<PAGE>
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.:
MARCH 31, 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)
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 May 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
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I--FINANCIAL INFORMATION
Consolidated Balance Sheets of Conversion Technologies International, Inc. and
Subsidiary as of March 31, 1997 and June 30, 1996...................................... 3
Consolidated Statements of Operations of Conversion Technologies International, Inc. and
Subsidiary for the three- and nine-month periods ended March 31, 1997 and 1996......... 4
Consolidated Statements of Cash Flows of Conversion Technologies International, Inc.
and Subsidiary for the nine-month periods ended March 31, 1997 and 1996................ 5
Notes to Consolidated Financial Statements............................................... 6
Management's Discussion and Analysis of Financial Condition and Results of Operations.... 10
PART II--OTHER INFORMATION................................................................. 16
</TABLE>
2
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
-------------- --------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents......................................................... $ 522,070 $ 4,539,464
Marketable securities............................................................. -- 2,009,632
Notes receivable.................................................................. 660,000 --
Accounts receivable, less allowance for doubtful accounts of $18,000 at March 31,
1997 and $25,000 at June 30, 1996............................................... 233,598 343,214
Inventories....................................................................... 436,739 337,736
Prepaid expenses and other current assets......................................... 491,119 205,984
-------------- --------------
Total current assets.............................................................. 2,343,526 7,436,030
Property, plant and equipment:
Land............................................................................ 75,000 75,000
Building and improvements....................................................... 1,618,586 1,609,832
Machinery and equipment......................................................... 12,813,089 11,573,933
Construction in progress........................................................ 542,088 1,008,480
-------------- --------------
15,048,763 14,267,245
Less accumulated depreciation................................................... (2,533,836) (1,630,639)
-------------- --------------
12,514,927 12,636,606
Deferred finance charges, less accumulated amortization of
$122,158 at March 31, 1997 and $81,272 at June 30, 1996......................... 457,457 494,843
Other noncurrent assets........................................................... 499,473 38,304
Restricted assets
Project Fund.................................................................... 158 72,859
Debt service reserve funds...................................................... 1,086,134 1,268,457
-------------- --------------
$ 16,901,675 $ 21,947,099
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.................................................................. $ 981,898 $ 1,279,280
Deferred revenue.................................................................. 553,850 557,907
Reserve for disposal.............................................................. 781,400 737,000
Accrued expenses.................................................................. 709,388 778,306
Current portion of capital lease obligations...................................... 39,311 72,914
Current portion of long-term debt................................................. 456,692 437,285
-------------- --------------
Total current liabilities......................................................... 3,522,539 3,862,692
Capital lease obligations, less current portion................................... 45,838 74,693
Long-term debt, less current portion.............................................. 10,945,468 11,281,715
Stockholders' equity:
Class A common stock, $.00025 par value, authorized 25,000,000
shares, issued and outstanding 5,539,745 shares at March 31, 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..................................................... (174,554) --
Accumulated deficit............................................................. (21,625,933) (17,179,068)
-------------- --------------
Total stockholders' equity........................................................ 2,387,830 6,727,999
-------------- --------------
$ 16,901,675 $ 21,947,099
-------------- --------------
-------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue............................................... $ 467,862 $ 445,961 $ 1,152,020 $ 2,076,894
Cost of goods sold.................................... 813,116 716,521 2,976,157 2,025,851
------------- ------------- ------------- -------------
Gross (loss)/profit on sales.......................... (345,254) (270,560) (1,824,137) 51,043
Selling, general and administrative................... 638,976 436,022 1,847,200 1,213,315
Process development costs............................. -- 313,045 -- 776,113
------------- ------------- ------------- -------------
Loss from operations.................................. (984,230) (1,019,627) (3,671,337) (1,938,385)
Interest expense, net................................. (277,460) (272,708) (775,528) (681,123)
