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, 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 February 12, 1998, the
Issuer had outstanding 5,539,745 shares of Common Stock, 553,000 shares of
Series A Convertible Preferred Stock, 5,801,058 Redeemable Class A Warrants and
4,410,041 Redeemable Class B Warrants.
Transitional Small Business Disclosure Format
Yes No X
------ ------
<PAGE>
Contents
Page
No.
----
Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of December 31, 1997
and June 30, 1997.................................................... 3
Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three and six
month periods ended December 31, 1997 and 1996....................... 4
Consolidated Statements of Cash Flows of Conversion
Technologies International, Inc. and Subsidiaries for the six
month periods ended December 31, 1997 and 1996....................... 5
Notes to Consolidated Financial Statements........................... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 11
Part II - Other Information............................................... 14
2
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31, June 30,
1997 1997
------------- -----------
Assets
<S> <C> <C>
Cash and cash equivalents $ 992,494 $ 325,092
Accounts receivable, less allowance for
doubtful accounts of $18,000 at December
31, 1997 and June 30, 1997 271,540 146,225
Inventories 612,273 521,060
Prepaid expenses and other current assets 161,024 188,525
----------- ------------
Total current assets 2,037,331 1,180,902
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 1,578,293 1,578,293
Machinery and equipment 6,899,414 6,713,599
Construction in progress 29,500 29,500
----------- ------------
8,582,207 8,396,392
Less accumulated depreciation (1,854,079) (1,456,610)
----------- ------------
6,728,128 6,939,782
Deferred finance charges, less accumulated
amortization of $86,155 and $135,786
at December 31, 1997 and June 30, 1997
respectively 82,574 443,829
Other noncurrent assets 10,145 3,100
Restricted assets
Project fund -- 158
Debt service reserve funds -- 869,153
----------- ------------
$ 8,858,178 $9,436,924
=========== ============
Liabilities and stockholders' equity (deficiency)
Accounts payable $ 1,572,238 $1,711,212
Deferred revenue 353,182 491,944
Reserve for disposal 596,000 713,100
Accrued expenses 798,468 858,447
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 25,898 35,495
Current portion of long-term debt 361,045 530,258
----------- ------------
Total current liabilities 3,941,831 4,575,456
Capital lease obligations, less current portion 26,949 39,414
Long-term debt, less current portion 1,961,010 10,784,343
Stockholders' equity (deficiency):
Series A Convertible Preferred Stock,
$.001 par value, authorized 880,000
shares, issued and outstanding 553,000
shares at December 31, 1997 553
Common Stock, $.00025 par value, authorized
25,000,000 shares, issued and outstanding
5,539,745 shares at December 31, 1997 and June
30, 1997 1,385 1,385
Additional paid-in capital 28,719,514 24,186,932
Unearned stock compensation -- (116,369)
Accumulated deficit (25,793,064) (30,034,237)
----------- ------------
Total stockholders' equity (deficiency) 2,928,388 (5,962,289)
----------- ------------
$ 8,858,178 $ 9,436,924
=========== ============
See Accompanying Notes
</TABLE>
3
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue
Product sales $ 408,972 $ 216,697 $ 651,068 $ 448,854
Recycling fees 82,448 123,188 165,494 235,304
------------ ---------------- ---------------- ---------------
Total revenues 491,420 339,885 816,562 684,158
Cost of goods sold 663,098 956,133 1,348,874 2,163,041
---------------- ----------------- ---------------- ---------------
Gross loss on sales (171,678) (616,248) (532,312) (1,478,883)
Selling, general and administrative 537,858 650,845 1,223,420 1,208,224
---------------- ----------------- ---------------- ---------------
Loss from operations (709,536) (1,267,093) (1,755,732) (2,687,107)
Interest expense, net 48,460 267,297 357,451 498,068
---------------- ---------------- --------------- --------------
Loss before extraordinary item (757,996) (1,534,390) (2,113,183) (3,185,175)
Extraordinary item - Gain on
debt retirement 492,338 -- 6,354,356 --
---------------- ---------------- ---------------- --------------
Net income (loss) (265,658) (1,534,390) 4,241,173 (3,185,175)
Discount on issuance of Series A
Convertible Preferred Stock -- -- (1,573,500) --
---------------- ---------------- ---------------- -------------
Net income (loss) attributable to
common shareholders $ (265,658) $ (1,534,390) $ 2,667,673 $ (3,185,175)
================ ================ ================ ==============
Basic Earnings Per Common Share:
Loss before extraordinary item $ (0.16) $ (0.32) $ (0.77) $ (0.67)
Extraordinary item 0.10 -- 1.33 --
------------------ ---------------- ---------------- --------------
Net income (loss) $ (0.06) $ (0.32) $ (0.56) $ (0.67)
================ ================ ================ ==============
See Accompanying Notes.
