SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission File No.:
December 31, 1996 000-28198
----------------------
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
82 Bethany Road, Suite 6
Hazlet, New Jersey 07730
(Address of principal executive offices) (Zip Code)
(908) 888-3828
(Issuer's telephone number, including area code)
-------------------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No | |
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
As of February 12, 1997, the Issuer had outstanding 5,539,745 shares of Common
Stock, 4,639,550 Redeemable Class A Warrants and 3,527,050 Redeemable Class B
Warrants.
<PAGE>
Contents
Page
No.
-----
Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiary as of December
31, 1996 and June 30, 1996...........................................3
Consolidated Statements of Operations of Conversion
Technologies International, Inc. and Subsidiary for the
three and six month periods ended December 31, 1996 and 1995.........4
Consolidated Statements of Cash Flows of Conversion
Technologies International, Inc. and Subsidiary for the six
month periods ended December 31, 1996 and 1995.......................5
Notes to Consolidated Financial Statements.............................6
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................9
Part II - Other Information................................................14
2
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Consolidated Balance Sheets
December 31, June 30,
1996 1996
------------- -------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,764,391 $ 4,539,464
Marketable securities -- 2,009,632
Notes receivable 416,761 --
Accounts receivable, less allowance for
doubtful accounts of $18,000 and
$25,000 at December 31, 1996 and
June 30, 1996, respectively 240,216 343,214
Inventories 431,424 337,736
Prepaid expenses and other current assets 294,051 205,984
------------ ------------
Total current assets 3,146,843 7,436,030
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 1,609,832 1,609,832
Machinery and equipment 11,720,714 11,573,933
Construction in progress 1,647,129 1,008,480
------------ ------------
15,052,675 14,267,245
Less accumulated depreciation (2,255,653) (1,630,639)
------------ ------------
12,797,022 12,636,606
Deferred finance charges, less
accumulated amortization of
$108,529 and $81,272 at
December 31, 1996 and
June 30, 1996, respectively 467,586 494,843
Other noncurrent assets 144,716 38,304
Restricted assets
Project Fund 156 72,859
Debt service reserve funds 1,300,879 1,268,457
------------ ------------
$ 17,857,202 $ 21,947,099
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 726,277 $ 1,279,280
Deferred revenue 582,072 557,907
Reserve for disposal 790,900 737,000
Accrued expenses 563,905 778,306
Current portion of capital lease
obligations 40,201 72,914
Current portion of long-term debt 446,392 437,285
------------ ------------
Total current liabilities 3,149,747 3,862,692
Capital lease obligations, less
current portion 53,509 74,693
Long-term debt, less current portion 11,062,611 11,281,715
Stockholders' equity:
Class A common stock, $.00025 par
value, authorized 25,000,000
shares, issued and outstanding
5,539,745 and 5,449,745 shares
at December 31, 1996 and June 30,
1996, respectively 1,385 1,362
Additional paid-in capital 24,186,932 23,905,705
Unearned stock compensation (232,739) --
Accumulated deficit (20,364,243) (17,179,068)
------------ ------------
Total stockholders' equity 3,591,335 6,727,999
------------ ------------
$ 17,857,202 $ 21,947,099
============ ============
See accompanying notes.
3
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Three months ended Six months ended
December 31, December 31,
1996 1995 1996 1995
------------------------- -------------------------
Revenue $ 339,885 $ 838,804 $ 684,158 $ 1,630,933
Cost of goods sold 956,133 675,936 2,163,041 1,309,330
------------------------- -------------------------
Gross (loss)/profit
on sales (616,248) 162,868 (1,478,883) 321,603
Selling, general and
administrative 650,845 488,988 1,208,224 777,293
Process development
costs -- 212,082 -- 463,068
------------------------- -------------------------
Loss from operations (1,267,093) (538,202) (2,687,107) (918,758)
Interest expense, net
267,297 229,588 498,068 408,415
------------------------- -------------------------
Net loss $(1,534,390) $ (767,790) $(3,185,175) $(1,327,173)
========================= =========================
Net loss per
common share $ (0.32) $ (0.65) $ (0.67) $ (1.12)
========================= =========================
See accompanying notes.