Other income.......................................... -- 81,811 -- 81,811
------------- ------------- ------------- -------------
Net loss.............................................. $ (1,261,690) $ (1,210,524) $ (4,446,865) $ (2,537,697)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per common share............................. $ (0.26) $ (1.02) $ (0.93) $ (2.14)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net loss............................................................................ $ (4,446,865) $ (2,537,697)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation expense............................................................ 903,197 639,711
Amortization of deferred financing and patent costs............................. 40,886 40,673
Settlement with former officer.................................................. -- (99,000)
Stock compensation expense...................................................... 106,673 --
Changes in operating assets and liabilities:
Decrease in accounts receivable............................................... 109,616 46,950
Increase in inventories....................................................... (99,003) (89,563)
(Increase) decrease in other current assets................................... (285,135) 34,087
Increase in other noncurrent assets........................................... (461,169) (7,038)
Decrease in deferred revenue.................................................. (4,057) (360,814)
Increase (decrease) in accounts payable, reserve for disposal and other
accrued expenses............................................................ (321,900) 746,291
------------- -------------
Net cash used in operating activities............................................... (4,457,757) (1,586,400)
INVESTING ACTIVITIES
Sale of marketable securities....................................................... 2,009,632 --
Issuance of notes receivable........................................................ (660,000) --
Capital expenditures................................................................ (781,518) (3,830,030)
------------- -------------
Net cash used in investing activities............................................... 568,114 (3,830,030)
FINANCING ACTIVITIES
Increase in deferred finance and registration costs................................. (3,500) (464,744)
Issuance of notes payable........................................................... -- 2,425,000
Payment of notes payable............................................................ -- (10,000)
Issuance of long-term debt.......................................................... 8,282 3,044,302
Decrease in restricted assets....................................................... 255,024 196,797
Principal payments on long-term debt................................................ (325,122) (221,873)
Principal payments under capital lease obligations.................................. (62,458) (72,382)
Issuance of common stock............................................................ 23 --
------------- -------------
Net cash provided by financing activities........................................... (127,751) 4,897,100
------------- -------------
------------- -------------
Decrease in cash and cash equivalents............................................... (4,017,394) (519,330)
Cash and cash equivalents at beginning of period.................................... 4,539,464 733,843
------------- -------------
Cash and cash equivalents at end of period.......................................... $ 522,070 $ 214,513
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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, 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:
MARCH 31, 1997 JUNE 30, 1996
-------------- -------------
Raw materials.......................... $105,051 $ 79,237
Work-in-process........................ 125,262 135,536
Finished goods......................... 206,426 122,963
-------- --------
$436,739 $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 March 31, 1997, 63.3% of the Company's revenue was
derived from two major customers. Revenue generated from each of these
customers amounted to $210,364 and $85,664 which represents 45.0% and 18.3%
of total revenue, respectively. For the three months ended March 31, 1996,
78.5% of the Company's revenue was derived from three major customers.
Revenue generated from each of these customers amounted to $176,540, $102,088
and $71,378 which represents 39.6%, 22.9% and 16.0% of total revenue,
respectively.
6
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended March 31, 1997, 64.3% of the Company's revenue was
derived from two major customers. Revenue generated from each of these
customers amounted to $500,904 and $239,541 which represents 43.5% and 20.8%
of total revenue, respectively. For the nine months ended March 31, 1996,
89.0% of the Company's revenue was derived from three major customers.
Revenue generated from each of these customers amounted to $1,121,237,
$516,054 and $211,198 which represents 54.0%, 24.8% and 10.2% of total
revenue, respectively.
One such major customer, Thomson Consumer Electronics, discontinued sending
cathode ray tube ("CRT") glass to, and purchasing 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 March 31, 1996, the
Company reduced the reserve by approximately $539,000. From July 1, 1996 to
March 31, 1997, the Company increased the reserve by approximately $44,000.