</TABLE>
4
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
For the six months
ended
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Loss before extraordinary item $(2,113,183) $(3,185,175)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation expense 401,796 625,014
Amortization of deferred financing costs 27,887 27,257
Stock compensation expense 116,369 48,488
Changes is operating assets and liabilities:
Decrease (increase) in accounts receivable (125,315) 102,998
(Increase)decrease in inventories ( 91,213) (93,688)
(Increase) decrease in other current
assets 27,501 (88,067)
(Increase) decrease in other noncurrent
assets (7,045) (106,412)
Increase(decrease)in deferred revenue (138,762) 24,165
Increase (decrease) in accounts payable,
reserve for disposal and other accrued
expenses (316,053) (713,504)
----------- ------------
Net cash used in operating activities (2,218,018) (3,358,924)
Investing activities
Sale of marketable securities -- 2,009,632
Issuance of notes receivable -- (416,761)
Capital expenditures (190,142) (785,430)
----------- -----------
Net cash used in investing activities (190,142) 807,441
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 675,285 40,281
Principal payments on long-term debt (2,112,546) (218,279)
Principal payments under capital lease
obligations (22,062) (53,897)
Issuance of Series A Preferred Stock 4,533,135 --
Issuance of common stock -- 23
----------- -----------
Net cash provided by (used in) financing
activities 3,075,562 (223,590)
----------- -----------
(Decrease) increase in cash and cash
equivalents 667,402 (2,775,073)
Cash and cash equivalents at beginning of
period 325,092 4,539,464
------------ ------------
Cash and cash equivalents at end of period $ 992,494 $1,764,391
============ =============
Supplemental disclosure of cash flow
information
Interest paid $ 319,959 $ 725,582
============ =============
See Accompanying Notes.
</TABLE>
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
December 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, 1997 included in the Company's annual report on Form 10-KSB as
amended.
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, 1997 June 30, 1997
----------------- -------------
Raw materials $ 105,429 $ 61,949
Work-in-process 9,718 111,961
Finished goods 497,126 347,150
------- -------
$ 612,273 $ 521,060
======= =======
3. Revenue Recognition
The Company derives most of its revenue from fees charged to accept waste
materials and from the sale of its products. With respect to revenue from fees
charged to accept waste materials, the Company initially records the fees it
receives for accepting waste materials for processing as deferred revenue. After
the materials have been processed into finished goods inventory, the deferred
revenue is recognized as fee revenue based upon the amount of finished goods
inventory produced (by tonnage), valued at the fee charged for accepting the
waste material. With respect to revenue from product sales, including products
created from processed waste materials, revenue is recognized only upon shipment
of products to customers.
For the three months ended December 31, 1997, 90.9% of the Company's revenue was
derived
6
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
from five major customers. Revenue generated from each of these customers
amounted to $243,382, $94,473, $42,111, $37,886 and $28,753, which represents
49.5%, 19.2%, 8.6%, 7.7% and 5.9% of total revenue, respectively. For the three
months ended December 31, 1996, 85.8% of the Company's revenue was derived from
four major customers. Revenues generated from each of these customers amounted
to $145,198, $91,838, $27,503 and $26,986, which represents 42.7%, 27.0%, 8.1%
and 8.0% of total revenue, respectively.
For the six months ended December 31, 1997, 91.6% of the Company's revenue was
derived from five major customers. Revenue generated from each of these
customers amounted to $404,238, $104,629, $81,019, $79,493 and $78,554, which
represents 49.5%, 12.8%, 9.9%, 9.8% and 9.6% of total revenue, respectively. For
the six months ended December 31, 1996, 81.8% of the Company's revenue was
derived from four major customers. Revenue generated from each of these
customers amounted to $290,540, $153,877, $61,965 and $53,035, which represents
42.5%, 22.5%, 9.1% and 7.7% of total revenue, respectively.
