 1,180,902 1,836,150 3,017,052
Property, plant and equipment (net) ............................... 6,939,782 -- 6,939,782
Noncurrent assets ................................................. 446,929 (330,361) 116,568
Restricted assets ................................................. 869,311 (419,964) 449,347
------------ ------------ ------------
$ 9,436,924 $ 1,085,825 $ 10,522,749
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Accrued expenses .................................................. $ 858,447 (76,667) $ 781,780
All other current liabilities ..................................... 3,717,009 -- 3,717,009
------------ ------------ ------------
Total current liabilities .................................... 4,575,456 (76,667) 4,498,789
Capital lease obligations, less current portion 39,414 -- 39,414
Long-term debt, less current portion .............................. 10,784,343 (8,000,000) 2,784,343
Stockholders' equity (deficiency):
Common stock, $.00025 par value, authorized
25,000,000 shares, issued and outstanding
5,539,745 shares .......................................... 1,385 -- 1,385
Additional paid-in capital, common stock ..................... 24,186,932 -- 24,186,932
Preferred stock, $.001 par value, authorized
15,000,000 shares, issued and outstanding
414,500 shares ............................................ 415 415
Additional paid-in capital, preferred stock .................. -- 3,455,735 3,455,735
Unearned stock compensation .................................. (116,369) -- (116,369)
Accumulated deficit .......................................... (30,034,237) 5,706,342(2) (24,327,895)
------------ ------------ ------------
Total stockholders' equity (deficiency) ........................... (5,962,289) 9,162,492 3,200,203
------------ ------------ ------------
$ 9,436,924 $ 1,085,825 $ 10,522,749
============ ============ ============
<FN>
- ----------
(1) Reflects gross proceeds of $4,145,000 on the sale of Preferred Stock, less
commissions and estimated expenses totaling $656,328 and $1,620,000 paid to
retire the IDA Bonds.
(2) Reflects a pre-tax gain on retirement of $8,000,000 IDA Bonds based on (i)
payments of $1,620,000 cash, (ii) forfeiture of $419,964 in debt service
reserve funds, (iii) $76,667 accrued interest recorded at June 30, 1997 on
the IDA Bonds which was paid from the debt service reserve fund subsequent
to June 30, 1997, and (iv) a write-off of $330,361 for deferred finance
charges related to the retired IDA Bonds. The pro forma adjustment does not
include the related tax, if any, that may be payable with respect to the
debt retirement. If Dunkirk is deemed to be solvent immediately prior to
the retirement of the IDA Bonds, 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 net operating loss carryforwards ("NOLs"),
subject to possible limitations (see below). Even if sufficient NOLs were
available to offset such taxable income, the Company may still be subject
to alternative minimum tax. 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 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' assets has not been completed at this time to
determine Dunkirk's solvency.
</FN>
</TABLE>
The Company's capital lease payments were approximately $84,000 for the year
ended June 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.
-21-
<PAGE>
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's short-term and long-term liquidity will depend on its ability to
achieve cash-flow break even on its operations and to increase sales of its
products. The Company currently is not profitable and therefore relies on cash
from its financing activities to fund its operations. As discussed above under
the heading "Overview", the Company has taken a number of steps to preserve
cash, reduce costs and increase its revenues, but there can be no assurance that
the Company will ever achieve profitability. In addition, the Company has not
yet achieved sufficient sales to replace all the revenue lost from the
termination of the Company's relationship with Thomson in March 1997, and will
not achieve the levels of revenue it experienced during the period when Thomson
was a customer until such time as additional revenue is obtained. The Company is
not aware of any other matters which are likely to have a material impact on the
Company's short-term or long-term liquidity.
The Company sells its recycled glass to Techneglas pursuant to a Clean Cullet
Sale Agreement (the "Cullet Agreement") and an open purchase order arrangement.
The Cullet Agreement had an initial term of three years expiring August 1998 and
automatically renews for additional one year terms unless either party gives the
other written notice of termination at least 120 days prior to the end of any
term. The Cullet Agreement includes provisions relating to specifications,
delivery and acceptance of processed CRT glass. The Cullet Agreement also
requires the Company to sell, and Techneglas to purchase, various amounts of the
CRT glass processed by the Company. The Cullet Agreement also contains pricing
and other customary terms. Techneglas has been purchasing substantially all of
the CRT glass processed by the Company since the loss of Thomsen as a customer.
The Company has no material commitments for capital expenditures.
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
anticipated shifts in ownership (the Preferred Stock offering), the Company's
ability to utilize its net operating loss carryforwards could be severely
limited.
Pending Accounting Pronouncements
- ---------------------------------
SFAS No. 128 "Earning Per Share," SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosure about segments of an Enterprise and Related
Information" are not effective for
-22-
<PAGE>
the Company until December 31, 1997, June 30, 1999 and June 30, 1999,
respectively. Management believes these standards will not have a material
impact on the Company.
Item 7. Financial Statements
- -----------------------------
See Financial Statements annexed.
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
- ----------------------------------------------------------
None.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- ---------------------------------------------------------------------
William L. Amt, 56, joined the Company in August 1997 as President and Chief
Executive Officer and was appointed to the Board in September 1997. Prior to
joining the Company, Mr. Amt was the President and Chief Executive Officer of
Octagon, Inc., a publicly-held company providing radiological control and
operations and maintenance services to utilities and governmental agencies. From
1991 until joining Octagon in November 1993, Mr. Amt was both the Vice President
International and the Vice President of the Chemicals Business Unit for Ford
Bacon & Davis, Incorporated, a multinational engineering and consulting firm
serving the chemical and hydrocarbon industry. From 1988 to 1991, Mr. Amt was
Director of Marketing and Business Development Manager for Simons Eastern
Consultants, Inc., a major international design and engineering firm. Mr. Amt is
a registered professional engineer and holds a B.S. Degree from Purdue
University.
Eckardt C. Beck, 54, has been a director of the Company since February 1995,
Chairman of the Board since February 1997, and served as Acting President and
Chief Executive Officer from June to August 1997. Mr. Beck served as the
Chairman and Chief Executive Officer of Air & Water Technologies Corporation
from October 1987 through June 1994 and as a director from June 1990 through
November 1994. Mr. Beck has served as Chairman and Chief Executive Officer of
other environmental technologies companies prior to 1987. Mr. Beck also served
as the Assistant Administrator of the United States Environmental Protection
Agency in charge of the national water and waste programs and as the Regional
Administrator of EPA Region 2. Except with respect to Mr. Beck's involvement
with the Company as set forth above, from December 1994 through the present, Mr.
Beck has not had any employment or material consulting relationships with any
entity.
Douglas M. Costle, 58, was appointed to the Company's Board of Directors in
October 1997. Mr. Costle has been a director of Niagara Mohawk Power
Corporation, a publicly held utility company, from January 1991 through present.
Mr. Costle is currently a director of several privately held technology
companies and is an Independent Trustee of John Hancock Mutual
-23-
<PAGE>
Funds. Retired since 1992, Mr. Costle served as Dean of Vermont Law School from
1987 to 1992 and is a former Administrator of the U.S. Environmental Protection
Agency.
Stephen D. Fish, 51, was appointed to the Company's Board of Directors in
October 1997. Mr. Fish has been President of Fish Enterprises, a privately held
real estate development and management company, from 1970 through present. Mr.
Fish also serves on the Advisory Board of Fleet Bank of Connecticut.
Peter H. Gardner, 31, has been a director of the Company since October 1995. Mr.
Gardner is a Vice President at Technology Funding Inc., the Managing General
Partner of two investment funds which are stockholders of and consultants to the
Company. See "Security Ownership of Certain Beneficial Owners, Directors and
Management" and "Certain Relationships and Related Transactions." Mr. Gardner
joined Technology Funding Inc. in July 1994. Mr. Gardner held the position of
Project Leader and Project Scientist at Roy F. Weston, Inc., an environmental
engineering firm, from June 1990 through August 1993. In 1993 to 1994, Mr.
Gardner pursued a graduate degree in business administration.
Scott A. Katzmann, 41, has been a director of the Company since October 1994.
Mr. Katzmann is a Managing Director and the Head of Capital Markets at Paramount
Capital Inc. Prior to joining Paramount Capital, Inc. in March 1993, Mr.
Katzmann spent over 10 years with The First Boston Corporation, where he
specialized in early stage venture capital financings, leveraged acquisition
financings, investment partnerships, oil and gas transactions, expansion capital
financings and project financings. Prior to that, he was an Investment Officer
in the Investment Department of Aetna Life & Casualty, where he specialized in
private placements.
Alexander P. Haig, 45, has been a director of the Company since May 1996. Since
February 1996, Mr. Haig has been President and Chief Operating Officer of Sky
Station International Inc., a privately-held telecommunications company. Mr.
Haig has served since 1988 as a principal and legal counsel to Worldwide
Associates, Inc., a privately-held business adviser to both U.S. and foreign
countries for marketing and sales activities. Prior to 1988, Mr. Haig was an
attorney in private practice.
Irwin M. Rosenthal, 68, was appointed as a director of the Company in May 1996.
Mr. Rosenthal is an attorney and since 1960 has specialized in securities law.
He is currently a senior partner at Rubin Baum Levin Constant & Friedman. From
January 1990 to November 1991, Mr. Rosenthal was a senior partner at Baer, Marks
and Upham and prior thereto he was an attorney at various other law firms. Mr.
Rosenthal serves as Secretary and as a director of Magar Inc., a private
investment firm, of which he is a principal stockholder. He is also a director
of Magna-Lab, Inc., a publicly-traded medical technology company, Symbollon
Corporation, a publicly-traded chemical and medical technology company, Life
Medical Sciences, Inc., a publicly-traded medical technology company, and
Echocath, Inc., a publicly-traded medical technology company, and is a general
partner of Alliance which is a partnership which invests in companies and may
take on a management role in such companies.
