SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission File No.:
September 30, 1997 000-28198
----------------------
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
3452 Lake Lynda Drive, Suite 280
Orlando, Florida 32817
(Address of principal executive offices)
(407) 207-5900
(Issuer's telephone number, including area code)
-------------------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of October 20, 1997, the
Issuer had outstanding 5,539,745 shares of Common Stock, 414,500 shares of
Series A Convertible Preferred Stock, 4,639,550 Redeemable Class A Warrants and
3,527,050 Redeemable Class B Warrants.
<PAGE>
Transactional Small Business Disclosure Format
Yes No X
----- -----
Explanatory Note
Conversion Technologies International, Inc. (the "Company") hereby amends Item 1
of Part 1 of its Quarterly Report on Form 10-QSB for the quarter ended September
30, 1997 (the "Form 10-QSB"), which was filed with the Securities and Exchange
Commission on October 24, 1997, by deleting Item 1 of Part 1 of the Form 10Q-SB
and replacing Item 1 of Part 1 with the information set forth herein. The
Company also hereby amends Exhibit 11 to the Form 10-QSB by replacing Exhibit 11
with the information contained in the Exhibit 11 attached hereto.
Table of Contents
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Page
No.
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Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of September
30, 1997 and June 30, 1997.................................... 3
Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three month
periods ended September 30, 1997 and 1996..................... 4
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the three month
periods ended September 30, 1997 and 1996..................... 5
Notes to Consolidated Financial Statements....................... 6
2
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, June 30,
1997 1997
------------- -----------
(Unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 637,506 $ 325,092
Accounts receivable, less allowance for
doubtful accounts of $18,000 at September
30, 1997 and June 30, 1997 212,319 146,225
Inventories 627,539 521,060
Prepaid expenses and other current assets 161,409 188,525
----------- -----------
Total current assets 1,638,773 1,180,902
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 1,578,293 1,578,293
Machinery and equipment 6,798,419 6,713,599
Construction in progress 29,500 29,500
----------- -----------
8,481,212 8,396,392
Less accumulated depreciation (1,654,274) (1,456,610)
----------- -----------
6,826,938 6,939,782
Deferred finance charges, less accumulated
amortization of $79,483 and $135,786
at September 30, 1997 and June 30, 1997
respectively 106,821 443,829
Other noncurrent assets 10,191 3,100
Restricted assets
Project fund 158
Debt service reserve funds 454,924 869,153
----------- -----------
$ 9,037,647 $ 9,436,924
=========== ===========
Liabilities and stockholders' equity (deficiency)
Accounts payable $ 1,377,967 $ 1,711,212
Deferred revenue 439,948 491,944
Reserve for disposal 651,550 713,100
Accrued expenses 873,350 858,447
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 35,098 35,495
Current portion of long-term debt 673,487 530,258
----------- -----------
Total current liabilities 4,286,400 4,575,456
Capital lease obligations, less current portion 33,265 39,414
Long-term debt, less current portion 2,613,539 10,784,343
Stockholders' equity (deficiency):
Series A Convertible Preferred Stock,
$.001 par value, authorized 880,000
shares, issued and outstanding 414,500
shares at September 30, 1997 415
Common Stock, $.00025 par value, authorized
25,000,000 shares, issued and outstanding
5,539,745 shares at September 30, 1997 and June
30, 1997 1,385 1,385
Additional paid-in capital 27,688,234 24,186,932
Unearned stock compensation (58,185) (116,369)
Accumulated deficit (25,527,406) (30,034,237)
----------- -----------
Total stockholders' equity (deficiency) 2,104,443 (5,962,289)
----------- -----------
$ 9,037,647 $ 9,436,924
=========== ===========
See Accompanying Notes
</TABLE>
3
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
For the three months ended
September 30,
1997 1996
---------------- ----------------
<S> <C> <C>
Revenue $ 325,142 $ 344,273
Cost of goods sold 685,776 1,206,908
---------------- ----------------
Gross loss on sales (360,634) (862,635)
Selling, general and administrative 685,562 557,379
---------------- ----------------
Loss from operations (1,046,196) (1,420,014)
Interest expense, net 308,991 230,771
---------------- ----------------
Loss before extraordinary item (1,355,187) (1,650,785)
Extraordinary item - Gain on
debt retirement 5,862,018
---------------- ----------------
Net income (loss) 4,506,831 (1,650,785)
Discount on issuance of Series A
Convertible Preferred Stock (1,573,500)
---------------- ----------------
Net income attributable to common
shareholders $ 2,933,331 $ (1,650,785)
================ ================
Loss per common share before
extraordinary item $ (0.60) $ (0.35)
================ ================
Net income (loss) per common share $ 0.60 $ (0.35)
See Accompanying Notes.