4
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
December 31,
1996 1995
------------ ------------
Operating activities
Net loss $(3,185,175) $(1,327,173)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Depreciation expense 625,014 428,720
Amortization of deferred
financing and patent costs 27,257 27,044
Settlement with former officer -- (99,000)
Stock compensation expense 48,488 --
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable 102,998 (19,126)
Increase in inventories (93,688) (105,222)
Increase in other current assets (88,067) (2,737)
Increase in other noncurrent assets (106,412) (7,038)
Increase (decrease) in deferred revenue 24,165 (278,929)
Increase (decrease) in accounts
payable, reserve for disposal
and other accrued expenses (713,504) (27,202)
----------- -----------
Net cash used in operating activities (3,358,924) (1,410,663)
Investing activities
Sale of marketable securities 2,009,632 --
Issuance of notes receivable (416,761) --
Capital expenditures (785,430) (3,106,384)
----------- -----------
Net cash provided by (used in)
investing activities 807,441 (3,106,384)
Financing activities
Increase in deferred finance and
registration costs -- (393,746)
Issuance of notes payable -- 2,225,000
Issuance of long-term debt 8,282 3,033,049
Decrease (increase) in restricted assets 40,281 (20,656)
Principal payments on long-term debt (218,279) (184,805)
Principal payments under capital
lease obligations (53,897) (48,326)
Issuance of common stock 23 --
----------- -----------
Net cash (used in) provided by
financing activities (223,590) 4,610,516
----------- -----------
(Decrease) increase in cash and
cash equivalents (2,775,073) 93,469
Cash and cash equivalents at
beginning of period 4,539,464 733,843
----------- -----------
Cash and cash equivalents at
end of period $ 1,764,391 $ 827,312
=========== ===========
See accompanying notes.
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1996
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods presented have been
included. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes for the fiscal year
ended June 30, 1996 included in the Company's annual report on Form 10-KSB.
2. Inventories
Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.
Inventories consisted of the following:
December 31, 1996 June 30, 1996
----------------- -------------
Raw materials $ 93,332 $ 79,237
Work-in-process 138,090 135,536
Finished goods 200,002 122,963
-------- --------
$431,424 $337,736
======== ========
3. Revenue Recognition
The Company derives most of its revenue from a combination of fees charged to
accept waste materials and from the sale of its products. Revenue recognition of
the fees charged to accept the waste material is deferred until the material is
placed through the conversion process.
For the three months ended December 31, 1996, 69.7% of the Company's revenue was
derived from two major customers. Revenue generated from each of these customers
amounted to $145,197 and $91,838 which represents 42.7% and 27.0% of total
revenue, respectively. For the three months ended December 31, 1995, 84.6% of
the Company's revenue was derived from the same two major customers. Revenue
generated from each of these customers amounted to $553,567 and $155,868 which
represents 66.0% and 18.6% of total revenue, respectively.
6
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
For the six months ended December 31, 1996, 65.0% of the Company's revenue was
derived from two major customers. Revenue generated from each of these customers
amounted to $290,540 and $153,877 which represents 42.5% and 22.5% of total
revenue, respectively. For the six months ended December 31, 1995, 83.3% of the
Company's revenue was derived from the same two major customers. Revenue
generated from each of these customers amounted to $944,697 and $413,966 which
represents 57.9% and 25.4% of total revenue, respectively.
One such customer, Thomson Consumer Electronics, has notified the Company that
it will cease to send cathode ray tube ("CRT") glass to, and purchase recycled
CRT glass from, the Company as of March 1997.