-24-
<PAGE>
Jack D. Hays, Jr., joined the Company in July 1997 as Executive Vice
President-Operations and Marketing and Secretary. Prior to joining the Company,
Mr. Hays was vice president of IBMS, Inc., a market chemical process consulting
company from, September 1993 through June 1997. Mr. Hays was also a National
Account Executive at Brown & Root, Inc., an engineering, construction and
environmental consulting firm, from July 1993 through June 1996. Prior to his
employment at Brown & Root, Inc., Mr. Hays served as a consultant to Brown &
Root, Inc. from March 1993 to June 1993. Mr. Hays was Executive Vice President
at Ford, Baron & Davis, Incorporated, an engineering and construction consulting
firm from February 1992 through March 1993. Prior to joining Ford, Bacon &
Davis, Incorporated, Mr. Hays was with PPG Industries, Inc., where he had over
30 years of experience in various operating and management positions. Mr. Hays
received a B.S. and M.S. in Chemical Engineering from Louisiana State University
and a M.B.A. from the University of Pittsburgh.
Richard H. Hughes joined the Company in July 1997 as Vice President-Sales and
Marketing. Prior to joining the Company, Mr. Hughes was Vice-President of IBMS,
Inc. from September 1993 to June 1997, where he consulted on various market
research projects for companies in the chemical processing industry. Mr. Hughes
was Vice-President Sales and Marketing for ISE America, Inc., a chemical
manufacturing company and a division of Mitsubishi Industries, from December
1990 to December 1995. Mr. Hughes received his B.S. in Chemistry and Mathematics
from the University of Charleston.
Robert Dejaiffe is the Company's Vice President - Technology and has been Vice
President and Technical Director of the Company's wholly-owned subsidiary,
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), since joining
Dunkirk in July 1992. His career started as an engineer with Corning
Incorporated where he was responsible for the design and construction of several
specialty glass furnaces. Mr. Dejaiffe then became Manager of Research and
Development for the 48 Insulation Division of Foster Wheeler Corporation, where
he developed a new electric furnace design and worked with high temperature
industrial insulations using reduced glass. From 1981 to 1989, he was at Potters
Industries as Manager of Advanced Technology and Manager of Process Development
Engineering, and from October 1989 until joining the Company, he managed a
research and testing facility at Penn State University. He holds several patents
on glass composites, furnace accessories and refractory treatments. Mr. Dejaiffe
received his B.S. in Ceramics Engineering from Penn State University and M.B.A.
from Syracuse University.
Section 16(a) Beneficial Ownership Reporting Compliance
- --------------------------------------------------------
Section 16(a) of the Exchange Act requires the Company's officers and directors
and persons who are beneficial owners of ten percent or more of the Company's
Common Stock to file reports of ownership and changes in ownership of the
Company's securities with the Securities and Exchange Commission. Such officers,
directors and beneficial owners are required by applicable regulations to
provide to the Company copies of all forms they file under Section 16(a).
Based solely upon a review of the copies of forms furnished to the Company, and
written representations from certain reporting persons, the Company believes
that during the fiscal year
-25-
<PAGE>
ended June 30, 1997, all filing requirements applicable to its officers,
directors and ten percent beneficial owners were complied with except that
Donald R. Kendall, Jr., a former director of the Company, filed a Form 5 on
August 25, 1997 which was required to be filed on August 14, 1997.
Item 10. Executive Compensation
- -------------------------------
The following table sets forth a summary of the compensation earned by Eckardt
C. Beck, the Company's Chairman who served as Acting Chief Executive Officer
from June 1997 to August 1997, Harvey Goldman, the Company's former
Vice-Chairman, President and Chief Executive Officer, and Perry A. Pappas, the
Company's former Vice President and General Counsel (collectively, the "Named
Executive Officers") for services rendered in all capacities to the Company
during the Company's fiscal years ended June 30, 1995, 1996 and 1997. No other
executive officer of the Company received salary and bonus compensation in
excess of $100,000 during the fiscal year ended June 30, 1997 (sometimes
referred to herein as "Fiscal Year 1997"). William L. Amt, the Company's current
President and Chief Executive Officer and Jack D. Hays, Jr., the Company's
current Executive Vice President - Operations and Marketing and Secretary are
not included below because their employment began after Fiscal Year 1997.
<TABLE>
Summary Compensation Table
<CAPTION>
Annual
Compensation Long-Term Compensation
------------ ----------------------
Restricted Securities
Stock Underlying
Name and Principal Position Year Salary($) Awards($) Options/SARs(#)
- -------------------------------------------------------------- ---- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
Eckardt C. Beck .............................................. 1997 $ 48,000(1) 10,121(2)
Chairman and Acting President and Chief Executive Officer from 1996 $ 12,000 1,217
June 1997 to August 1997 ..................................... 1995
Harvey Goldman ............................................... 1997 $168,750(3) $260,000(4) 40,000(5)
Former Vice - Chairman, President and Chief Executive Officer 1996 $180,000 50,000(6)
1995 $180,000
Perry A. Pappas .............................................. 1997 $119,790 $ 32,500(7) 15,000(8)
Former Vice President, General Counsel and Secretary 1996 $104,167 21,923
1995
- -----------
<FN>
(1) Mr. Beck became Chairman in February 1997 and served as Acting President
and Chief Executive Officer from June 1997 to August 1997. Compensation
represents consulting fees pursuant to his Consulting Agreement with the
Company. See "Certain Relationships and Related Transactions." Mr. Beck
currently receives $8,000 per month under the Consulting Agreement.
(2) Granted in July and October 1996 pursuant to the Company's Non-Employee
Director Stock Option Plan. All options vest one year from grant date.
-26-
<PAGE>
(3) Mr. Goldman ceased being an officer of the Company in June 1997. He is
currently a Consultant to the Company and receives $10,000 per month under
such Consulting Agreement through June 1998. See "Certain Relationships and
Related Transactions."
(4) Granted in October 1996 pursuant to the Company's Long-Term Employee
Incentive Plan. The shares vest in January 1998 and had a market value of
$130,000 on June 30, 1997. The shares are entitled to receive dividends if
and when declared by the Company. Mr. Goldman does not hold any other
restricted stock in the Company.
(5) Incentive Stock Options granted in October 1996 pursuant to the Company's
Employee Stock Option Plan. The options have terminated.
(6) Non-qualified stock options granted in April 1996. The options have
terminated.
(7) Granted in October 1996 pursuant to the Company's Long-Term Employee
Incentive Plan. The shares vest in January 1998 and had a market value of
$16,250 on June 30, 1997. The shares are entitled to receive dividends if
and when declared by the Company. Mr. Pappas does not hold any other
restricted stock in the Company.
(8) Incentive Stock Options granted in October 1996 pursuant to the Company's
Employee Stock Option Plan. The options have an exercise price of $4.40 per
share and are fully vested.
</FN>
</TABLE>
Option Grants in Fiscal Year 1997
- ---------------------------------
The following table sets forth the number of individual stock option grants made
to each Named Executive Officer during Fiscal Year 1997.
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARS
Underlying Granted to Exercise or
Options/SARs Employees in Base Price
Name Granted(#) Fiscal Year(1) ($/sh) Expiration Date
- ------------------------- ------------ ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
Eckardt C. Beck.......... 121(2) * $4.40 7/1/06
10,000(3) 5.1% $5.00 10/15/06
Harvey Goldman........... 40,000(4) 20.5% $4.40
Perry A. Pappas.......... 15,000(5) 7.7% $4.40 7/23/03
- -----------
<FN>
* Less than one percent.
(1) The Company granted options to purchase an aggregate of 155,347 shares of
Common Stock during Fiscal Year 1997.
(2) Granted on July 1, 1996 pursuant to the Company's Stock Option Plan for
Non-Employee Directors. These options vested on July 1, 1997.
-27-
<PAGE>
(3) Granted on October 15, 1996 pursuant to the Company's Stock Option Plan for
Non-Employee Directors. These options vested on October 15, 1997.
(4) Non-qualified Options granted outside of the Company's Employee Stock
Option Plan. Mr. Goldman's options have terminated.
(5) Incentive Stock Options granted pursuant to the Company's Employee Stock
Option Plan. All options were vested in July 1997.
</FN>
</TABLE>
Aggregated Options/SAR Exercises in Last Fiscal Year and Year End Option Values
- -------------------------------------------------------------------------------
The following table sets forth the aggregate value of unexercised options to
acquire shares of the Company's Common Stock by the Named Executive Officers
exercised during Fiscal Year 1997. None of the Named Executive Officers
exercised options during Fiscal Year 1997.
<TABLE>
<CAPTION>
Number of
Unexercised Value of Unexercised In-the
Options at FY- Money Options at FY-
End(#) End($)(1)
------------------- ----------------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ----------------------------------------- ------------------- ----------------------------
<S> <C> <C>
Eckardt C. Beck.......................... 1,338/10,000 $0/$0
Harvey Goldman........................... 0/0 $0/$0
Perry A. Pappas.......................... 7,308/29,615 $0/$0
<FN>
(1) Calculated based on the difference between the exercise price and the price
of a share of the Company's Common Stock on June 30, 1997. As of June 30,
1997, the exercise prices of each of the options held by the Named
Executive Officers exceeded the price of a share of the Company's Common
Stock.
</FN>
</TABLE>
Compensation of Directors
- -------------------------
In Fiscal Year 1997, Directors who were full-time employees of the Company
received no cash compensation for services rendered as members of the Board of
Directors (the "Board") or committees thereof. Directors who were not full-time
employees of the Company received reimbursement of out-of-pocket expenses for
attendance at Board meetings. The Company maintains a Stock Option Plan for
Non-Employee Directors, pursuant to which options to purchase an aggregate of
50,847 shares of Common Stock were issued during Fiscal Year 1997. Such options
vest one year from the date of grant and contain exercise prices of between
$3.125 and $5.00 per share. Non-Employee directors received no other
compensation for their services as directors for Fiscal Year 1997.
