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, 1999 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)
7 San Bartola Drive
St. Augustine, Florida 32086
(Address of principal executive offices)
(904) 808-0503
(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 5, 1999, the Issuer
had outstanding 6,947,045 shares of Common Stock, 545,830 shares of Series A
Convertible Preferred Stock, convertible into 10,916,600 shares of Common Stock,
Redeemable Class A Warrants exercisable for 9,808,666 shares of Common Stock and
Redeemable Class B Warrants exercisable for 7,617,287 shares of Common Stock.
Transactional Small Business Disclosure Format
Yes |_| No |X|
1
<PAGE>
Contents
Page
No.
---
Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies International,
Inc. and Subsidiaries as of March 31, 1999 and June 30, 1998.............3
Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three and nine month
periods ended March 31, 1999 and 1998....................................4
Consolidated Statement of Stockholders' Equity (Deficiency) of
Conversion Technologies International, Inc. and Subsidiaries for
the nine month period ended March 31, 1999...............................5
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the nine month periods
ended March 31, 1999 and 1998............................................6
Notes to Consolidated Financial Statements..................................7
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................14
PART II - Other Information...................................................19
2
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 113,163 $ 168,483
Accounts receivable, less allowance for doubtful accounts of
$18,000 at March 31, 1999 and June 30, 1998 215,237 258,990
Inventories 553,981 557,292
Prepaid expenses and other current assets 165,800 94,596
------------ ------------
Total current assets 1,048,181 1,079,361
Property, plant and equipment:
Land -- --
Building and improvements -- --
Machinery and equipment 794,127 702,614
Construction in progress -- --
------------ ------------
794,127 702,614
Less accumulated depreciation (256,434) (148,057)
------------ ------------
537,693 554,557
Property, plant and equipment held for sale at estimated disposal value 1,000,000 1,000,000
Other assets, less accumulated amortization of $116,962 and
$97,811 at March 31, 1999 and June 30, 1998 respectively 112,782 132,783
------------ ------------
$ 2,698,656 $ 2,766,701
============ ============
Liabilities and stockholders' deficiency
Notes payable $ 1,610,930 $ 502,000
Accounts payable 1,688,330 1,193,624
Reserve for disposal 301,000 515,000
Accrued expenses 606,485 394,163
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 19,608 23,965
Current portion of long-term debt 2,514,497 2,524,255
------------ ------------
Total current liabilities 6,975,850 5,388,007
Capital lease obligations, less current portion -- 15,235
Long-term debt, less current portion -- --
Stockholders' deficiency:
Series A Convertible Preferred Stock, $ .001 par value,
authorized 880,000 shares, issued and outstanding 613,030
and 613,280 shares at March 31, 1999 and June 30, 1998 respectively 613 614
Common Stock, $.00025 par value, authorized 50,000,000
shares, issued and outstanding 5,603,045 and 5,600,545
shares at March 31, 1999 and June 30, 1998 respectively 1,401 1,400
Additional paid-in capital 33,823,106 32,876,274
Unearned stock compensation (63,934) (207,000)
Accumulated deficit (38,038,380) (35,307,829)
------------ ------------
Total stockholders' deficiency (4,277,194) (2,636,541)
------------ ------------
$ 2,698,656 $ 2,766,701
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 256,210 $ 60,541 $ 548,195 $ 165,169
Cost of goods sold 311,717 116,818 893,930 483,961
----------- ----------- ----------- -----------
Gross loss on sales (55,507) (56,277) (345,735) (318,792)
Selling, general and administrative 407,222 361,077 1,158,303 1,418,778
----------- ----------- ----------- -----------
Operating loss (462,729) (417,354) (1,504,038) (1,737,570)
Interest expense, net 116,685 30,335 323,725 153,929
----------- ----------- ----------- -----------
Loss from continuing operations (579,414) (447,689) (1,827,763) (1,891,499)
Income (loss) from operations of
discontinued subsidiary (25,602) 111,673 142,858 (557,700)
----------- ----------- ----------- -----------
Loss before extraordinary item (605,016) (336,016) (1,684,905) (2,449,199)
Extraordinary item - gain on debt
retirement -- -- -- 6,354,356
----------- ----------- ----------- -----------
Net income (loss) (605,016) (336,016) (1,684,905) 3,905,157
Preferred stock dividends (193,299) -- (1,045,644) (1,573,500)
----------- ----------- ----------- -----------
Net income (loss) applicable to
Common Stock $ (798,315) $ (336,016) $(2,730,549) $ 2,331,657
=========== =========== =========== ===========
Basic Earnings Per Common Share:
Loss from continuing operations $ (0.16) $ (0.09) $ (0.59) $ (0.72)
Income (loss) from discontinued
operations -- 0.02 0.03 $ (0.12)
----------- ----------- ----------- -----------
Loss before extraordinary item (0.16) (0.07) (0.56) $ (0.84)
Extraordinary item -- -- -- 1.33
----------- ----------- ----------- -----------
Net income (loss) applicable to
Common Stock $ (0.16) $ (0.07) $ (0.56) $ 0.49