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
nine-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 March 31, 1997 and 1996 was 4,799,186 and 1,184,591,
respectively. The weighted average number of common shares outstanding for
the nine-month periods ended March 31, 1997 and 1996 was 4,765,031 and
1,185,387, respectively.
6. COMMITMENTS AND CONTINGENCIES
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 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
7
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in construction and disputes with the Company over the scope of the work to
be performed by the contractor. The Company has served the contractor with
its complaint, alleging, among other things, breach of contract, fraud and
defamation, and seeks damages in excess of $1,000,000. The contractor has
served an answer with affirmative defenses and counterclaims against the
Company for breach of contract. The aggregate amount of the claims by the
contractor against the Company is $483,000 plus interest. The 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.
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 income for the fiscal year
ended December 31, 1996 were $24,991,505 and $28,500, 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 common 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, December 11, 1996 and March 26, 1997 the Company
advanced $250,000, $60,000 and $350,000, respectively, to Octagon under
secured promissory notes. The notes are secured by a second lien on Octagon's
assets and interest is charged at 8.25 %. The notes are due on demand on or
after February 13, 1997. Octagon repaid $55,000 of such amount in April 1997.
8. SUBSEQUENT EVENTS
In April 1997, the Company received a letter from a placement agent with
respect to its interest in acting as placement agent on a best efforts basis
for the private placement (the "Private Placement") of a new series of
preferred stock (the "New Series A Preferred Stock"). The Private Placement
would consist of a minimum of 300,000 and a maximum of 500,000 shares of New
Series A Preferred Stock (to be sold in units of 10,000 each) (plus an
over-allotment option with respect to an additional 200,000 shares) at a
stated par value of $10 per share. The New Series A Preferred Stock would be
immediately convertible at the option of the holder into the Company's common
stock based upon a specified price per share. Commencing 12 months from the
final closing of the Private Placement, the holders of the New Series A
Preferred Stock would
8
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be entitled to receive dividends, payable in cash or, at the option of the
Company, in additional shares of New Series A Preferred Stock, at the rate of
10% per annum. The New Series A Preferred Stock would entitle the holder to
the number of votes equal to the number of shares of the Company's common
stock into which the New Series A Preferred Stock is convertible. In
consideration for the Private Placement, the placement agent would receive a
cash commission of 9% and a non-accountable expense allowance of 4% of the
total proceeds. The placement agent would also receive warrants to purchase
shares of the Company's New Series A Preferred Stock equal to 10% of the
total number of shares of New Series A Preferred Stock issued in the Private
Placement at an exercise price equal to 110% of the offering price of such
shares. No assurance can be given that the Private Placement will be
consummated on the terms stated herein or at all.
The Company has been granted a deferral of all interest and principal
payments due under its $8 million Solid Waste Disposal Facility Bonds for the
two-year period commencing March 1, 1997 through and including March 1, 1999;
provided, however, that all such interest and principal payments will be made
from the Company's debt service reserve funds until such reserve funds are
depleted. The total amount of deferred principal and interest payments is
approximately $2,386,000, of which approximately $870,000 will be made from
the Company's debt service reserve funds. Replenishment of the debt service
reserve funds, plus repayment of all additional deferred interest will be due
in 20 equal, consecutive quarterly installments commencing on June 1, 1999.
Repayment of the deferred principal will be due on December 1, 2010. The
continuing effect of such deferral is conditioned upon the consummation of
the Octagon acquisition by June 30, 1997 and the completion of a private
placement of at least $2 million by July 15, 1997 and of at least an
additional $3 million by August 15, 1997. In addition, following consummation
of the private placement, the Company will be subject to certain covenants,
including minimum net worth and working capital covenants.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of operations
Consolidated revenues for the three months ended March 31, 1997 were
approximately $468,000, consisting primarily of CRT glass recycling fees,
approximately $65,000 of ALUMAGLASS-Registered Trademark- sales and
approximately $30,000 of other glass products sales. For the same three-month
period of 1996, the Company's consolidated revenues were approximately
$446,000, of which approximately $69,000 was from sales of ALUMAGLASS and the
remainder was CRT recycling fees. Consolidated revenues for the nine months
ended March 31, 1997 were approximately $1,152,000, consisting primarily of
CRT glass recycling fees, approximately $174,000 of ALUMAGLASS sales and
approximately $35,000 of other glass and ceramic products sales. For the same
nine-month period of 1996, the Company's consolidated revenues were
approximately $2,077,000, of which approximately $134,000 was from sales of
ALUMAGLASS and the remainder was CRT recycling fees. In each case, as
compared to the prior year period, 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.