-28-
<PAGE>
The Company entered into a Consulting Agreement with Eckardt C. Beck in March
1995, which was amended in February 1997 and August 1997. Pursuant to the
Consulting Agreement, Mr. Beck has agreed to, among other things, assist the
Company in strategic planning, business development, investor relations, fund
raising and such other activities as shall be reasonably requested by the Board
and within Mr. Beck's areas of expertise. Mr. Beck will receive a monthly
consulting fee of $8,000 pursuant to the Consulting Agreement until its
expiration in August 2000.
Employment Contracts and Employment Termination Arrangements
- ------------------------------------------------------------
William L. Amt is employed with the Company under a one-year employment
agreement, which provides for automatic one-year renewal options unless contrary
written notice is given by either party. Under the terms of the employment
agreement, which includes confidentiality and non-competition provisions, Mr.
Amt receives an annual salary of $160,000, subject to increase at the discretion
of the Board. Mr. Amt will not receive an annual bonus or an incentive bonus,
except as may be provided by the Board. Both the Company and Mr. Amt may
terminate the employment agreement at any time by providing written notice to
the other party. If the termination is initiated by the Company without cause,
Mr. Amt is entitled to receive severance in the amount of one years' salary. Mr.
Amt has also been granted incentive stock options to purchase 300,000 shares of
Common Stock at an exercise price of $1.375 per share. Twenty percent (20%) of
such options were vested immediately and twenty percent (20%) of such options
will vest on the first, second, third and fourth anniversary of the date of
issuance.
Jack D. Hays, Jr. is employed with the Company under a one-year employment
agreement, which provides for automatic one-year renewal options unless contrary
written notice is given by either party. Under the terms of the employment
agreement, which includes confidentiality and non-competition provisions, Mr.
Hays receives an annual salary of $125,000, subject to increase at the
discretion of the Board. Mr. Hays will not receive an annual bonus or an
incentive bonus, except as may be provided by the Board. Both the Company and
Mr. Hays may terminate the employment agreement at any time by providing written
notice to the other party. If the termination is initiated by the Company
without cause, Mr. Hays is entitled to receive severance in the amount of one
years' salary. Mr. Hays has also been granted incentive stock options to
purchase 100,000 shares of Common Stock at an exercise price of $1 5/8 per
share. Twenty percent (20%) of such options were vested upon issuance and twenty
percent (20%) of such options vest on the first, second, third and fourth
anniversary of the date of issuance.
Richard H. Hughes is employed with the Company under a one-year employment
agreement, which provides for automatic one-year renewal options unless contrary
written notice is given by either party. Under the terms of the employment
agreement, which includes confidentiality and non-competition provisions, Mr.
Hughes receives an annual salary of $90,000, subject to increase at the
discretion of the Board. Mr. Hughes will not receive an annual bonus or an
incentive bonus, except as may be provided by the Board. Both the Company and
Mr. Hughes may terminate the employment agreement at any time by providing
written notice to the other party. If the termination is initiated by the
Company without cause, Mr. Hughes is entitled to receive severance in the amount
of one years' salary. Mr. Hays has also been granted incentive stock
-29-
<PAGE>
options to purchase 75,000 shares of Common Stock at an exercise price of $1 5/8
per share. Twenty percent (20%) of such options were vested upon issuance and
twenty percent (20%) of such options vest on the first, second, third and fourth
anniversary of the date of issuance.
In June 1997, the Company entered into a Consulting Agreement with Harvey
Goldman, former Vice-Chairman, President and Chief Executive Officer of the
Company, which terminates his prior employment agreement with the Company and
contains mutual releases for any claims under such prior agreement. Mr. Goldman
is entitled to receive a monthly consulting fee of $10,000 pursuant to the
Consulting Agreement through June 1998. In the event that the Company fails to
pay the consideration due under the Consulting Agreement, Mr. Goldman retains
all rights that he had under his prior agreement with respect to termination.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock and Series A Convertible Preferred Stock
(the "Convertible Preferred Stock") as of September 30, 1997 by (i) each person
known by the Company to own beneficially more than 5% of the outstanding Common
Stock or Convertible Preferred Stock of the Company, (ii) each of the Company's
directors, (iii) each of the Company's Named Executive Officers (defined
herein), and (iv) all directors and executive officers of the Company as a
group. Holders of the Convertible Preferred Stock are entitled to the number of
votes equal to the number of shares of Common Stock into which such shares of
Convertible Preferred Stock are convertible, and are entitled to vote together
with the holders of the Common Stock. Accordingly, the information in the table
below reflects ownership by the above individuals of each of the Company's
Common Stock assuming the conversion of all outstanding shares of the
Convertible Preferred Stock and the Convertible Preferred Stock separately. At
September 30, 1997 each share of Convertible Preferred Stock was convertible
into eight shares of Common Stock.
Percentage
Number of of
Shares Convertible
Beneficially Percentage of Preferred
Name of Beneficial Owner (1) Owned(2) Voting Power(3) Stock(4)
- ---------------------------- ------------ --------------- -----------
Eckardt C. Beck (5)................. 165,171 1.9 2.4
William L. Amt (6).................. 60,000 * --
Peter H. Gardner (7)................ 746,421 8.2 7.6
Alexander P. Haig (8)............... 9,992 * --
Scott A. Katzmann (9)............... 50,950 * --
Douglas M. Costle .................. -- * --
Stephen D. Fish..................... 160,000 1.8 4.8
Irwin M. Rosenthal (10)............. 5,121 * --
Jack D. Hays, Jr. (11).............. 20,000 * --
Richard H. Hughes (12).............. 15,000 * --
-30-
<PAGE>
Technology Funding Venture Partners
V, An Aggressive Growth Fund, L.P. (13) 746,421 8.2 7.6
All officers and directors as a
group (10 persons) (14)........... 1,243,720 13.4 14.8
Harvey Goldman (15)................. 185,964 2.1 --
c/o Vestcom International, Inc.
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071
Perry A. Pappas (16)................ 66,923 * --
c/o Buchanan Ingersoll
500 College Road East
Princeton, New Jersey 08540
The Aries Fund, 680,279 7.6 15.9
a Cayman Islands Trust (17)......
787 7th Avenue
48th Floor
New York, New York 10019
Aries Domestic Fund, L.P. (18)..... 446,034 4.9 8.2
787 7th Avenue
48th Floor
New York, New York 10019
Porter Partners, L.P. (19).......... 320,000 3.6 9.7
100 Shoreline, Suite 211B
Mill Valley, CA 94941
P.A.W. Offshore Fund, Ltd. (20)..... 400,000 4.5 12.1
90 Mees Pierson
904 East Bay Street
P.O. Box 55-6233
Nassau, Bahamas
J.F. Shea Co., Inc. (21)........... 240,000 2.7 7.2
655 Brea Canyon Road
Walnut, California 91789
Pequot Scot Fund, LP (22)........... 180,000 2.0 5.4
354 Pequot Avenue
Southport, CT 06490
- -----------
* Less than one percent.
-31-
<PAGE>
(1) Unless otherwise indicated and subject to applicable community property
laws, each stockholder has sole voting and investment power with respect to
all shares of Common Stock beneficially owned by such stockholder. Unless
otherwise indicated, the address of each stockholder is c/o Conversion
Technologies International, Inc., 3452 Lake Lynda Drive, Suite 280,
Orlando, Florida 32817.
(2) The number of shares beneficially owned by each person named in the table
consists of the number of shares held by each individual of (i) the
Company's Common Stock; (ii) the Company's Preferred Stock, as converted
into Common Stock; and (iii) Common Stock subject to options or warrants
that are presently exercisable or exercisable within 60 days of September
30, 1997.
(3) Applicable percentage of voting power is based on the 8,855,745 shares of
Common Stock entitled to vote at the Meeting. That number is comprised of
5,539,745 outstanding shares of Common Stock and 3,316,000 shares of Common
Stock issuable upon conversion of 414,500 outstanding shares of Convertible
Preferred Stock. Shares of Common Stock subject to options that are
presently exercisable or exercisable within 60 days are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person but are not treated as
outstanding for the purpose of computing the percentage of any other
person.
(4) Applicable percentage of ownership is based on 3,316,000 shares of Common
Stock issuable upon conversion of the 414,500 shares of Convertible
Preferred Stock outstanding as of September 30, 1997.
(5) Includes currently exercisable options to purchase 61,338 shares of Common
Stock. Also includes options to purchase 10,000 shares of Common Stock
which are exercisable within 60 days. Excludes options to purchase 240,000
shares of Common Stock which are not exercisable within 60 days. The
address of such stockholder is 6345 NW 26th Terrace, Boca Raton, Florida
33496.
(6) Includes currently exercisable options to purchase 60,000 shares of Common
Stock. Excludes options to purchase 240,000 shares of Common Stock which
are not exercisable within 60 days.
(7) Includes securities beneficially owned by Technology Funding Partners III,
L.P. ("TFP III") and Technology Funding Partners V, An Aggressive Growth
Fund, L.P. ("TFVP V") (as detailed in footnote 13 to this table). Mr.
Gardner is an Investment Officer at Technology Funding, Inc. ("TFI") and
the Managing General Partner of TFP III and TFVP V. Mr. Gardner disclaims
beneficial ownership of all securities of the Company owned by TFP III and
TFVP V. Includes currently exercisable options to purchase 11,338 shares of
Common Stock and options to purchase 4,000 shares of Common Stock which are
exercisable within 60 days. Excludes options to purchase 16,000 shares of
Common Stock which are not exercisable within 60 days. The address of such
stockholder is c/o Technology Funding Inc., 2000 Alameda de las Pulgas, San
Mateo, California 94403.