4. Reserve for Disposal
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), a 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 probable disposal costs for the unprocessed waste materials on hand in
the event the conversion processes being developed were not successful. To date,
the Company has disposed of 158 tons of the waste materials which it had not
been able to process, all of which was disposed of during the three months ended
December 31, 1997. The amount of unprocessed waste materials on hand was 6,732
tons at June 30, 1997 and 5,301 tons at December 31, 1997. From July 1, 1996 to
December 31, 1996, the Company increased the reserve by approximately $54,000,
from $737,000 to $791,000. From July 1, 1997 to December 31, 1997, the Company
reduced the reserve by approximately $117,000 from $713,000 to $596,000. The
increases/decreases in the reserve, which resulted from changes in the
quantities of unprocessed waste materials on hand, have been charged/credited
against operations. The Company intends to adjust the reserve for disposal if
and when it can refine existing processes to increase yields and/or develop new
processes for the unprocessed waste materials on hand.
7
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
5. Net Income (Loss) Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
The basic net income (loss) per common share is based on the net income (loss)
attributable to common shareholders 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 original Series A Preferred
Stock was converted upon the closing of the initial public offering). The
diluted net income (loss) per common share is the same as the basic net income
(loss) per common share since the effect of the conversion of all dilutive
securities would be antidilutive due to the loss before extraordinary item. The
weighted average number of common shares outstanding for the three-month periods
ended December 31, 1997 and 1996 was 4,799,186 and 4,785,686, respectively. The
weighted average number of common shares outstanding for the six-month periods
ended December 31, 1997 and 1996 was 4,799,186 and 4,747,436, respectively. The
discount on the issuance of the Company's Series A Convertible Preferred Stock
(the "Preferred Stock"), which was issued in August, September and December
1997, 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. For the issuance of Preferred Stock in December,
there was not any discount (See Note 7).
8
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
6. Commitments and Contingencies
The Company is a party to litigation commenced by the Company in the Supreme
Court of New York, County of Chautauqua, against a general contractor hired to
construct an improved abrasives finishing area, which was a part of the
Company's capital expansion program. The contractor commenced work in April
1995, but was asked to stop work in November 1995 following significant cost
overruns, problems and delays in construction and disputes with the Company over
the scope of the work to be performed by the contractor. The Company has served
the contractor with its complaint, alleging, among other things, breach of
contract, fraud and defamation, and seeks damages in excess of $1,000,000. The
contractor has served an answer with affirmative defenses and counterclaims
against the Company for breach of contract. The aggregate amount of the claims
by the contractor against the Company is $483,000 plus interest. The Company
does not believe that there will be a material adverse outcome in the foregoing
dispute.
7. Capital Stock
In August, September, and December of 1997, the Company sold 553,000 shares of
Preferred Stock, with a par value of $.001 per share and a stated value of $10
per share, under a placement agency agreement for the private placement of the
Preferred Stock. The net proceeds to the Company were $4,533,135 after deducting
the placement agent commissions and expenses and other transaction expenses.
Each share of Preferred Stock is convertible into ten shares of common stock at
a conversion price of $1.00 per share. Commencing in December 1998, 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 received a cash commission of 9% and a
non-accountable expense allowance of 4% of the gross proceeds. The placement
agent also received 55,300 warrants to purchase shares of the Company's
Preferred Stock at an exercise price of $11.00.
In July and August of 1997 the Company borrowed and repaid a total of $500,000
for working capital purposes, and in connection therewith, issued warrants to
purchase 125,037 shares of Common Stock at an exercise price equal to $1.05.
The Company's Board of Directors authorized an increase of the authorized number
of common shares to 50 million shares, subject to the approval of the Company's
stockholders.
9
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
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 forgiveness resulted in a net pretax gain to the Company of
approximately $5,862,000, which is reported as an Extraordinary Item.
In December 1997, the Empire State Development Corporation/JDA (the "ESDC"),
which had previously assumed approximately $1,888,000 of debt plus accrued
interest of approximately $82,000 owed by Dunkirk to Key Bank of New York ("Key
Bank"), granted the Company a debt forgiveness of $500,000. Also, the balance of
the related debt service reserve fund of approximately $459,000 was applied
against the outstanding principal and accrued interest. This forgiveness
resulted in a net pretax gain to the Company of approximately$492,000, which is
reported as an Extraordinary Item.