The net change in cost of goods sold for the three months ended March 31,
1997 versus the same prior year period, an increase of approximately $97,000,
reflects a number of factors, including (i) an approximately $58,000 net
increase in the non-cash charge associated with the reserve for potential
disposal costs of raw materials (an approximately $10,000 decrease in the
reserve for the three months ended March 31, 1997 as a result of a modest
decrease in certain raw material inventories compared with an approximately
$68,000 decrease in the reserve for the three months ended March 31, 1996,
during which the decrease in such inventories was somewhat greater), (ii) a
portion of the three months ended March 31, 1996 process development costs,
which were fixed in nature, are now included in cost of goods sold because
the specific processes have since become operational and (iii) an increase of
approximately $124,000 in the non-cash charge for depreciation, reflecting
completion of the major components of the abrasives finishing area. Partially
offsetting these cost increases were decreases of approximately $70,000 in
energy costs and approximately $20,000 in personnel costs resulting from
reductions in production levels and manufacturing personnel headcount.
The net change in cost of goods sold for the nine months ended March 31, 1997
versus the same prior year period, an increase of approximately $950,000
despite lower sales volume, reflects (i) an approximately $583,000 net
increase in the non-cash charge associated with the reserve for potential
disposal costs of raw materials (an approximately $44,000 increase in the
reserve for the nine months ended March 31, 1997 as a result of a modest
increase in certain raw material inventories compared with an approximately
$539,000 decrease in the reserve for the nine months ended March 31, 1996,
during which such inventories decreased significantly), (ii) a portion of the
nine months ended March 31, 1996 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 approximately
$437,000 in the non-cash charge for
10
<PAGE>
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 nine months ended March 31, 1997. Partially
offsetting these cost increases was an approximately $245,000 reduction in
freight costs, reflecting a May 1996 change in product pricing policy under
which certain 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 $345,000 for the three months and
$1,824,000 for the nine months ended March 31, 1997, compared to a loss of
approximately $271,000 and a profit of approximately $51,000, respectively,
for the same periods of 1996.
Selling, general and administrative expenses of approximately $639,000 for
the three months ended March 31, 1997 compare with approximately $436,000 for
the same 1995 period. This increase includes approximately $92,000 higher
non-manufacturing personnel costs, approximately $71,000 higher consulting
costs, approximately $64,000 higher legal expenses and approximately $53,000
of added costs primarily for directors' and officers' insurance and investor
relations. These cost increases were partially offset by approximately
$20,000 lower sales expense and an approximately $42,000 cost reduction
resulting from a loss on the return of production equipment during the three
months ended March 31, 1996. For the nine months ended March 31, 1997, these
selling, general and administrative expenses totaled approximately
$1,847,000, as compared with approximately $1,213,000 for the same 1996
period. This increase includes approximately $196,000 higher personnel costs,
approximately $195,000 higher consulting costs, approximately $103,000 higher
legal costs and approximately $129,000 of added costs primarily for
directors' and officers' insurance and investor relations, together with a
$99,000 settlement received in the nine months ended March 31, 1996 from a
former officer of Dunkirk. Partially offsetting these increases was
approximately $43,000 due to lower sales expense and an approximately $42,000
loss during the nine months ended March 31, 1996 on the return of production
equipment.