-32-
<PAGE>
(8) Includes currently exercisable options to purchase 121 shares of Common
Stock. Also includes options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.
(9) Includes currently exercisable options and warrants to purchase 24,771
shares of Common Stock and 12,179 Escrow Shares beneficially owned by Scott
A. Katzmann. Also includes options to purchase 14,000 shares of Common
Stock which are exercisable within 60 days. Excludes options to purchase
16,000 shares of Common Stock which are not exercisable within 60 days.
(10) Includes currently exercisable options to purchase 121 shares of Common
Stock. Also includes options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.
(11) Includes currently exercisable options to purchase 20,000 shares of Common
Stock. Excludes options to purchase 80,000 shares of Common Stock which are
not exercisable within 60 days.
(12) Includes currently exercisable options to purchase 15,000 shares of Common
Stock. Excludes options to purchase 60,000 shares of Common Stock which are
not exercisable within 60 days.
(13) Includes (A) securities held by TFVP V consisting of (i) 207,547 shares of
Common Stock, (ii) 7,875 shares of Convertible Preferred Stock, (iii)
warrants, exercisable within 60 days, to purchase 83,771 shares of Common
Stock, and (B) securities held by TFP III consisting of (i) 69,180 shares
of Common Stock , (ii) 23,625 shares of Convertible Preferred Stock and
(iii) warrants, exercisable within 60 days, to purchase 118,585 shares of
Common Stock . Includes currently exercisable options issued to Peter
Gardner to purchase 11,338 shares of Common Stock and options to purchase
4,000 shares of Common Stock which are exercisable within 60 days. Excludes
(i) options issued to Peter Gardner to purchase 16,000 shares of Common
Stock , (ii) warrants to purchase 2,104 shares of Common Stock held by TFVP
V and (iii) 680 shares of Common Stock held by TFP III, which, in each
case, are not exercisable within 60 days.
(14) Calculation does not include securities held by Mr. Goldman or Mr. Pappas
who are no longer directors or officers of the Company.
(15) Includes currently exercisable warrants to purchase 5,239 shares of Common
Stock. Mr. Goldman is no longer an officer or director of the Company. (See
"Certain Relationships and Related Transactions Consulting Agreements").
(16) Includes currently exercisable options to purchase 56,923 shares of Common
Stock. Mr. Pappas is no longer an officer of the Company.
-33-
<PAGE>
(17) Paramount Capital Asset Management, Inc. ("PCAM") is the Investment Manager
to The Aries Fund, a Cayman Islands Trust (the "Aries Trust"). Lindsay A.
Rosenwald, M.D. is President and sole shareholder of PCAM. PCAM and Dr.
Rosenwald may be considered to beneficially own the securities owned by the
Aries Trust by virtue of their authority to vote and/or dispose of the
securities. PCAM and Dr. Rosenwald disclaim beneficial ownership of all
securities of the Company held by the Aries Trust. Securities held by the
Aries Trust consist of 40,789 Class A Warrants which entitle the holder to
acquire one share of Common Stock and one Class B Warrant to acquire one
share of Common Stock; warrants to purchase an additional 70,701 shares of
Common Stock; and 66,000 shares of Convertible Preferred Stock convertible
into 528,000 shares of Common Stock. In addition, Dr. Rosenwald
beneficially owns warrants to purchase 44,719 shares of the Company's
Common Stock.
(18) PCAM is the General Partner of the Aries Domestic Fund L.P. Dr. Rosenwald
is the President and sole shareholder of PCAM. PCAM and Dr. Rosenwald may
be considered to beneficially own the securities owned by the Aries
Domestic Fund, L.P. by virtue of their authority to vote and/or dispose of
the securities. PCAM and Dr. Rosenwald disclaim beneficial ownership of all
securities of the Company held by the Aries Domestic Fund, L.P. Securities
held by Aries Domestic Fund, L.P. consist of 67,982 Class A Warrants which
entitle the holder to acquire one share of Common Stock and one Class B
Warrant to acquire one share of Common Stock; warrants to purchase an
additional 38,070 shares of Common Stock; and 34,000 shares of Convertible
Preferred Stock convertible into 272,000 shares of Common Stock. In
addition, Dr. Rosenwald beneficially owns warrants to purchase 44,719
shares of the Company's Common Stock.
(19) Jeffrey H. Porter, the Managing General Partner of Porter Partners, L.P.
Mr. Porter may be considered a beneficial owner of the securities owned by
Porter Partners, L.P. by virtue of his authority to vote and/or dispose of
the securities held by Porter Partners, L.P. Mr. Porter disclaims
beneficial ownership of all securities of the Company held by Porter
Partners, L.P.
(20) Peter Wright is the Investment Manager for the P.A.W. Offshore Fund, Ltd.
Mr. Wright may be considered the beneficial owner of the securities owned
by the P.A.W. Offshore Fund, Ltd. by virtue of his authority to vote and/or
dispose of the Company's securities held by P.A.W. Offshore Fund, Ltd. Mr.
Wright disclaims beneficial ownership of all securities of the Company held
by P.A.W. Offshore Fund, Ltd.
(21) Edmund H. Shea, Jr. is Vice President of J.F. Shea Co., Inc. Mr. Shea may
be considered the beneficial owner of the securities owned by J.F. Shea
Co., Inc. by virtue of his authority to vote and/or dispose of the
Company's securities held by J.F. Shea Co., Inc. Mr. Shea disclaims
beneficial ownership of all securities of the Company held by J.F. Shea
Co., Inc.
(22) Amiel Peretz is Chief Financial Officer of Dawson-Samberg Capital
Management, Inc., the investment advisor of Pequot Scot Fund LP. Mr. Peretz
may be considered the beneficial owner of the securities owned by Pequot
Scot Fund, LP. by virtue of his authority to vote
-34-
<PAGE>
and/or dispose of the Company's securities held by Pequot Scot Fund, LP.
Mr. Peretz disclaims beneficial ownership of all securities of the Company
held by Pequot Scot Fund, LP.
Item 12. Certain Relationships and Related Transactions
- -------------------------------------------------------
Employment Agreements
The Company has entered into employment agreements with William L. Amt, who
became President and Chief Executive Officer in August 1997, Jack D, Hays, Jr.,
who became Executive Vice President - Operations and Marketing and Secretary of
the Company in July 1997, and Richard H. Hughes, who also became Vice President
- - Sales and Marketing of the Company in July 1997. See "Executive Compensation -
Employment Contracts and Employment Termination Arrangements."
Consulting Agreements
- ---------------------
In March 1995, the Company entered into a Consulting Agreement with Eckardt C.
Beck. The Consulting Agreement was amended in February and August 1997. Pursuant
to the Consulting Agreement, Mr. Beck has agreed to, among other things, assist
the Company in strategic planning, business development, investor relations,
fund raising and such other activities as shall be reasonably requested by the
Board and within Mr. Beck's areas of expertise. Mr. Beck will receive a monthly
consulting fee of $8,000 pursuant to the Consulting Agreement until its
expiration in August 2000.
In May 1995, the Company entered into a consulting agreement with TFP III and
TFP V (the "TFI Consulting Agreement"). Pursuant to the TFI Consulting
Agreement, the consultants agreed to, among other things, introduce the Company
to strategic partners and potential customers, provide strategic marketing
advice, identify complementary technologies with strategic synergies, and
identify and assist in procuring appropriate media channels for the Company's
products. As compensation for their services, the consultants received warrants
which were amended in May 1996 to become warrants to purchase 69,177 shares of
the Company's common stock, at an exercise price of $5.28 per share. Peter H.
Gardner, a director of the Company, is an Investment Officer at TFI, the
Managing General Partner of TFP III and TFVP V, and serves as TFI's designee on
the Board.
In July 1995, the Company entered into a Project Development Assistance
Agreement with TFI (the "TFI Assistance Agreement"). Pursuant to the TFI
Assistance Agreement, certain designated principals of TFI will, among other
things, assist the Company in project development efforts both in the United
States and abroad by identifying potential strategic partners, assisting in
obtaining regulatory approvals and providing regulatory guidance and otherwise
facilitating project development activities. The Company will pay to TFI or its
designees a success fee of $75,000 for completed projects and a fee of 7% on any
funds invested in the Company by a strategic partner introduced by TFI (together
with warrants to purchase that number of shares of Common Stock of the Company
as is equal to 5% of the amount invested divided by the
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<PAGE>
Common Stock share purchase price, at an exercise price equal to 110% of such
purchase price). The term of the TFI Assistance Agreement is one year, subject
to renewal, cancelable by either party upon 30 days' prior written notice.
In June 1997, the Company entered into a Consulting Agreement with Harvey
Goldman, former Vice-Chairman, President and Chief Executive Officer of the
Company, which terminates his prior employment agreement with the Company and
contains mutual releases for claims under such prior agreement. Pursuant to the
Consulting Agreement, Mr. Goldman has agreed to, among other things, assist the
Company in project development, strategic planning and such other activities as
shall be reasonably requested by the Board of Directors and within Mr. Goldman's
areas of expertise. Mr. Goldman is entitled to receive a monthly consulting fee
of $10,000 per month for nine months terminating with the final payment due in
June 1998.