4. Reserve for Disposal
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), the
wholly-owned subsidiary of the Company, began accepting waste materials
(primarily CRT glass) in early 1994. Upon accepting the waste materials, Dunkirk
established a reserve for the potential disposal costs for the waste materials
accepted, in the event that the conversion processes being developed were not
successful. From July 1, 1995 to December 31, 1995, the Company reduced the
reserve by approximately $471,000. From July 1, 1996 to December 31, 1996, the
Company increased the reserve by approximately $54,000. The increases/decreases
in the reserve, which substantially resulted from changes in the volume of
inventory, have been charged/credited against operations. The Company intends to
adjust the reserve when the conversion processes prove commercially successful.
5. Net Loss Per Common Share
The net loss per common share is based on the net loss for the three- and
six-month periods, divided by the weighted average number of common shares
outstanding during the period (excluding 740,559 common shares that were
deposited into escrow in connection with the Company's initial public offering,
and including 1,023,054 shares of the Company's common stock into which the
Company's Series A Preferred Stock was converted upon the closing of the initial
public offering). Common Stock equivalents such as stock options and warrants
are not included as their effect is anti-dilutive. The weighted average number
of common shares outstanding for the three-month periods ended December 31, 1996
and 1995 was 4,785,686, and 1,184,591, respectively. The weighted average number
of common shares outstanding for the six-month periods ended December 31, 1996
and 1995 was 4,747,436 and 1,185,797, respectively.
6. Commitments and Contingencies
The Company is a party to litigation commenced by the Company in the Supreme
Court of New York, County of Chautauqua, against a general contractor hired to
construct an improved abrasives finishing area. 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
7
<PAGE>
Conversion Technologies International, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
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 case is currently in the discovery phase. The Company does not believe that
an adverse outcome in the foregoing dispute would have a material adverse effect
on the Company.
The Company is currently negotiating a union contract with its employees at the
Dunkirk facility.
7. Proposed Merger
On August 26, 1996, the Company announced that it had entered into a Letter of
Intent relating to the merger (the "Merger") of Octagon, Inc. ("Octagon") with
and into a subsidiary of Conversion Technologies International, Inc. Octagon is
a technical services firm providing radiological control and operations and
maintenance services to nuclear utilities and the Departments of Energy and
Defense. Octagon's revenue and net loss were $28,779,075 and $(527,768),
respectively, for the year ended December 31, 1995. Unaudited Octagon revenue
and net income for the nine months ended September 30, 1996 were $18,919,800 and
$436,454, respectively.
On November 18, 1996, an Agreement and Plan of Reorganization relating to the
Merger was signed by the Company, a newly-formed subsidiary of the Company and
Octagon.
Under the terms of the proposed merger, the holders of Octagon common stock will
receive one share of the Company's stock for every ten shares of Octagon common
stock, and Octagon will become a wholly-owned subsidiary of the Company. The
consummation of the merger is subject to customary conditions.
On September 20, 1996, the Company advanced $250,000 to Octagon under a secured
promissory note issued pursuant to a Loan and Security Agreement between the
Company and Octagon. The note is secured by a second lien on Octagon's assets
and interest is charged at 8.25 %. The note is due on demand on or after
February 13, 1997.
On December 11, 1996 the Company loaned an additional $60,000 to Octagon
pursuant to the Loan and Security Agreement, which amount was used by Octagon to
make certain indemnification payments for legal fees incurred by certain former
executives of Octagon. The loan is due on demand after February 13,1997.
On January 21, 1997, the Company filed a Form S-4 Registration Statement with
the Securities and Exchange Commission covering up to 850,000 shares of the
Company's common stock to be issued to Octagon's stockholders and option holders
in the merger.
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Consolidated revenues for the three months ended December 31, 1996 were
approximately $340,000, consisting primarily of CRT glass recycling fees and
approximately $44,000 of ALUMAGLASS(TM) sales. For the same three-month period
of 1995, the Company's consolidated revenues were approximately $839,000, of
which approximately $14,000 was from sales of ALUMAGLASS and the remainder was
CRT recycling fees. Consolidated revenues for the six months ended December 31,
1996 were approximately $684,000, consisting primarily of CRT glass recycling
fees and approximately $110,000 of ALUMAGLASS sales. For the same six-month
period of 1995, the Company's consolidated revenues were approximately
$1,631,000, of which approximately $65,000 was from sales of ALUMAGLASS and the
remainder was CRT recycling fees. In each case, the decrease in revenues
primarily reflects reduced inventory of unprocessed CRT glass, improvements in
CRT manufacturing processes which have resulted in lower levels of glass
breakage at the Company's CRT customers' facilities and increased competition in
the form of additional CRT glass recycling vendors, in each case, as compared to
the prior year period.