</TABLE>
4
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
For the three months
ended
September 30,
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Loss before extraordinary item $(1,355,187) $(1,650,785)
Adjustments to reconcile loss to net cash
provided by
(used in) operating activities: 197,644 339,821
Depreciation expense 11,302 13,628
Amortization of deferred financing costs
Accrued interest income on marketable
securities (26,718)
Stock compensation expense 58,184
Changes is operating assets and liabilities:
Increase in accounts receivable (66,094) (39,463)
Increase in inventories (106,479) (86,945)
Decrease (increase) in other current
assets 27,116 (116,225)
Increase in other noncurrent assets (7,091) (59,723)
Increase(decrease)in deferred revenue (51,996) 10,073
Decrease in accounts payable, reserve
for disposal and other accrued expenses (379,892) (327,749)
----------- -----------
Net cash used in operating activities (1,672,473) (1,944,086)
Investing activities
Issuance of notes receivable (250,000)
Capital expenditures (84,820) (706,569)
----------- -----------
Net cash used in investing activities (84,820) (956,569)
Financing activities
Decrease in deferred finance charges 1,750
Issuance of notes payable 500,000
Issuance of long-term debt 8,282
Payment of notes payable (500,000)
Decrease in restricted assets 220,361 56,686
Principal payments on long-term debt (1,647,575) (112,751)
Principal payments under capital lease
obligations (6,546) (39,939)
Issuance of Series A Preferred Stock 3,501,717
----------- -----------
Net cash provided by (used in) financing
activities 2,069,707 (87,722)
----------- -----------
Increase (decrease) in cash and cash
equivalents 312,414 (2,988,377)
Cash and cash equivalents at beginning of
period 325,092 4,539,464
------------ -----------
Cash and cash equivalents at end of period $ 637,506 $1,551,087
============ ============
Supplemental disclosure of cash flow
information
Interest paid $ 270,323 $ 470,765
============ ============
See Accompanying Notes.
</TABLE>
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods presented have been
included. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes for the fiscal year
ended June 30, 1997 included in the Company's annual report on Form 10-KSB.
2. Inventories
Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.
Inventories consisted of the following:
September 30, 1997 June 30, 1997
------------------ -------------
Raw materials $ 86,954 $ 61,949
Work-in-process 94,295 111,961
Finished goods 446,290 347,150
------- -------
$ 627,539 $ 521,060
======= =======
3. Revenue Recognition
The Company derives most of its revenue from a combination of fees charged to
accept waste materials and from the sale of its products. Revenue recognition of
the fees charged to accept the waste material is deferred until the material is
placed through the conversion process. Revenue is recognized for the sale of
products upon shipment to customers.
For the three months ended September 30, 1997, 89.6% of the Company's revenue
was derived from four major customers. Revenue generated from each of these
customers amounted to $160,856, $52,266, $41,607, and $36,442 which represents
49.5%, 16.1%, 12.8%, and 11.2% of total revenue, respectively. For the three
months ended September 30, 1996, 70.4% of the Company's revenue was derived from
three major customers. Revenue generated from each of these customers amounted
to $145,343, $62,039, and $34,979 which represents 42.2%, 18.0%, and 10.2% of
total revenue, respectively.