Series A Convertible Preferred Stock
- ------------------------------------
On September 5, 1997, the Company closed on the second tranch of a private
placement of the Company's Convertible Preferred Stock (the "Convertible
Preferred Stock Private Placement"). Paramount Capital, Inc. acted as placement
agent (the "Placement Agent" or "Paramount") for the Convertible Preferred Stock
Private Placement and has received an aggregate placement fee to date of
$373,050, which represents 9% of the aggregate gross proceeds, and an expense
allowance of $165,800 which represents 4% of the aggregate gross proceeds. In
addition, upon the closing of the Convertible Preferred Stock Private Placement,
the Company will grant to the Placement Agent, and/or its designees, warrants to
purchase Convertible Preferred Stock equal to 10% of the total number of shares
of Convertible Preferred Stock sold in the Convertible Preferred Stock Private
Placement at an exercise price equal to 110% of the offering price of the
Convertible Preferred Stock. The warrant(s) to be issued upon the closing of the
Convertible Preferred Stock Private Placement are exercisable for ten years
commencing six months from the final closing of the Convertible Preferred Stock
Private Placement. The warrants contain certain antidilution and registration
rights provisions. Scott A. Katzmann, a director of the Company, is a Managing
Director of the Placement Agent.
-36-
<PAGE>
Prior Preferred Stock Placement
- -------------------------------
Between August 1994 and May 1995, Paramount acted as placement agent in
connection with the private placement of a prior series of Preferred Stock (the
"Old Preferred Shares"). The Placement Agent received $632,250 in commissions
and a non-accountable expense allowance of $281,000 in consideration of its
services as placement agent. In addition, designees of the Placement Agent
received, as additional compensation, warrants to purchase an aggregate of
281,000 Old Preferred Shares, at an exercise price of $2.75 per share,
exercisable for a period of 10 years following the closing of the offering. Such
warrants were amended and restated in May 1996 to be warrants to purchase 97,185
shares of Common Stock at an exercise price of $4.84 per share. In connection
with this private placement, until November 1997, the Placement Agent will be
entitled to receive a placement fee of 9%, plus a 4% expense allowance, on any
investments received by the Company from investors or corporate partners
(excluding project finance investors) that were introduced to the Company by
Paramount.
Lindsay A. Rosenwald, M.D., is the President, Chairman and sole stockholder, and
Peter Kash is a Managing Director, of Paramount. In connection with the private
placement of Old Series A Shares, Dr. Rosenwald and Mr. Kash received warrants
to purchase Old Series A Shares, which currently represent warrants to purchase
34,353 and 4,788 shares of Common Stock, respectively.
Bridge Loans
- ------------
In connection with a bridge financing in 1994 (the "1994 Financing"), designees
of Paramount received warrants to purchase an aggregate of 7,307 shares of
Common Stock with an initial per share exercise price equal to $13.55. Such
warrants were amended and restated in May 1996 to become exercisable for 20,750
shares of Common Stock at an exercise price of $4.77 per share. Such warrants
include warrants to purchase 10,374 shares of Common Stock issued to Dr.
Rosenwald and warrants to purchase 4,671 shares of Common Stock issued to Mr.
Kash.
In September, October and November 1995, the Company borrowed an aggregate of
$650,000 from stockholders of the Company or their affiliates for working
capital. Of such amount, an aggregate of $250,000 was provided by TFP III and
TFVP V, and an aggregate of $200,000 was provided by Aries Domestic Fund, L.P.
and the Aries Trust (collectively, the "Aries Funds"), two funds for which
Paramount Capital Asset Management, Inc. is the general partner and investment
manager, respectively. Dr. Rosenwald is the President and sole stockholder of
Paramount Capital Asset Management, Inc. The principal amount of such loans was
exchanged in December 1995 for $650,000 principal amount of new notes and
warrants to purchase 325,000 shares of Common Stock (which warrants were
exchanged automatically on the closing of the Company's initial public offering
("IPO") for Redeemable Class A Warrants to purchase 325,000 shares of Common
Stock). The notes received by such stockholders were repaid at the closing of
the IPO.
In March 1996, the Company borrowed an aggregate of $200,000 pursuant to
promissory notes bearing interest at the rate of 10% per annum. Of such amount,
Dr. Rosenwald provided
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<PAGE>
$150,000, Scott A. Katzmann and Peter Kash each provided $18,750 and Harvey
Goldman provided $12,500. Such notes were repaid at the closing of the IPO.
In May 1996, the Company borrowed $200,000 from Dr. Rosenwald pursuant to
promissory notes bearing interest at the rate of 10% per annum, which were
repaid at the closing of the IPO.
In July and August 1997, the Company borrowed an aggregate of $500,000 from the
Aries Funds pursuant to a line of credit agreement (the "1997 Bridge Loan"). The
1997 Bridge Loan bears interest at the rate of 12% per annum and was repaid in
August 1997. In connection with the 1997 Bridge Loan, the Company issued to the
Aries Funds warrants to purchase an aggregate of 100,000 shares of Common Stock
at a per share exercise price equal to $1 5/16. Such warrants expire July 21,
2002 and contain certain antidilution and registration rights provisions. In
August 1997 the Aries Funds purchased 100,000 shares of Convertible Preferred
Stock for $1,000,000 in the Convertible Preferred Stock Private Placement.
Issuances of Securities to Executive Officers and Directors
- -----------------------------------------------------------
From the period from inception to December 1995, the Company granted options to
purchase an aggregate of 48,891 shares of Common Stock to executive officers and
directors of the Company with exercise prices ranging from $13.55 to $20.53 per
share. Such options were repriced in May 1996 to $4.40 per share.
In April 1996, the Company issued non-qualified stock options outside of the
Employee Stock Option Plan, all of which are Escrow Options (defined herein), to
Mr. Goldman, to purchase 50,000 shares of Common Stock. Such options have an
exercise price of $4.40 per share and vest ratably over three years on an annual
basis. Mr. Goldman was also granted options to purchase 40,000 shares of Common
Stock in October 1996 at an exercise price of $4.40. All of Mr. Goldman's
options have terminated.
On July 1, 1996, each director received an option to purchase 121 shares of
Common Stock pursuant to an automatic grant under the Company's Stock Option
Plan for Non-Employee Directors. Such options have an exercise price of $5.00
per share and are fully vested.
On October 11, 1996, Mr. Goldman and Mr. Pappas purchased 80,000 and 10,000
shares, respectively, of Common Stock for a purchase price of $.00025 per share,
pursuant to restricted stock grant awards under the 1996 Employee Incentive
Plan. Such shares vest in January 1998.
On October 15, 1996, the Board of Directors granted options to its non-employee
directors pursuant to the Stock Option Plan for Non-Employee Directors to
purchase an aggregate of 50,000 shares of Common Stock. Such options have an
exercise price of $3.125 per share and are fully vested.
On July 1, 1997, Messrs. Hays and Hughes were granted incentive stock options to
purchase 100,000 and 75,000 shares of Common Stock, respectively. Messrs. Hays
and Hughes' stock options have an exercise price of $1.625 per share. Twenty
percent (20%) of such options
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<PAGE>
vested upon issuance and twenty percent (20%) vest on the first, second, third
and fourth anniversary of the date of issuance.
On July 22, 1997, Messrs. Beck and Pappas were granted non-qualified stock
options to purchase 300,000 and 20,000 shares, respectively, of Common Stock at
an exercise price of $1.375. Mr. Beck's options vest twenty percent (20%) at
issuance and twenty percent (20%) on the first, second, third and fourth
anniversary of the date of issuance. Mr. Pappas' options were vested upon
issuance.
On August 1, 1997, Mr. Amt was granted a non-qualified stock option to purchase
300,000 shares of Common Stock at an exercise price of $1.375. Mr. Amt's options
vest twenty percent (20%) at issuance and twenty percent (20%) on the first,
second, third and fourth anniversary of the date of issuance.
On August 6, 1997, Messrs. Gardner and Katzmann were each granted stock options
to purchase 20,000 shares of Common Stock at an exercise price of $1.875 under
the Stock Option Plan for Non-Employee Directors. Twenty percent (20%) of such
options vested upon issuance and twenty percent (20%) vest on the first, second,
third and fourth anniversary of the date of issuance.
On August 29, 1997, Mr. Fish purchased 20,000 shares of Convertible Preferred
Stock for $200,000, and on September 5, 1997, Mr. Beck purchased 10,000 shares
of Convertible Preferred Stock for $100,000 in the Convertible Preferred Stock
Private Placement.
Board Designee and Other TFI Covenants
- --------------------------------------
The Company, TFP III and TFVP V entered into a Series A Preferred Stock Purchase
Agreement in May 1995 with respect to the Old Preferred Shares. The agreement,
as amended in December 1995, provides that the Company will (i) use its best
efforts to nominate a designee of TFI to the Board of Directors and (ii) sell
shares of stock and grant options to employees, officers, directors and
consultants only pursuant to Board approved plans and agreements containing
three-year vesting provisions (except in the case of sales of stock or grants of
options to new employees where the Board determines otherwise for valid business
reasons). Such covenants terminate upon the earlier of (a) May 1999 and (b) such
time as TFP III and TFVP V cease to hold approximately 18,270 shares of Common
Stock in the aggregate. At September 30, 1997, TFP III and TFVP V collectively
hold 276,727 shares of Common Stock, 31,500 shares of Convertible Preferred and
warrants to purchase an additional 69,171 shares of Common Stock.
Escrow Securities
- -----------------
In connection with the IPO, 740,559 shares of Common Stock (the "Escrow Shares")
and options to purchase an aggregate of 71,923 shares of Common Stock (the
"Escrow Options"), of which options to purchase 50,000 shares of Common Stock
have been canceled, were deposited into escrow by the holders thereof. The
Escrow Shares include shares held by Harvey Goldman (100,725) and Scott A.