During the three- and nine-month periods ended March 31, 1996, the Company
incurred process development costs of approximately $313,000 and $776,000,
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 March 31, 1997.
Net interest expense increased to approximately $277,000 for the three months
and $776,000 for the nine months ended March 31, 1997 from approximately
$273,000 and $681,000, respectively, for the same prior year periods. These
cost increases include capitalized interest of approximately $117,000 during
the three months and $362,000 during the nine months ended March 31, 1996,
which were offset by approximately $97,000 and $167,000 of respective lower
interest paid in fiscal 1997 as a result of reductions in debt principal and
approximately $12,000 and $114,000 of respective increases for the two
periods in interest income on cash received in fiscal 1997 from the Company's
initial public offering in May 1996 (the "IPO").
11
<PAGE>
Other income for the three and nine months ended March 31, 1996 reflects an
approximately $82,000 refund of an investment tax credit by the State of New
York for the year ended June 30, 1994. Refunds covering the subsequent two
years have been applied for, but have not yet been received.
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 March 31, 1997, the Company had approximately
$11,402,000 in principal amount of long-term indebtedness (excluding capital
lease obligations) outstanding and a net working capital deficit of
approximately $1,179,000.
The Company's negative cash flow from operations for the nine months ended
March 31, 1997 was approximately $(4,458,000). This level of negative cash
flow represents an increase from levels experienced during the nine months
ended March 31, 1996, 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.
On November 18, 1996, the Company entered into an agreement and Plan of
Reorganization relating to the merger (the "Merger") of Octagon, Inc.
("Octagon") with and into a newly-formed subsidiary of the Company. Octagon
is a technical services firm providing radiological control and operations
and maintenance services to nuclear utilities and the Departments of Energy
and Defense. Under the terms of the proposed Merger, the holders of Octagon
common stock will receive one share of the Company's common stock for every
ten shares of Octagon common stock, and Octagon will become a wholly-owned
subsidiary of the Company. Octagon's revenue and net income for the fiscal
year ended December 31, 1996 were $24,991,505 and $28,500, respectively. The
Merger is expected to be completed during the quarter ending June 30, 1997.
The consummation of the Merger is subject to customary conditions.
On September 20, 1996, December 11, 1996 and March 26, 1997 the Company
advanced $250,000, $60,000 and $350,000, respectively, to Octagon under
secured promissory notes. The notes are secured by a second lien on Octagon's
assets and interest is charged at 8.25 %. The notes are due on demand on or
after February 13, 1997. Octagon repaid $55,000 of such amount in April 1997.
At March 31, 1997, the Company had approximately $522,000 in available cash
and marketable securities. Although 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, it will require additional financing
to fund its business and the combined entity resulting from its pending
acquisition of Octagon.
In April 1997, the Company received a letter from a placement agent with
respect to its interest in acting as placement agent on a best efforts basis
for a private placement (the "Private Placement") of a new series of
preferred stock (the "New Series A Preferred Stock") to be issued by the
Company for aggregate gross proceeds of a minimum of $3 million and a maximum
of $5
12
<PAGE>
million, plus an over-allotment option in the aggregate amount of $2 million.
The Private Placement will be made to accredited investors and will consist
of a minimum of 300,000 and a maximum of 500,000 shares of New Series A
Preferred Stock (to be sold in units of 10,000 each) (plus up to an
additional 200,000 shares subject to the over-allotment option) at a stated
par value of $10 per share. In consideration for the Private Placement, the
placement agent will receive a cash commission of 9% of the total proceeds of
the Private Placement and a non-accountable expense allowance of 4% of the
total proceeds of the Private Placement. The placement agent will also
receive warrants to purchase that number of shares of the New Series A
Preferred Stock as shall equal 10% of the total number of shares of New
Series A Preferred Stock sold in the Private Placement at an exercise price
equal to 110% of the offering price of such shares. The placement agent will
conduct the Private Placement on a best efforts, rather than firm commitment,
basis, and there can be no assurance that such offering will be consummated.