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 4,862,486 4,799,186 4,861,765 4,799,186
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficiency)
Nine Months Ended March 31, 1999
<TABLE>
<CAPTION>
Series A Preferred Stock Common Stock
-------------------------------- ------------------------------------
Additional Additional Unearned
Number Paid-In Number Paid-In Stock
of Shares Amount Capital of Shares Amount Capital Compensation
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1998 613,280 $ 614 $ 8,157,807 5,600,545 $ 1,400 $ 24,718,467 $ (207,000)
Series A Preferred Stock
converted into Common Stock (250) (1) (3,670) 2,500 1 3,670
Stock compensation -- 44,254
Common Stock options
cancelled for employee -- (98,812) 98,812
Adjustment of prior conversions
of Series A Preferred Stock
into Common Stock (28,460) -- 28,460
Preferred Stock dividends 1,045,644 --
Net Loss
-----------------------------------------------------------------------------------------
Balance at March 31, 1999 613,030 $ 613 $ 9,171,321 5,603,045 $ 1,401 $ 24,651,785 $ (63,934)
============================== =======================================================
<CAPTION>
Total
Stockholders'
Accumulated Equity
Deficit (Deficiency)
------------------------------
<S> <C> <C>
Balance at July 1, 1998 $(35,307,829) $ (2,636,541)
Series A Preferred Stock
converted into Common Stock --
Stock compensation 44,254
Common Stock options
cancelled for employee --
Adjustment of prior conversions
of Series A Preferred Stock
into Common Stock --
Preferred Stock dividends (1,045,644) --
Net Loss (1,684,905) (1,684,905)
------------------------------
Balance at March 31, 1999 $(38,038,378) $ (4,277,192)
==============================
</TABLE>
See accompanying notes.
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
Operating activities
Net (loss) income $(1,684,905) $ 3,905,157
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation expense 108,377 605,009
Amortization expense 19,151 33,437
Amortization of discount on notes payable 97,200
Extraordinary item -- (6,354,356)
Stock compensation expense 44,254 116,369
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 43,753 (178,034)
Decrease (increase) in inventories 3,311 (56,499)
(Increase) decrease in prepaid expenses and other current assets (71,204) 2,290
Decrease (increase) in other assets 850 (7,045)
Decrease in deferred revenue -- (491,944)
Increase (decrease) in accounts payable, reserve for
disposal and other accrued expenses 493,026 (401,732)
----------- -----------
Net cash used in operating activities (946,187) (2,827,348)
Investing activities
Capital expenditures (91,513) (248,053)
----------- -----------
Net cash used in investing activities (91,513) (248,053)
Financing activities
Decrease in deferred finance charges -- 1,750
Issuance of notes payable 1,027,778 500,000
Payment of notes payable (16,048) (500,000)
Decrease in restricted assets -- 675,285
Principal payments on long-term debt (9,758) (2,127,347)
Principal payments under capital lease obligations (19,592) (29,884)
Issuance of Series A Preferred Stock, net of offering costs -- 4,528,445
----------- -----------
Net cash provided by financing activities 982,380 3,048,249
----------- -----------
Decrease in cash and cash equivalents (55,320) (27,152)
Cash and cash equivalents at beginning of period 168,483 325,092
----------- -----------
Cash and cash equivalents at end of period $ 113,163 $ 297,940
=========== ===========
Supplemental disclosure of cash flow information
Interest paid $ 55,500 $ 367,633
=========== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999
(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, 1998 included in the Company's annual report on Form 10-KSB.
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. The Company has had limited
revenue and has incurred significant losses which has resulted in a working
capital deficiency and a stockholders' deficiency. The Company does not
currently possess sufficient funds to conduct its business and satisfy its
liabilities. The Company has significant past due payables and is in default in
payment of principal and interest on substantially all of its indebtedness for
borrowed money other than the Line of Credit and as a result all of the
Company's debt has been classified as a current liability on March 31, 1999 and
June 30, 1998. In order to allow the Company to continue operating in the short
term, the Acting President and Chief Executive Officer of the Company, has
advanced to the Company, or has not received accrued compensation of, an
aggregate of $190,000, and the Company has borrowed additional funds on a short
term basis from the issuers of the Line of Credit. The Company is currently
seeking additional financing through a private placement of its equity
securities. There can be no assurance that the Company will be able to obtain
necessary financing. If the Company is not able to obtain immediate financing,
the Company may be forced to further limit or even cease operations. In view of
the foregoing, there is substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments relating to the realization of assets and
liquidation of liabilities that might be necessary should the Company be unable
to continue as a going concern.