Katzmann (12,179 shares). The Escrow Securities are not assignable or
-39-
<PAGE>
transferable. The holders thereof have the power to vote the Escrow Shares while
such shares are held in escrow. Holders of any options in escrow may exercise
their options prior to their release from escrow; however, the shares issuable
upon any such exercise will continue to be held in escrow as Escrow Shares. The
Escrow Securities will be released from escrow, on a pro rata basis, if, and
only if, one or more of the following conditions is/are met: (a) the Company's
net income before provision for income taxes and exclusive of any extraordinary
earnings or charges which would result from the release of the Escrow Securities
(all as audited by the Company's independent public accountants) (the "Minimum
Pretax Income") amounts to at least $4.7 million for the fiscal year ending June
30, 1998; (b) the Minimum Pretax Income amounts to at least $7.0 million for the
fiscal year ending June 30, 1999; (c) the Minimum Pretax Income amounts to at
least $9.3 million for the fiscal year ending June 30, 2000; (d) the Closing
Price (as defined) of the Company Common Stock averages in excess of $11.25 per
share for 60 consecutive business days during the 18-month period commencing on
May 16, 1996; (e) the Closing Price of the Company Common Stock averages in
excess of $15.00 per share for 60 consecutive business days during the 18-month
period commencing 18 months from May 16, 1996; or (f) during the periods
specified in (d) or (e) above, the Company is acquired by or merged into another
entity in a transaction in which the value of the per share consideration
received by the stockholders of the Company on the date of such transaction or
at any time during the applicable period set forth in (d) or (e), respectively,
equals or exceeds the applicable levels set forth in (d) or (e), respectively.
The Minimum Pretax Income amounts set forth above are those originally
established at the time of the IPO. Such Minimum Pretax Income amounts have been
increased as a result of the issuance of the Preferred Stock .
The Minimum Pretax Income amounts shall (i) be calculated exclusive of any
extraordinary earnings or any charges to income resulting from release of the
Escrow Securities and (ii) be increased proportionately, with certain
limitations, in the event additional shares of the Common Stock or securities
convertible into, exchangeable for or exercisable into the Common Stock are
issued. The Closing Price amounts set forth above are subject to adjustment in
the event of any stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the Escrow
Securities, including any property distributed as dividends or pursuant to any
stock split, merger, recapitalization, dissolution or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Securities. If none of the applicable Minimum Pretax Income or Closing Price
levels set forth above have been met by October 15, 2000, the Escrow Securities,
as well as any dividends or other distributions made with respect thereto, will
be canceled and contributed to the capital of the Company. The Company expects
that the release of any Escrow Securities to officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could increase the loss
or reduce or eliminate the Company's net income for financial reporting purposes
for the period(s) during which such shares are, or become probable of being,
released from escrow. Although the amount of compensation expense recognized by
the Company will not affect the Company's total
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<PAGE>
stockholders' equity, it may have a negative effect on the market price of the
Company's securities.
The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between the Company and D.H. Blair Investment Banking
Corp., the underwriter of the IPO, and should not be construed to imply or
predict any future earnings by the Company or any increase in the market price
of its securities.
All future transactions with beneficial owners of the Company's securities and
the Company's directors or executive officers will be on terms no less favorable
than those available from unaffiliated parties.
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
The Company filed a Current Report on Form 8-K on April 2, 1997 relating to its
private placement of preferred stock.
-41-
<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: December 18, 1997 /s/ William L. Amt
-------------------------------------------
William L. Amt
President and Chief Executive Officer
Dated: December 18, 1997 /s/ John G. Murchie
-------------------------------------------
John G. Murchie
Controller and Principal Financial Officer
-42-
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors.......... ....................................F-2
Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of June 30,
1997 and June 30, 1996....................................................F-3
Consolidated Statements of Operations of Conversion
Technologies International, Inc. and Subsidiaries for
the years ended June 30, 1997 and June 30, 1996...........................F-4
Consolidated Statements of Stockholders' Equity of
Conversion Technologies International, Inc. and Subsidiaries
for the years ended June 30, 1997 and June 30, 1996.......................F-5
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the years ended
June 30, 1997 and June 30, 1996...........................................F-6
Notes to Consolidated Financial Statements...................................F-8
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 Subsidiaries (Company) at June 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. 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 Subsidiaries at June 30, 1997 and 1996, and
the consolidated results of their operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has generated only minimal revenue, has incurred significant losses, has
a working capital deficiency and has a stockholders' deficiency. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
Metro Park, New Jersey ERNST & YOUNG LLP
September 18, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
June 30,
------------------------------
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents ........................................... $ 325,092 $ 4,539,464
Marketable securities ............................................... -- 2,009,632
Accounts receivable, less allowance for doubtful accounts
of $18,000 at June 30, 1997 and $25,000 at June 30, 1996 ....... 146,225 343,214
Inventories ......................................................... 521,060 337,736
Prepaid expenses and other current assets ........................... 188,525 205,984
------------ ------------
Total current assets ................................................ 1,180,902 7,436,030
Property, plant and equipment:
Land ........................................................... 75,000 75,000
Building and improvements ...................................... 1,578,293 1,609,832
Machinery and equipment ........................................ 6,713,599 11,573,933
Construction in progress ....................................... 29,500 1,008,480
------------ ------------
8,396,392 14,267,245
Less accumulated depreciation .................................. (1,456,610) (1,630,639)
------------ ------------
6,939,782 12,636,606
Deferred finance charges, less accumulated amortization of
$135,786 at June 30, 1997 and $81,272 at June 30, 1996 ......... 443,829 494,843
Other noncurrent assets ............................................. 3,100 38,304
Restricted assets
Project Fund ................................................... 158 72,859
Debt service reserve funds ..................................... 869,153 1,268,457
------------ ------------
$ 9,436,924 $ 21,947,099
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Accounts payable .................................................... $ 1,711,212 $ 1,279,280
Deferred revenue .................................................... 491,944 557,907
Reserve for disposal ................................................ 713,100 737,000
Accrued expenses .................................................... 858,447 778,306
Investment tax credit payable ....................................... 235,000 --
Current portion of capital lease obligations 35,495 72,914
Current portion of long-term debt ................................... 530,258 437,285
------------ ------------
Total current liabilities ........................................... 4,575,456 3,862,692
Capital lease obligations, less current portion ..................... 39,414 74,693
Long-term debt, less current portion ................................ 10,784,343 11,281,715
Stockholders' equity (deficiency):
Class A common stock, $.00025 par value, authorized 25,000,000
shares, issued and outstanding 5,539,745 shares at June 30,
1997 and 5,449,745 shares at June 30, 1996 .................. 1,385 1,362
Additional paid-in capital ..................................... 24,186,932 23,905,705
Unearned Stock Compensation .................................... (116,369) --
Accumulated deficit ............................................ (30,034,237) (17,179,068)
------------ ------------
Total stockholders' equity (deficiency) ............................. (5,962,289) 6,727,999
------------ ------------
$ 9,436,924 $ 21,947,099
============ ============
See accompanying notes.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Operations
Year ended June 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenue ........................... $ 1,429,008 $ 2,679,987
Cost of goods sold ................ 3,952,374 3,093,560
------------ ------------
Gross loss on sales ............... (2,523,366) (413,573)
Selling, general and administrative 3,918,726 1,821,179
Process development costs ......... -- 996,259
Write-off of fixed assets ......... 5,711,567 --
------------ ------------
Loss from operations .............. (12,153,659) (3,231,011)
Interest expense .................. (1,277,310) (1,076,077)
Interest income ................... 226,505 114,326
Other income ...................... 349,295 81,811
------------ ------------
Loss before extraordinary item .... (12,855,169) (4,110,951)
Extraordinary item ................ -- 442,000
------------ ------------
Net loss .......................... $(12,855,169) $ (4,552,951)
============ ============
Net loss per common share
before extraordinary item .... $ (2.69) $ (2.64)
============ ============
Net loss per common share ......... $ (2.69) $ (2.92)
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997 and June 30, 1996
Preferred Stock Class A Common Stock
------------------------------------------ ----------------------------------------
Additional Additional
Number Paid-In Number Paid-In
of Shares Amount Capital of Shares Amount Capital
--------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 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 ... 66,750
Net Loss ..................
--------- ---------- ---------- --------- ------ ------------
Balance at June 30, 1996 ....... -- -- -- 5,449,745 1,362 23,905,705
Issuance of Class A
common stock ............ 90,000 23
Stock Compensation ........ 281,227
Net Loss ..................
--------- ---------- ---------- --------- ------ ------------
Balance at June 30, 1997 ....... -- $ -- $ -- 5,539,749 $1,385 $ 24,186,932
========= ========== ========== ========= ====== ============
Total
Unearned Stockholders'
Stock Accumulated Equity
Compensation Deficit (Deficiency)
------------ ----------- ------------
<S> <C> <C> <C>
Balance at July 1, 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 ... 66,750
Net Loss .................. (4,552,951) (4,552,951)
--------- ------------ ------------
Balance at June 30, 1996 ....... -- (17,179,068) 6,727,999
Issuance of Class A
common stock ............ 23
Stock Compensation ........ (116,369) 164,858
Net Loss .................. (12,855,169) (12,855,169)
--------- ------------ ------------
Balance at June 30, 1997 ....... $(116,369) $(30,034,237) $ (5,962,289)
========= ============ ============
See accompanying notes.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Year ended June 30,
-------------------------------
1997 1996
------------- -------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss ................................................... $(12,855,169) $ (4,552,951)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation expense .................................. 1,036,416 886,863
Amortization of deferred financing and patent costs ... 54,514 54,302
Write-down of fixed assets ............................ 5,711,567 --
Write-off of inventories .............................. 96,752 --
Stock compensation expense ............................ 164,858 --
Settlement with former officer ........................ (99,000)
Debt discount on Bridge Notes ......................... 66,750
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ......... 196,989 (59,643)
Increase in inventories ............................ (280,076) (110,012)
Decrease (increase) in other current assets ........ 17,459 (72,952)
Decrease (increase) in other noncurrent assets ..... 35,204 (7,038)
Decrease in deferred revenue ....................... (65,963) (386,323)
Increase (decrease) in accounts payable, reserve
for disposal and other accrued expenses ...... 723,173 (811,824)
------------ ------------
Net cash used in operating activities ...................... (5,164,276) (5,091,828)
INVESTING ACTIVITIES
Sale (purchase) of marketable securities ................... 2,009,632 (2,009,632)
Capital expenditures ....................................... (1,051,159) (4,396,016)
------------ ------------
Net cash provided by (used in) investing activities ........ 958,473 (6,405,648)
FINANCING ACTIVITIES
Increase in deferred finance and registration costs ........ (3,500) (40,427)
Issuance of notes payable .................................. -- 2,675,000
Payment of notes payable ................................... -- (3,061,500)
Issuance of long-term debt ................................. 8,282 3,056,476
Decrease (increase) in restricted assets ................... 472,005 (347,408)
Principal payments on long-term debt ....................... (412,681) (399,445)
Principal payments under capital lease obligations ......... (72,698) (93,750)
Issuance of common stock ................................... 23 13,514,151
------------ ------------
Net cash (used in) provided by financing activities ........ (8,569) 15,303,097
------------ ------------
(Decrease) increase in cash and cash equivalents ........... (4,214,372) 3,805,621
Cash and cash equivalents at beginning of period ........... 4,539,464 733,843
------------ ------------
Cash and cash equivalents at end of period ................. $ 325,092 $ 4,539,464
============ ============
See accompanying notes.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended June 30,
----------------------------
1997 1996
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Interest paid, net of amount capitalized ............. $ 1,320,882 $ 1,009,746
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS
Surrender and cancellation of common stock ........... -- (99,000)
Issuance of warrants in connection with bridge notes.. -- 66,750
See accompanying notes.