6
<PAGE>
4. Reserve for Disposal
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), the
wholly-owned subsidiary of the Company, began accepting waste materials
(primarily CRT glass) in early 1994. Upon accepting the waste materials, Dunkirk
established a reserve for the potential disposal costs for the waste materials
accepted, in the event that the conversion processes being developed were not
successful. From July 1, 1996 to September 30, 1996, the Company increased the
reserve by approximately $14,000. From July 1, 1997 to September 30, 1997, the
Company decreased the reserve by approximately $62,000. The increases/decreases
in the reserve, which substantially resulted from changes in the volume of
inventory, have been charged/credited against operations. The Company intends to
adjust the reserve when the conversion processes prove commercially successful.
5. Net Income (Loss) Per Common Share
The net income (loss) per common share is based on the net income (loss)
attributable to common shareholders for the three-month period, divided by the
weighted average number of common shares outstanding during the period
(excluding 740,559 common shares that were deposited into escrow in connection
with the Company's initial public offering, and including 1,023,054 shares of
the Company's common stock into which the Company's original Series A Preferred
Stock was converted upon the closing of the initial public offering). Common
Stock equivalents such as stock options and warrants are included when their
effect is not anti-dilutive. The weighted average number of common shares
outstanding at September 30, 1997 and 1996 was 4,874,695 and 4,709,186,
respectively. The discount on the issuance of the Company's Series A Convertible
Preferred Stock (the "Preferred Stock") represents the aggregate discount
(difference) between the conversion price of the Preferred Stock and the fair
market value of the Company's Common Stock on each of the issuance dates of the
Preferred Stock by the Company in August and September 1997 (see Note 7).
6. Commitments and Contingencies
The Company is a party to litigation commenced by the Company in the Supreme
Court of New York, County of Chautauqua, against a general contractor hired to
construct an improved abrasives finishing area, which was a part of the
Company's capital expansion program. The contractor commenced work in April
1995, but was asked to stop work in November 1995 following significant cost
overruns, problems and delays in construction and disputes with the Company over
the scope of the work to be performed by the contractor. The Company has served
the contractor with its complaint, alleging, among other things, breach of
contract, fraud and defamation, and seeks damages in excess of $1,000,000. The
contractor has served an answer with affirmative defenses and counterclaims
against the Company for breach of contract. The aggregate amount of the claims
by the contractor against the Company is $483,000 plus interest.
7
<PAGE>
The Company does not believe that there will be a material adverse outcome in
the foregoing dispute.
7. Capital Stock
In August and September 1997, the Company sold 414,500 shares of Preferred Stock
under a placement agency agreement for the private placement of the Preferred
Stock. The net proceeds to the Company were $3,501,717 after deducting the
placement agent commissions and expenses and other transaction expenses. The
private placement consists of a minimum of 300,000 and a maximum of 500,000
shares of stock with an option for the placement agent to sell up to an
additional 300,000 shares to cover over-allotments, if any, with a par value of
$.001 per share and a stated value of $10 per share. Each share of Preferred
Stock is initially convertible into eight shares of common stock at a conversion
price of $1.25 per share, subject to adjustment based on the lesser of $1.25 and
the prevailing average market price of the common stock immediately preceding
any subsequent closing, if any. Commencing 12 months from the final closing of
the private placement, the holders of the Preferred Stock are entitled to
receive dividends payable in cash, or at the option of the Company, in
additional shares of Preferred Stock at the rate of 10% per annum. The placement
agent is entitled to receive a cash commission of 9% and a non-accountable
expense allowance of 4% of the gross proceeds. The placement agent is also
entitled to receive warrants to purchase shares of the Company's Preferred Stock
equal to 10% of the total shares issued at an exercise price equal to 110% of
the offering price of such shares.
In July and August 1997, the Company borrowed and repaid a total of $500,000 for
working capital purposes, and in connection therewith, issued warrants to
purchase 100,000 shares of Common Stock at an exercise price equal to $1 5/16.