To the extent that Dunkirk is deemed to be insolvent immediately prior to either
of these debt forgivenesses by an amount which equals or exceeds the amount of
debt forgiveness, the Company will not recognize taxable income from such
forgiveness; 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 forgiveness, 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 forgiveness, 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 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.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months Ended December 31, 1997 Compared to Three Months Ended December 31,
1996
Total revenues increased by $151,000 for the three months ended December 31,
1997 to $491,000 compared with $340,000 for the three months ended December 31,
1996 due to $94,000 of sales from the decorative particles business, which
started operations in 1997 and an increase of $72,000 in sales of clean cullet.
The decrease in cost of goods sold of $293,000 for the three months ended
December 31, 1997 to $663,000, compared with $956,000 for the three months ended
December 31, 1996, despite the increase in revenue of $151,000, is due to a
number of factors, including (i) a decrease of $206,000 as a result of
discontinuing the melter operations and writing-off the assets associated
therewith during the fourth quarter of Fiscal 1997, (ii) a net decrease in the
charge to operations of $74,000 for the change in the reserve for disposal costs
for the unprocessed waste materials on hand, (iii) a decrease of $78,000 due to
the reduced level of operations in the abrasives finishing department, and (iv)
an increase of $133,000 from the decorative particles business started in 1997.
As a result of the increased revenues and decreased cost of goods sold discussed
above, the Company's gross margin improved by $444,000 for the three months
ended December 31, 1997 to a loss of $172,000 compared with a loss of $616,000
for the three months ended December 31, 1996.
Selling, general and administrative expenses decreased by $113,000 for the three
months ended December 31, 1997 to $538,000, compared with $651,000 for the three
months ended December 31, 1996, as a result of a $53,000 decrease in salaries
and related fringe costs, a decrease of $103,000 in professional fees, and an
increase of $27,000 from the decorative particles business.
Net interest expense decreased by $219,000 to $48,000 for the three months ended
December 31, 1997, compared with $267,000 for the three months ended December
31, 1996. This resulted from a decrease in the interest income of $20,000 on
cash received from the Company's initial public offering and a decrease in
interest expense of $239,000 resulting from the reduction of debt from the
repayment and forgivenesses during 1997.
Six Months Ended December 31, 1997 Compared to Six Months Ended December 31,
1996.
Total revenues for the six months ended December 31, 1997 were $816,000 compared
to $684,000 for the six months ended December 31, 1996 or an increase of
$132,000 due to the $105,000 of sales from the decorative particles business and
an increase of $28,000 in the sales of ALUMAGLASS over the prior year.
The decrease in cost of goods sold of $814,000 to $1,349,000 for the six months
ended December 31, 1997, from $2,163,000 for the six months ended December 31,
1996, despite the increase in revenues of $816,000, is caused by a number of
factors, including (i) a decrease of $737,000 as a result of
11
<PAGE>
discontinuing the melter operations and writing-off the assets associated
therewith during the last quarter of Fiscal 1997, (ii) a net decrease in the
charge to operations of $150,000 for the change in the reserve for disposal
costs for the unprocessed waste materials on hand, (iii) a decrease of $156,000
due to the reduced level of operations in the abrasives finishing department,
and (iv) an increase of $301,000 from the decorative particles business started
in 1997.
The Company's gross margin improved by $946,000 to a loss of $533,000 for the
six months ended December 31, 1997, from a loss of $1,479,000 for the six months
ended December 31, 1996, as a result of the $132,000 increase in revenues and
the $814,000 decrease in cost of goods sold discussed above.
Selling, general and administrative expenses were approximately the same for the
six months ended December 31, 1997 at $1,223,000 compared to $1,208,000 for the
six months ended December 31, 1996. The decrease of $93,000 in salaries and
related fringe costs was more than offset by the $73,000 increase in
compensation expenses relating to capital stock and the $64,000 increase from
the decorative particles business.
Net interest expense decreased by $141,000 to $357,000 for the six months ended
December 31, 1997, from $498,000 for the six months ended December 31, 1996, as
a result of a $244,000 decrease in interest expense due to the reduction in debt
from the repayment and forgivenesses and of a $103,000 decrease in interest
income due mainly to the interest received on cash received from the Company's
initial public offering.