</TABLE>
F-7
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
1. ORGANIZATION
Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing, recycling and processing various substrates and
advanced materials. These substrates and materials include (i) industrial
abrasives which can be used for surface cleaning and surface preparation
applications such as in cleaning steel structures, railcars, aircraft parts, and
equipment in loose grain blasting operations; (ii) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (iii) performance aggregates which can be
used as structural and textural enhancers, fillers and additives and to
strengthen and add consistency to materials such as cements, plasters, grouts,
roofing and flooring and glass and ceramic materials. The Company is also
engaged in the business of recycling cathode ray tube ("CRT") glass produced in
the manufacture of televisions for resale to such manufacturers and others.
Although substantially all of the Company's revenues to date have been derived
from its CRT recycling operations, the Company intends to focus its efforts on
its substrates and advanced materials products. The Company's revenue streams
are a combination of waste conversion fees and manufactured product sales.
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, 1996 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).
In November 1996, the Company entered into an Agreement and Plan of
Reorganization with Octagon, Inc. ("Octagon") pursuant to which a wholly-owned
subsidiary of the Company would be merged with and into Octagon (the "Merger"),
whereby, Octagon would become a wholly-owned subsidiary of the Company. On June
30, 1997, the Company and Octagon mutually terminated the Merger. Pursuant to
the terms of a Termination Agreement, the Company agreed to forgive remaining
bridge loans, including interest, in the approximate amount of $630,000 it made
to Octagon in fiscal 1997 in payment for certain services provided by Octagon to
the Company prior to the termination of the Merger and Octagon agreed to provide
certain services
F-8
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
1. ORGANIZATION (CONTINUED)
to the Company. This amount is included in Selling, General and Administrative
expenses in the Consolidated Statement of Operations.
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. The Company has had limited
revenue and has incurred significant losses which has resulted in a working
capital deficiency and a stockholders' deficiency. In view of the foregoing,
there is substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the realization of assets and liquidation of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
In late fiscal 1997 and early fiscal 1998 the Company engaged new management.
The Company's new management team has initiated a plan to reverse the history of
limited revenues and continued losses through a series of deliberate actions
based upon the following five elements. Long term debt has been renegotiated to
reduce interest expense (see Note 9). Raw material costs are being cut through
the use of third party tollers and the application of lower cost alternative
substrates. Revenues from colored substrates are anticipated to increase as the
Company's decorative particle production facility in St. Augustine, Florida
becomes fully operational. Investments in product development have been
curtailed and investments in sales and marketing will be increased.
Manufacturing and operating overheads have been reduced. Although management
believes the foregoing course of action would allow the Company to continue as a
going concern for the next year, there are no assurances that management will be
successful in implementing the plans and eliminating the substantial doubt as to
its ability to continue as a going concern.
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
subsidiaries, Dunkirk International Glass and Ceramics Corporation and Advanced
Particle Technologies, Inc. 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
F-9
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Revenue is recognized for the sale of
products upon shipment to customers.
For the year ended June 30, 1997, 61.2% of the Company's revenue was derived
from two major customers. Revenue generated from each of these customers
amounted to $621,830 and $252,686 which represents 43.5% and 17.7% of total
revenue, respectively. For the year ended June 30, 1996, 87.6% 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. The Company's customer
who generated the 17.7% and 25.3% of the total revenue for fiscal 1997 and 1996,
respectively, ceased shipping CRT glass and purchasing recycled CRT glass from
the Company in March 1997.
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. From July 1, 1995 to
June 30, 1996, the Company reduced the reserve by approximately $623,000, and
from July 1, 1996 to June 30, 1997 the Company further reduced the reserve by
approximately $24,000. The decreases in the reserve, which substantially
resulted from changes in the volume of inventory, have been 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.
F-10
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories consisted of the following:
June 30,
------------------------
1997 1996
---- ----
Raw materials ....... $ 61,949 $ 79,237
Work-in-process...... 111,961 135,536
Finished goods....... 347,150 122,963
-------- --------
$521,060 $337,736
======== ========
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 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.
During fiscal 1997, the Company experienced reduced levels of revenue and
increased costs. Also in fiscal 1997, the Company shut down its melter and
certain related equipment which it does not intend to use in the foreseeable
future, and accordingly, the Company has adjusted these asset values to their
estimated fair value which was determined to be zero as it is estimated that the
cost to disassemble, transport and reassemble the melter and peripheral
equipment would approximate any remaining fair value of those assets. As a
result, the Company has taken a charge in the fourth quarter pursuant to SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" in the amount of $5,711,567.
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 were carried at cost which approximated fair value at June 30, 1996.
F-11
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Financing Costs
Deferred costs include costs related to obtaining debt financing, and are being
amortized under the interest method of accounting. (See Note 9).
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)
in fiscal 1996. No such costs were incurred in fiscal 1997.
Investment Tax Credit
The Company received a gross cash refund of $566,547 related to a New York State
investment tax credit in June 1997. However, the Company has recorded a $235,000
reserve against this amount as the Company may be required to refund such amount
pursuant to a recapture provision. The net amount of $331,547 is included in
"Other Income."
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 which
were repaid out of the proceeds of the Company's IPO (see Note 4).
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
F-12
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
1997 and 1996 were 1,023,054, 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, 1997 and 1996 were 4,773,311 and
1,559,908, 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. 128 "Earnings Per Share," SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosure about segments of an Enterprise and Related
Information" are not effective for the Company until December 31, 1997, June 30,
1999 and June 30, 1999, respectively. Management believes these standards will
not have a material impact on the Company.
F-13
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
<TABLE>
<CAPTION>
3. DEBT
Long-term debt consists of the following obligations as of June 30, 1997 and 1996:
June 30,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
Dunkirk--Chautauqua Region Industrial Development
Corporation (CRIDA) mortgage note (collateralized by a
mortgage on real property having a carrying value of
approximately $1,510,100 at June 30, 1997) payable in
monthly installments of $4,285 including interest at a
variable rate (6% at June 30, 1997) through October 1,
2004. $ 304,432 $ 336,529
Dunkirk--Term loans with a bank payable in 84 monthly
installments of $40,944 including principal and
interest at the prime rate (8.50% at June 30, 1997)
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). (See Note 9). 1,887,871 2,192,379
Dunkirk--Subordinated mortgage note (collateralized by a
mortgage on real property having a carrying value of
approximately $1,510,100 at June 30, 1997) payable in
monthly installments of $4,956 including interest at
10% through January 21, 2004. 288,516 317,517
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 $5,163,200. 33,170 49,295
F-14
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
3. DEBT (CONTINUED)
June 30,
------------------------
1997 1996
----------- ----------
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 $5,163,200. 48,727 59,974
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 $5,163,200. 48,096 67,799
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 Notes 5 and 9). 8,000,000 8,000,000
F-15
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
3. DEBT (CONTINUED)
June 30,
------------------------
1997 1996
----------- ----------
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% (10.50% at June 30,
1997) 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, 1997) 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. 703,789 695,507
----------- -----------
Total Debt 11,314,601 11,719,000
Less current maturities 530,258 437,285
----------- -----------
$10,784,343 $11,281,715
=========== ===========
</TABLE>
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 (see Note
9):
June 30,
1998 $ 530,258
1999 1,044,448
2000 1,107,982
2001 990,836
2002 865,939
Thereafter 6,775,138
------------
$ 11,314,601
============
F-16
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
3. DEBT (CONTINUED)
The carrying amounts and fair values of long-term borrowings consisted of the
following at June 30, 1997:
Carrying Amount Fair Value
--------------- ----------
5% subordinated note .............. $ 48,096 $ 45,206
6% mortgage note .................. 304,432 262,189
7% subordinated note .............. 33,170 32,023
8% subordinated note .............. 48,727 46,420
8.50% secured bank loan ........... 1,887,871 1,887,871
10% subordinated mortgage note .... 288,516 284,256
Variable rate debt ................ 703,789 703,789
11.5% solid waste disposal bonds .. 8,000,000 8,000,000
----------- -----------
Total Long-Term Borrowings ... $11,314,601 $11,261,754
========== ==========
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% (See Note 9).
4. NOTES PAYABLE
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 fiscal 1996 (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 International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
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).
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.