The net change in cost of goods sold for the three months ended December 31,
1996 versus the same prior year period, an increase of approximately $280,000
despite lower sales volume, reflects a number of factors, including (i) an
approximately $306,000 net increase in the non-cash charge associated with the
reserve for potential disposal costs of raw materials (an approximately $40,000
increase in the reserve for the three months ended December 31, 1996 as a result
of a modest increase in certain raw material inventories compared with a
$266,000 decrease in the reserve for the three months ended December 31, 1995,
during which such inventories decreased significantly), (ii) a portion of the
three months ended December 31, 1995 process development costs, which were fixed
in nature, are now included in cost of goods sold because the specific processes
have since become operational, (iii) an increase of $117,000 in the non-cash
charge for depreciation, reflecting completion of the major components of the
abrasives finishing area, (iv) approximately $71,000 in non-recurring
engineering charges relating to potential underground fuel tank removal and an
abandoned capital expenditure project and (v) the expensing of production
inefficiencies incurred during modifications to the abrasives and other
processing systems during the three months ended December 31, 1996. Partially
offsetting these cost increases was a $140,000 reduction in freight costs,
reflecting a May 1996 change in product pricing policy pursuant to which
customers now pay outgoing freight, and approximately $99,000 lower personnel
costs resulting from manufacturing personnel headcount reductions.
The net change in cost of goods sold for the six months ended December 31, 1996
versus the same prior year period, an increase of approximately $854,000 despite
lower sales volume, reflects the same factors as the foregoing three-month
comparison-(i) an approximately $525,000 net increase in the non-cash charge
associated with the reserve for potential disposal costs of raw materials (an
approximately $54,000 increase in the reserve for the six months ended December
31, 1996 as a result of a modest increase in certain raw material inventories
compared with a $471,000 decrease in the reserve for the six months ended
December 31, 1995, during which such inventories decreased significantly), (ii)
a portion of the six months ended
9
<PAGE>
December 31, 1995 process development costs, which were fixed in nature, are now
included in cost of goods sold because the specific processes have since become
operational, (iii) an increase of $313,000 in the non-cash charge for
depreciation, reflecting completion of the major components of the abrasives
finishing area, (iv) approximately $71,000 in non-recurring engineering charges
relating to potential underground fuel tank removal and an abandoned capital
expenditure project and (v) the expensing of production inefficiencies incurred
during modifications to the abrasives and other processing systems during the
six months ended December 31, 1996. Again also, partially offsetting these cost
increases was a $239,000 reduction in freight costs, reflecting the May 1996
change in product pricing policy under which customers now pay outgoing freight.
As a consequence of the above revenue and cost changes, the Company's gross
margin declined to a loss of approximately $616,000 for the three months and
$1,479,000 for the six months ended December 31, 1996, from profits of
approximately $163,000 and $322,000, respectively, for the same periods of 1995.
Selling, general and administrative expenses of approximately $651,000 for the
three months ended December 31, 1996 compare with approximately $489,000 for the
same 1995 period. This increase includes approximately $72,000 higher
non-manufacturing personnel costs, approximately $54,000 higher consulting costs
and approximately $65,000 of added costs primarily for directors' and officers'
insurance and investor relations. For the six months ended December 31, 1996,
these selling, general and administrative expenses totaled approximately
$1,208,000, as compared with approximately $777,000 for the same 1995 period.
This increase includes approximately $104,000 higher personnel costs,
approximately $124,000 higher consulting costs and approximately $75,000 of
added costs primarily for directors' and officers' insurance and investor
relations, together with a $99,000 settlement received in the six months ended
December 31, 1995 from a former officer of Dunkirk.