Liquidity and Capital Resources
The Company's business is capital intensive. The Company has funded its
operations principally from debt financing, the private placement of shares of
preferred stock and the proceeds of the Company's initial public offering. At
December 31, 1997, the Company had approximately $2,322,000 in principal amount
of long-term indebtedness (excluding capital lease obligations) and net working
capital deficiency of approximately $1,905,000. As of December 31, 1997, the
Company had cash and cash equivalents of approximately $992,000.
In August, September, and December 1997, the Company raised aggregate gross
proceeds of $5,530,000 in a private placement of Preferred Stock. An aggregate
of 553,000 shares of Preferred Stock were issued. Each share of Preferred Stock
is convertible into ten shares of Common Stock at a conversion price of $1.00
per share.
The Company received net proceeds of $4,533,135 from the placement of the
Preferred Stock (after deducting the placement agent's commissions and
non-accountable expense allowance and other transaction expenses). Of such net
proceeds, $1,620,000 was used to redeem the IDA Bonds and $500,000 plus accrued
interest was used to repay the 1997 Bridge Loan (defined below), with the
remainder to be used for general working capital purposes, including accrued
payables.
In July and August 1997, the Company borrowed an aggregate of $500,000, which
was used for general working capital purposes (the "1997 Bridge Loan"). On
September 8, 1997, the 1997 Bridge Loan was repaid, together with accrued
interest at the rate of 12% per annum, out of the proceeds of the Preferred
Stock placement. In connection with the 1997 Bridge Loan, the Company issued
warrants to purchase 125,037 shares of Common Stock at an exercise price equal
to $1.05 per share.
12
<PAGE>
In September 1997, the $8,000,000 principal amount of IDA Bonds were redeemed in
full in exchange for a cash payment of $1,620,000 and Dunkirk's forfeiture of
its interest in a related debt service reserve fund (which had a then current
balance of approximately $194,000).
In July 1997, ESDC agreed to honor its guarantee of the term loans owing by the
Company's Dunkirk subsidiary to Key Bank, which process was completed in
December 1997 by ESDC assuming the principal of approximately $1,888,000 and
accrued interest of approximately $82,000 due on the loans. In addition, in
December 1997 ESDC forgave $500,000 on the outstanding principal balance of the
loans. ESDC has agreed to defer all interest and principal payments due under
the loans through July 1998 until the maturity date of the loans, with interest
continuing to accrue on such deferred amounts payable at maturity. ESDC has also
allowed Dunkirk to reduce the amount owed on such loans by the amount of a debt
service reserve fund (approximately $459,000) that was forfeited by Dunkirk.
As of December 31, 1997, the Company had approximately $2,322,000 in principal
amount of long-term indebtedness (excluding capital lease obligations),
consisting of (i) approximately $ 951,000 outstanding principal amount under the
Key Bank term loans assumed by ESDC, which loans bear interest at the prime rate
and are payable in monthly installments through December 2001 (subject to the
deferral through July 1, 1998 described above), (ii) approximately $667,000
aggregate outstanding principal amount under various mortgage and secured
equipment loans and (iii) approximately $704,000 aggregate outstanding principal
amount under subordinated indebtedness from certain of the Company's CRT glass
customers who provided financial assistance to the Company during its start-up
phase. The Company's long-term indebtedness is secured by liens on its fixed
assets. The Company's long-term indebtedness has been used to finance its
facility, equipment and related capital expenditures. Certain of the agreements
related to such long-term indebtedness contain customary covenants and default
provisions.
The Company's capital lease payments were approximately $22,000 for the six
months ended December 31, 1997 and are estimated to be approximately $41,000,
$27,000 and $23,000 for the fiscal years ending June 30, 1998, 1999 and 2000,
respectively, under current commitments. The Company's utility expenses average
approximately $40,000 per month at its current level of operations.
The Company's base annual fixed expenses include approximately $316,000 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 $247,000 for the
fiscal year ending June 30, 1998, excluding capital lease obligations.
The Company has federal net operating loss carryforwards that amounted to
approximately $20.6 million at June 30, 1997, which expire between 2006 and
2012. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), utilization of net operating loss carryforwards is limited if
there has been a change in control (ownership) of the Company. Although a
comprehensive evaluation has not yet been performed, it is likely that due to
prior shifts in ownership (the Dunkirk merger and the completion of the IPO) and
the current shifts in ownership (the Preferred Stock offering), the Company's
ability to utilize its net operating loss carryforwards could be severely
limited.