Except with respect to the contemplated Private Placement, neither the
Company nor Octagon has any commitments or other arrangements for any future
financing and there can be no assurance that any other debt or equity
financing will be available on acceptable terms or at all. Any equity
financings, including the Private Placement, will be dilutive to the
Company's stockholders and any debt financings will likely contain
restrictive covenants and additional debt service requirements, which could
adversely affect the Company's operating results. If the Private Placement is
not consummated and the Company is unable to obtain other financing, it will
be required to significantly curtail its activities to achieve cash flow
break even or cease operations.
The Company has been granted a deferral of all interest and principal
payments due under its $8 million Solid Waste Disposal Facility Bonds for the
two-year period commencing March 1, 1997 through and including March 1, 1999;
provided, however, that all such interest and principal payments will be made
from the Company's debt service reserve funds until such reserve funds are
depleted. The total amount of deferred principal and interest payments is
approximately $2,386,000, of which approximately $870,000 will be made from
the Company's debt service reserve funds. Replenishment of the debt service
reserve funds, plus repayment of all additional deferred interest will be due
in 20 equal, consecutive quarterly installments commencing on June 1, 1999.
Repayment of the deferred principal will be due on December 1, 2010. The
continuing effect of such deferral is conditioned upon the consummation of
the Octagon acquisition by June 30, 1997 and the completion of a private
placement of at least $2 million by July 15, 1997 and of at least an
additional $3 million by August 15, 1997. In addition, following consummation
of the private placement, the Company will be subject to certain covenants,
including minimum net worth and working capital covenants.
The Company previously entered into a joint venture with VANGKOE Industries,
Inc. ("VANGKOE"), pursuant to which the parties formed a joint venture
company, Advanced Particle Technologies, Inc., a Delaware corporation
("APT"), for the purpose of manufacturing color coated particles for sale as
construction material aggregates. APT is owned 50% by VANGKOE and 50% by the
Company. In February 1997, following delays in start-up and certain cost
overruns, the Company and VANGKOE entered into a letter agreement setting
forth the intent of the parties to terminate the joint venture. Pursuant to
such termination, the Company will purchase VANGKOE's 50% equity interest in
the joint venture company, as well as the proprietary color coating process,
for an aggregate of $165,000 in cash, whereupon APT
13
<PAGE>
will become a wholly-owned subsidiary of the Company. Following such
purchase, APT will manufacture the color coated particles for sale to
VANGKOE. VANGKOE will purchase such particles at a fixed price and, provided
that VANGKOE meets sales targets to be mutually agreed upon, serve as an
exclusive distributor of such particles for swimming pool plaster and other
pool-related applications. The sales targets will be merely threshholds for
VANGKOE to maintain its exclusivity as a distributor and VANGKOE will have no
obligation to meet such sales targets. VANGKOE will be 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. In
addition, the Company has no prior experience in operating a color coating
process and there can be no assurance that the Company will not experience
delays or other problems in manufacturing the color coated particles. In the
event that the restructured arrangement is successful, the Company believes
that the sale of substrates to VANGKOE will not adversely affect its sales
efforts for ALUMAGLASS and other products given that such products have not
been sold into the markets to be pursued by VANGKOE and VANGKOE will be
prohibited from selling such products other than for swimming pool plaster
and other pool-related applications.
As previously announced, in December 1996, Thomson Consumer Electronics
("Thomson") ceased sending CRT glass to, and purchasing 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 25.2% of the Company's revenue for the nine
months ended March 31, 1997, 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 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 1999 over a 12-year period,
(ii) $1,948,350 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
14
<PAGE>
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 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.
15
<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 three months
ended March 31, 1997.
16
<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: May 14, 1997 /s/ Harvey Goldman
Harvey Goldman
Chief Executive Officer,
President and Vice-Chairman
(Principal Executive and
Financial Officer)
17
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