During the three and six month periods ended December 31, 1995, the Company
incurred process development costs of approximately $212,000 and $463,000,
respectively, representing development activity, completed during the fiscal
year ended June 30, 1996, which was directed at the Company's ALUMAGLASS
abrasives product and its CRT glass recycling operation. No such costs were
incurred during the comparable periods ended December 31, 1996.
Net interest expense increased to approximately $267,000 for the three months
and $498,000 for the six months ended December 31, 1996 from approximately
$230,000 and $408,000, respectively, for the same prior year periods. These cost
increases reflects capitalized interest of approximately $156,000 during the
three months and $245,000 during the six months ended December 31, 1995,
partially offset by approximately $33,000 and $113,000 of respective increases
for the two periods in interest income on cash received from the Company's
initial public offering in May 1996 (the "IPO"), and lower interest paid as a
result of reductions in debt principals.
Liquidity and Capital Resources
The Company's business is capital intensive. The Company has funded its
operations principally from debt financing, the private placement of preferred
stock (subsequently converted into Common Stock) and the proceeds of the
Company's IPO. At December 31, 1996, the Company
10
<PAGE>
had approximately $11,509,000 in principal amount of long-term indebtedness
(excluding capital lease obligations) outstanding and approximately zero net
working capital.
The Company's negative cash flow from operations for the six months ended
December 31, 1996 was approximately $(3,359,000). This level of negative cash
flow represents an increase from levels experienced during the six months ended
December 31, 1995, and is principally due to lower monthly revenue and increased
production efforts during the three months ended September 30, 1996 to build
inventories of ALUMAGLASS that had been curtailed prior to the IPO due to cash
constraints.
At December 31, 1996, the Company had approximately $1,764,000 in available cash
and marketable securities. Since late September 1996 the Company has effected a
number of cost-saving measures in an effort to allow it to continue to fund its
operations from its existing resources. Such measures include ceasing melting
and other operations since inventories of ALUMAGLASS have reached satisfactory
levels, making reductions in overhead and other operating expenses and
refraining from making discretionary capital expenditures.
There can be no assurance that the Company's cost-cutting initiatives will be
sufficient to enable the Company to achieve and maintain cash flow break-even
from operations without obtaining additional financing, that the Company could
obtain additional financing if required on satisfactory terms, if at all, or
that the Company will ever achieve profitability.
To date, the Company's efforts to market ALUMAGLASS through distributors have
failed to generate significant sales. Accordingly, the Company may pursue joint
venture or corporate teaming efforts to develop further sales, which efforts
could include construction of on-site facilities at potential large volume
customer locations where certain feedstock materials may be present. In
addition, the Company plans to increase its marketing efforts on other
substrates produced by the Company, including specialty glass and fired ceramic
products.
The Company's joint venture with VANGKOE Industries, Inc. ("VANGKOE") relating
to the manufacture and sale of color coated particles for construction markets
has experienced delays in start-up, and the Company is in the process of
negotiating certain changes to the structure of the joint venture. Such changes
may involve the Company obtaining greater control over the manufacturing process
and technology in exchange for certain payments, although the outcome of such
negotiation cannot be determined at this time. In addition, VANGKOE is a new
company without significant assets or experience in the business to be pursued
by the joint venture. Accordingly, there can be no assurance that the joint
venture will be successful or result in any significant sales of the Company's
products.
As previously announced, in December 1996, the Company received notice from
Thomson Consumer Electronics ("Thomson") that Thomson will cease to send CRT
glass to, and purchase CRT glass from, the Company as of March 1997, which,
unless additional CRT sources are obtained, will further reduce the Company's
CRT glass recycling revenues. Thomson accounted for approximately 16.5% of the
Company's revenues for the fiscal year ended June 30, 1996 and 30.3% of the
Company's revenue for the six months ended December 31, 1996, in each case, when
taking into account sales of CRT glass supplied by Thomson to both Thomson and
customers other than Thomson. The Company has, however, begun to accept computer
monitors
11
<PAGE>
and computer CRT tubes as part of its strategy to reduce dependence on
television CRT manufacturers and enter the market for recycling computer CRT
tubes and monitors available from end-of-life computer monitors and displays.