The Company receives waste materials for processing into finished goods
inventory, which then can be sold to its customers. The Company has recorded a
reserve for disposal for the probable disposal costs of waste material it has
received which cannot be processed through the Company's current processing
methods, net of the amount of deferred revenue recorded with respect to such
materials. The Company
13
<PAGE>
is continually attempting to refine existing processes to increase yields and/or
develop new processes for the waste materials on hand which have not been able
to be processed. The Company records a disposal reserve with respect to
materials it cannot process because it is probable it will incur these costs on
the ultimate disposition of the waste materials. The Company estimates that the
disposal costs for material received by the Company that the Company cannot
process, if and when incurred, will exceed the fees the Company was paid to
accept such materials.
The Company had 5,301 tons of unprocessed waste materials on hand as of December
31, 1997, compared to 7,670 tons at December 31, 1996 and 5,839 tons at
September 30, 1997. The Company's disposal reserve was $596,000 as of December
31, 1997, compared to $791,000 at December 31, 1996 and $751,000 at September
30, 1997. The decreases in unprocessed waste materials on hand, and related
decreases in reserve for disposal, resulted primarily from applying certain
manual and "off-line" processing efforts to certain types of unprocessed CRT
glass which were processed and then purchased by a customer of the Company.
This Form 10-QSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include risks and uncertainties, including, but not
limited to: (i) the risk that the Company's marketing efforts with respect to
its abrasives, decorative particles and other products will not result in
increased sales and that the Company will continue to experience substantial
losses from operations, (ii) the risk that the Company will require additional
financing prior to achieving positive cash flow from operations and that it may
not be able to obtain such financing on terms acceptable to the Company or at
all, (iii) the risk that the redemption of the IDA Bonds or removal of
non-productive assets from service will result in taxable income to the Company
or otherwise create tax or tax-related obligations of the Company the result of
which could reduce the Company's net operating loss carry-forwards and/or,
depending on the amount of such taxable income, if any, result in the Company
being required to satisfy such obligations out of its available cash, at a time
when such obligations could exceed the Company's available cash, (iv) the risk
that the Company will experience interruptions in its manufacturing operations
which will delay shipments or result in lost business, (v) risks associated with
retaining and attracting key personnel, (vi) the risk that the Company will lose
key CRT customers prior to obtaining increased sales of its abrasives and other
products, (vii) risks associated with being able to obtain requisite supplies of
raw materials for its products, (viii) risks associated with its ability to
protect its intellectual property and proprietary rights, (ix) risks associated
with the failure to comply with applicable environmental laws and regulations
and (x) the risk that the Company will not be able to continue to satisfy the
minimum maintenance requirements for continued listing on the Nasdaq SmallCap
Market .
Part II - Other Information
Item 1. Legal Proceedings
See Note 6 of Notes to Consolidated Financial Statements above.
Item 2. Changes in Securities and Use of Proceeds
On December 8, 1997, the Company sold, pursuant to a private placement, an
aggregate 138,500 shares of Preferred Stock for aggregate gross proceeds of
$1,385,000 (the "Private Placement"). The Preferred
14
<PAGE>
Stock was sold pursuant to an exemption from registration pursuant to Regulation
D, promulgated under the Securities Act of 1933, as amended (the"Securities
Act'). In connection with the sale of the Preferred Stock, the Company did not
conduct any general advertisement or solicitation; each purchaser of the
Preferred Stock represented that, among other things, the purchaser was an
"accredited investor" as that term is defined in Regulation D and the purchaser
was purchasing the shares of Preferred Stock for investment and not with a view
to distribution. Appropriate legends were affixed to the certificates
representing the Preferred Stock. Paramount Capital, Inc. acted as a placement
agent in the Private Placement and received an aggregate placement fee of
$124,650, and an expense reimbursement of $66,896.
Each share of Preferred Stock is convertible into ten shares of Common Stock at
a conversion price of $1.00 per share. The holders of the Preferred Stock are
entitled to the number of votes equal to the number of shares of Common Stock of
the Company into which such shares of Preferred Stock are convertible, and are
entitled to vote together with the holders of the Common Stock.