5. RESTRICTED ASSETS
Dunkirk has $158 and $72,859 of project funds available at June 30, 1997 and
June 30, 1996, 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 ($419,963 at June
30, 1997 and $840,442 at June 30, 1996), and may be released under certain
conditions (see Note 9).
Dunkirk also has a debt service reserve fund of $449,190 at June 30, 1997 and
$428,015 at June 30, 1996, including interest, deposited in escrow as required
by the JDA for payment of the final installments due on the related debt (see
Note 9).
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 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
F-18
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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,
------------------------
1997 1996
---- ----
Machinery and equipment ............ $353,686 $354,352
Less accumulated amortization....... 289,382 217,375
-------- --------
$ 64,304 $136,977
======== ========
Lease amortization of $72,637 and $101,531 for the years ended June 30, 1997 and
1996, respectively, is included in cost of goods sold.
Future minimum lease payments together with the present value of the net minimum
lease payments for capitalized leases as of June 30, 1997 is as follows:
Capitalized Operating
Leases Leases
----------- ---------
June 30,
1998......................................... $41,486 $75,780
1999......................................... 27,179 75,780
2000......................................... 22,854 50,520
2001......................................... -- --
2002......................................... -- --
-------- --------
Total net minimum lease payments............. 91,519 $202,080
========
Less amount representing interest............ 16,610
-------
Present value of net minimum lease payments.. $74,909
=======
Total rent expense of the Company for the periods ended June 30, 1997 and 1996
was $73,674 and $99,530, respectively.
F-19
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
7. CAPITAL STOCK
On May 16, 1996, the Company completed an initial public offering of the
Company's common stock, Class A warrants and Class B warrants. Concurrent with
the closing of the IPO, the Company's Preferred Stock ($.001 par value,
authorized 15,000,000 shares) 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 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
the event that the Escrow Securities are released from escrow to the
stockholders of the Company who are officers, directors, employees or
consultants of the Company, compensation expense will be recorded for financial
reporting purposes. This non-cash charge to earnings will be equal to the fair
value of such securities on the date of their release.
F-20
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
7. CAPITAL STOCK (CONTINUED)
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:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price
--------- --------
<S> <C> <C>
Outstanding at July 1, 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
Granted July 1, 1996 through June 30, 1997 ......... -- --
Canceled July 1, 1996 through June 30, 1997 ........ -- --
----------
Outstanding at June 30, 1997 .......................... 319,204 4.40-5.28
==========
</TABLE>
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 July 1, 1995 ............ -- -- -- --
Issued May 16, 1996 and June 7, 1996.. 4,639,550 $ 5.85 3,527,050 $ 7.80
--------- ---------
Outstanding at June 30, 1997 and 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, and were
canceled in June of 1997 with the resignation of the executive officer and
director.
F-21
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
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:
Weighted
Average
Number Exercise
of Shares Price
--------- --------
EMPLOYEE PLAN OPTIONS
Outstanding at July 1, 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
Granted ................... 148,000 4.40
Canceled .................. (48,543) 4.40
-------
Outstanding at June 30, 1997.. 169,080 4.40
=======
NON-EMPLOYEE PLAN OPTIONS
Outstanding at July 1, 1995 6,266 4.40
Granted ................... 1,217 4.40
-------
Outstanding at June 30, 1996 7,483 4.40
Granted ................... 50,847 3.16
-------
Outstanding at June 30, 1997.. 58,330 3.32
=======
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
at June 30, 1997 At June 30, 1997
----------------------------------- ----------------------------
Weighted Average
Number of Weighted Average Contractual Life Number of Weighted Average
Range Shares Exercise Price (Years) Shares Exercise Price
--------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$3.125 50,000 $3.13 10.00
$4.40-$5.00 177,410 4.40 6.39 75,557 $4.40
------- ------
TOTAL 227,410 $4.12 7.18 75,557 $4.40
======= ======
</TABLE>
Of the total options outstanding under the plans, 75,557 and 24,081 were
exercisable at June 30, 1997 and 1996, respectively.
F-22
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
7. CAPITAL STOCK (CONTINUED)
At June 30, 1997, the Company has reserved 510,400 shares of Common Stock for
the exercise of options.
Pro forma information regarding net loss and net loss per share is required by
SFAS No. 123, and has been determined as if the Company had been accounting for
its employee and non-employee director stock options under the fair value method
of that Statement. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model for 1997 and the Minimum Value
Method for 1996 prior to becoming a public company in May 1996, with the
following assumptions for 1997 and 1996, respectively: weighted-average
risk-free interest rate of 6.0% for both years; volatility factors of the
expected market price of the Company's common stock of .778 for fiscal 1997 and
a weighted average expected life of the options of 7.36 for fiscal 1997 and 6.08
for fiscal 1996.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and non-employee director stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
and non-employee director options.
For purposes of pro forma disclosures, the estimated fair value of the options
granted in 1997 and 1996 is amortized to expense over the options' vesting
period. The weighted-average grant date fair value of options granted during
fiscal years 1997 and 1996 were $2.79 and $1.30, respectively. The Company's pro
forma information follows:
1997 1996
---- ----
Pro Forma net loss..................... $(13,127,518) $(4,576,091)
Pro Forma loss per common share........ $(2.75) $(2.93)
The pro forma disclosures presented above for fiscal year 1996 reflect
compensation expense only for options granted in fiscal 1996 and for fiscal 1997
only for options granted in fiscal years 1996 and 1997. These amounts may not
necessarily be indicative of the pro forma effect of SFAS No. 123 for future
periods in which options may be granted.
F-23
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
7. CAPITAL STOCK (CONTINUED)
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 800,000,
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. In October 1996, the Company issued a total of 90,000 shares (at
par value and, accordingly, compensation expense is being recognized) to two
former officers of the Company under the Plan which shares vest January 1, 1998.
Effective in July 1997, the Company issued a total of 600,000 options to two
officers of the Company which vest 20% at date of grant and 20% for each of the
next four years.
8. INCOME TAXES
There was no income tax expense/benefit for the Company for the years ended June
30, 1997 and 1996.
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, 1997 and 1996:
<TABLE>
<CAPTION>
For the year ended June 30,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Income tax benefit based on U.S. statutory rate... $(4,370,758) $(1,548,003)
Current year addition to the (federal) valuation
allowance ...................................... 4,370,758 1,548,003
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
F-24
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
8. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax assets and liabilities
are as follows:
June 30,
---------------------------
1997 1996
----------- -----------
Deferred tax assets:
Deferred revenue ..................... $ 196,778 $ 223,163
Reserve for disposal ................. 285,240 294,800
Start-up costs ....................... 57,334 86,000
Fixed assets ......................... 1,422,000
Tax loss carryforward ................ 8,228,700 4,584,808
----------- -----------
Total deferred tax assets .............. 10,190,052 5,188,771
Valuation allowances (federal & state).. 10,190,052 5,188,771
----------- -----------
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, 1997, the Company has approximately $20.6 million of net operating
loss carryforwards, which expire between 2006 and 2012. 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, 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
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 is likely that due to prior shifts in ownership (the Dunkirk
merger and the completion of the IPO) and anticipated shifts in ownership (See
Note 9), the Company's ability to utilize its net operating loss carryforwards
could be severely limited.
9. SUBSEQUENT EVENTS
In September 1997 the beneficial 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 receipt of a cash payment of
$1,620,000 and the remaining balance of a related debt service reserve fund
which has been reduced for interest payments made to the beneficial holders
during fiscal 1997 through September 1, 1997. The cash payment was made
utilizing proceeds from the private placement discussed below. This retirement
will result in a net pretax gain to the Company of approximately $6,190,000
which will be recorded in the first
F-25
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
9. SUBSEQUENT EVENTS (CONTINUED)
quarter of fiscal 1998. The Company will also write-off approximately $330,000
of deferred financing costs relating to such debt. If Dunkirk is deemed to be
solvent immediately prior to the time of such 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 net operating loss
carryforwards ("NOLs"), subject to the possible limitations discussed in Note 8.
Even if sufficient NOLs were available to offset such taxable income after the
limitations described below, the Company may still be subject to alternative
minimum tax. 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 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.
The New York State Job Development Authority (JDA) issued its guaranties (the
"Guaranties)") in favor of Key Bank of New York ("Key Bank") with respect to two
promissory notes (the "term loans") issued by Dunkirk and payable to the order
of Key Bank. The JDA has agreed to exercise its option under the Guaranties to
make the payments required under the term loans directly to Key Bank, provided
that Key Bank applies the amount currently held in the Company's related debt
service reserve fund to reduce the principal amount of the term loans. Upon the
assignment of the term loans and related loan documents to the JDA, the JDA has
also agreed to defer monthly payments of principal and interest due from Dunkirk
under each term loan through January 1998 until the maturity date of such loans.
Interest will continue to accrue on the principal amount and interest so
deferred will be payable at maturity.
In July and August 1997, the Company borrowed an aggregate of $500,000 (the
"1997 Bridge Loan") for general working capital purposes. 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. The 1997 Bridge Loan was
repaid in full plus accrued interest at 12% per annum on September 8, 1997 from
proceeds from the private placement discussed below.
The Company has entered into a placement agency agreement for a private
placement of the Company's preferred stock. The private placement consists of a
minimum of 300,000 and a maximum of 500,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") with an option for the Placement Agent
to sell up to an additional 300,000 shares to cover over-allotments, if any,
(the Preferred Stock is to be sold in units of 10,000) 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
F-26
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1997
9. SUBSEQUENT EVENTS (CONTINUED)
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 total
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. Through
September 18, 1997, 414,500 shares of Preferred Stock had been sold, with net
proceeds (after deducting the placement agent commissions and expenses - see
above) to the Company of $3,606,150.
In August 1997, The Company's Board of Directors authorized an increase of the
authorized number of the Company's common shares of up to a maximum of 60
million. This is subject to ratification of the Company's stockholders.