The Company is in the process of initiating a pilot program to study the
efficiencies of various tube and monitor disassembly processes, has identified
various markets and proprietary product applications for these materials and
will focus its efforts on this market in an effort to increase its CRT recycling
revenue and generate revenue from beneficial reuse of other CRT tube and monitor
components. There can be no assurance, however, that the Company will be able to
successfully enter this market and increase its CRT revenues due to various
risks, including, among others, risks associated with obtaining materials in a
competitive market, implementing and maintaining new processes and obtaining
outlets for all materials, in each case on satisfactory terms.
The Company's long-term indebtedness consists principally of (i) $8 million
outstanding principal amount of industrial development bonds issued through the
Chautauqua County Industrial Development Agency, which bear interest at 11.5%
with principal repayments commencing in 1998 over a 12-year period, (ii)
$2,029,843 outstanding principal amount under term loans provided by Key Bank of
New York and guaranteed by the New York Job Development Authority, which loans
bear interest at the prime rate and are payable in monthly installments through
January 2002 and (iii) various mortgage loans and subordinated indebtedness from
certain of the Company's CRT glass customers who provided financial and
technical assistance to the Company during its start-up phase. The Company's
debt service requirements are currently approximately $412,000 per quarter
(excluding capital lease obligations). The Company's long-term indebtedness is
secured by liens on substantially all of its fixed assets. The Company's
long-term indebtedness has been used to finance its facility, equipment and
related capital expenditures. Certain of the agreements related to such
long-term indebtedness contain a limited number of customary covenants and
default provisions.
The Company's capital lease payments were approximately $115,000 for the year
ended June 30, 1996 and are estimated to be approximately $84,000, $41,000 and
$27,000 for the fiscal years ending June 30, 1997, 1998 and 1999, respectively,
under current commitments. The Company's utility expenses average approximately
$40,000 per month at its current level of operations.
The Company's base annual fixed expenses include approximately $427,000 in
aggregate annual base compensation for the current executive officers of the
Company and debt service obligations relating to the Company's outstanding
indebtedness, which are estimated to aggregate approximately $1,647,000 for
fiscal 1997 (excluding capital lease obligations).
The Company has federal net operating loss carryforwards that amounted to
approximately $11.5 million at June 30, 1996 which expire between 2006 and 2011.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), utilization of net operating loss carryforwards is limited if there has
been a change in control (ownership) of the Company. Although a comprehensive
evaluation has not yet been performed, it appears that upon the merger
transaction with Dunkirk, effective August 31, 1994, and upon the IPO (effective
May 16, 1996) such changes in control (ownership) had occurred. As a result of
such changes, it appears that the Company's ability to utilize its net operating
loss carryforwards generated by Dunkirk prior to August 31, 1994 (approximately
$1.5 million) is limited by Section 382 and is further limited to the
12
<PAGE>
use of these loss carryforwards against future Dunkirk earnings only. In
addition, the consolidated losses incurred through the effective date of the IPO
(approximately $8.2 million) may be limited to as low as approximately $1
million on an annual basis.
The foregoing discussion contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in such forward-looking statements.
13
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
See Note 6 of Notes to Consolidated Financial Statements above.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the six months ended
December 31, 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
Dated: February 13, 1997 /s/ Harvey Goldman
-------------------------
Harvey Goldman
Chief Executive Officer,
President and Chairman
(Principal Executive and
Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,764,391
<SECURITIES> 0
<RECEIVABLES> 656,977
<ALLOWANCES> 18,000
<INVENTORY> 431,424
<CURRENT-ASSETS> 3,146,843
<PP&E> 15,052,675
<DEPRECIATION> 2,255,653
<TOTAL-ASSETS> 17,857,202
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0
0
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</TABLE>