The holders of the Preferred Stock are also entitled to certain voting rights
not shared by the holders of the Common Stock, so long as a majority of the
Preferred Stock sold in the Private Placement remains outstanding. The
affirmative vote of the holders of at least two-thirds of the Preferred Stock
will be required for (i) the issuance of securities senior to or on a parity
with the Preferred Stock with respect to dividends, voting or liquidation, (ii)
any alterations to the rights of the Preferred Stock, (iii) a liquidation,
dissolution or sale of substantially all of the assets of the Company, (iv) the
incurrence of over $100,000 of indebtedness (other than borrowings under working
capital lines of credit), and (v) the repurchase of any of the securities of the
Company. In addition, the holders of the Preferred Stock are entitled to a
liquidation preference in an amount per share equal to $13.50 plus declared
and/or accrued but unpaid dividends, if any. Finally, the holders of the
preferred stock are entitled to dividends, payable in cash or in kind, at an
annual rate of 10% beginning in December 1998. The Company must pay such
dividend prior to any dividend declared on the Common Stock. (For a detailed
description of the terms of the Preferred Stock, see the Certificate of
Designation of Series A Convertible Preferred Stock, which was filed as an
exhibit to the Company's Annual Report on Form 10-KSB for the year ended June
30, 1997).
15
<PAGE>
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
Exhibits
--------
11 Computation of per share earnings.
27 Financial Data Schedule.
Form 8-K
--------
None.
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: February 17, 1998 /s/ William L. Amt
--------------------------------------------
William L. Amt
President and Chief
Executive Officer
(Principal executive officer)
Dated: February 17, 1998 /s/ John G. Murchie
--------------------------------------------
John G. Murchie
Acting Chief Financial
Officer and Controller
(Principal financial officer)
17
<PAGE>
Exhibit 11
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Statement of Computation of Basic Net Income (Loss) Per Share
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Loss before extraordinary item $ (757,996) $ (1,534,390) $ (2,113,183) $ (3,185,175)
Discount on issuance of Series A
Convertible Preferred Stock -- -- (1,573,500) --
-------------- --------------- --------------- ---------------
Loss before extraordinary item
attributable to common shareholders $ (757,996) $ (1,534,390) $ (3,686,683) $ (3,185,175)
============== =============== =============== ===============
Weighted average number of
common shares outstanding 4,799,186 4,785,686 4,799,186 4,747,436
============== =============== =============== ===============
Loss per common share before
extraordinary item $ (0.16) $ (0.32) $ (0.77) $ (0.67)
============== =============== =============== ===============
Extraordinary item $ 492,338 $ -- $ 6,354,356 $ --
============== =============== =============== ===============
Income per share from
extraordinary item $ 0.10 $ -- $ 1.33 $ --
============== =============== =============== ===============
Net income (loss) $ (265,658) $ (1,534,390) $ 4,241,173 $ (3,185,175)
Discount on issuance of Series A
Convertible Preferred Stock -- -- (1,573,500) --
-------------- --------------- --------------- ---------------
Net income (loss) attributable
to common shareholders $ (265,658) $ (1,534,390) $ 2,667,673 $ (3,185,175)
============== =============== =============== ===============
Net income (loss) per
common share $ (0.06) $ (.032) $ 0.56 $ (0.67)
============== =============== =============== ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000923978
<NAME> Conversion Technologies International, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 992,494
<SECURITIES> 0
<RECEIVABLES> 271,540
<ALLOWANCES> 18,000
<INVENTORY> 612,273
<CURRENT-ASSETS> 2,037,331
<PP&E> 8,582,207
<DEPRECIATION> 1,854,079
<TOTAL-ASSETS> 8,858,178
<CURRENT-LIABILITIES> 3,941,831
<BONDS> 1,987,959
0
553
<COMMON> 1,385
<OTHER-SE> 2,926,450
<TOTAL-LIABILITY-AND-EQUITY> 8,858,178
<SALES> 816,562
<TOTAL-REVENUES> 816,562
<CGS> 1,348,874
<TOTAL-COSTS> 2,572,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 357,451
<INCOME-PRETAX> (2,113,183)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,113,183)
<DISCONTINUED> 0
<EXTRAORDINARY> 6,354,356
<CHANGES> 0
<NET-INCOME> 4,241,173
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