In August 1997, The Company's Board of Directors authorized an increase of the
authorized number of common shares of up to a minimum of 40 million shares and a
maximum of 60 million shares, subject to the approval of the Company's
stockholders.
8
<PAGE>
8. Extraordinary Item
In September 1997, the holders of Dunkirk's $8,000,000 Chautauqua County
Industrial Development Agency Solid Waste Disposal Facility Bonds (the "IDA
Bonds") retired the IDA Bonds in exchange for a cash payment of $1,620,000 and
the balance of the related debt service reserve fund of $194,000. The cash
payment was made utilizing proceeds from the private placement discussed in Note
7 above. This retirement results in a net pretax gain to the Company of
approximately $5,862,000 which is reported as an Extraordinary Item. To the
extent that Dunkirk is deemed to be insolvent immediately prior to such
repayment by an amount which equals or exceeds the amount of debt forgiveness,
the Company will not recognize taxable income from such repayment; however,
certain of Dunkirk's tax attributes (such as net operating loss carryforwards
("NOLs")) would be subject to reduction and would not be available to offset
future income from operations, if any. For this purpose, the amount of
insolvency is defined to be the excess of Dunkirk's liabilities over the fair
value of its assets. An independent appraisal of the fair value of Dunkirk's
assets has not been completed at this time to determine Dunkirk's solvency;
however, the Company believes that Dunkirk was insolvent at the time of
repayment, and accordingly has not recorded a tax provision on the Extraordinary
Item. If Dunkirk is deemed to be solvent immediately prior to the time of the
repayment, the Company will recognize taxable income for the debt forgiveness in
its tax year ending June 30, 1998. The amount of such income may be offset by
NOLs, subject to possible limitations as discussed below. Even if sufficient
NOLs were available to offset such taxable income after such limitations, the
Company may still be subject to alternative minimum tax.
The Company has federal NOLs that amounted to approximately $20.6 million at
June 30, 1997, which expire between 2006 and 2012. Pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"), utilization of NOLs
is limited if there has been a change in control (ownership) of the Company.
Although a comprehensive evaluation has not yet been performed, it is likely
that due to prior shifts in ownership (the Dunkirk merger and the completion of
the IPO) and the current shifts in ownership (the Preferred Stock offering), the
Company's ability to utilize its NOLs could be severely limited.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
Dated: December 19, 1997 /s/ William L. Amt
--------------------------------------------
William L. Amt
President and Chief
Executive Officer
(principal executive officer)
Dated: December 19, 1997 /s/ John G. Murchie
--------------------------------------------
John G. Murchie
Controller (principal financial officer)
10
Exhibit 11
<TABLE>
<CAPTION>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY
STATEMENT OF COMPUTATION OF PRIMARY NET INCOME (LOSS) PER SHARE
For the three months ended September 30, 1997 and 1996
Three months ended September 30,
1997 1996
---- ----
<S> <C> <C>
Net (loss) before extraordinary item $ (1,355,187) $ (1,650,785)
Discount on issuance of Series A
Convertible Preferred Stock (1,573,500)
---------------- -------------------
Net (loss) before extraordinary or
attributable to common shareholders $ (2,928,687) $ (1,650,785)
================= =================
Net income (loss) as reported $ 4,506,831 $ (1,650,785)
================= =================
Discount on issuance of Series A
Convertible Preferred Stock (1,573,500)
---------------- -------------------
Net income attributable to common
shareholders $ 2,933,331 $ (1,650,785)
================= =================
Weighted average number of common
shares outstanding 4,799,186 4,709,186
Assumed exercise of stock options and
warrants using the treasury stock
method 75,509 --
---------------- -------------------
Shares used in the computation 4,874,695 4,709,186
================= =================
Net (loss) per common share
before extraordinary item $ (0.60) $ (0.35)
================= =================
Net income (loss) as reported per
common share $ 0.60 $ (0.35)
================= =================
</TABLE>