7
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
In fiscal 1999, three officers of the Company resigned from the new management
team, which had been engaged in late fiscal 1997 and fiscal 1998. The Company's
remaining management team has initiated a plan to close-out the operations at
Dunkirk and sell the Dunkirk facility, renegotiate and pay-off creditors,
continue the reduction of manufacturing and operating overheads, put together a
new management team, and, if the above is successful, raise new capital from
alternate sources. Although management believes if the foregoing course of
action is achieved, it would allow the Company to continue as a going concern
for the next year, there are no assurances that management will be successful in
implementing these plans and eliminating the substantial doubt as to its ability
to continue as a going concern.
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, 1999 June 30, 1998
-------------- -------------
Raw materials $256,627 $216,639
Work-in-process 16,791 147,291
Finished goods 280,563 193,362
-------- --------
$553,981 $557,292
======== ========
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 or sold after
preliminary processing, 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.
8
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
For the three months ended March 31, 1999, 77.0% of the Company's revenue was
derived from three major customers. Revenue generated from each of these
customers amounted to $118,615, $68,661 and $28,976, which represents 42.2%,
24.5% and 10.3% of total revenue, respectively. For the three months ended March
31, 1998, 81.2% of the Company's revenue was derived from three major customers.
Revenue generated from each of these customers amounted to $440,071, $96,353 and
$85,371, which represents 57.5%, 12.6% and 11.1% of total revenue, respectively.
For the nine months ended March 31, 1999, 51.3% of the Company's revenue was
derived from two major customers. Revenue generated from each of these customers
amounted to $197,873 and $186,917, which represents 26.4% and 24.9% of total
revenue, respectively. For the nine months ended March 31, 1998, 85.3% of the
Company's revenue was derived from four major customers. Revenue generated from
each of these customers amounted to $844,309, $177,372, $163,924 and $163,541,
which represents 53.4%, 11.2%, 10.4% and 10.3% 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 and cleanup costs for the unprocessed waste materials
on hand in the event that the conversion processes being developed were not
successful. To date, the Company has disposed of 2,357 tons of waste materials
which it had not been able to process, of which 1,137 on was disposed of during
the year ended June 30, 1998 and 1,220 tons was disposed of during the nine
months ended March 31, 1999. The amount of unprocessed waste materials on hand
was 2,035 tons at June 30, 1998 and 843 tons at March 31, 1999. From July 1,
1997 to March 31, 1998, the Company reduced the reserve by approximately
$203,000 from $713,000 to $510,000. From July 1, 1998 to March 31, 1999, the
Company reduced the reserve by approximately $214,000 from $515,000 to $301,000.
The decreases in the reserve, which resulted from reductions in the quantities
of unprocessed waste materials on hand, have been credited against operations.
The Company intends to adjust the reserve for disposal if and when it can
further reduce the quantities of unprocessed waste materials on hand.
9
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
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
requirements of Statement 128.
Basic net income (loss) per common share is based on the net income (loss)
attributable to common stockholders for the period, divided by the weighted
average number of common shares outstanding during the period (excluding 740,559
common shares that were deposited into escrow in connection with the Company's
initial public offering). Potential common shares have not been included since
their effect would be anti dilutive. Common shares that could be potentially
dilutive include 784,877 stock options, 28,444,461 warrants and 13,499,500
shares underlying the Series A Preferred Stock, after giving effect to the reset
of the conversion price of the Series A Preferred Stock (see Note 7).
6. 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 Company
also wrote off approximately $324,000 of deferred financing costs relating to
such debt. 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. ESDC has also agreed to
defer all interest payments due under the loan through July 1, 1998 and to defer
all principal payments due under the loan through January 1, 1999 with interest
continuing to accrue on such deferred amounts payable monthly beginning July
1998 through December 2001. This forgiveness resulted in a net pretax gain to
the Company of approximately $492,000, which is reported as an Extraordinary
Item.
10
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
To the extent that Dunkirk is deemed to be insolvent immediately prior to either
of these debt forgiveness 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 carry forwards ("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.
At June 30, 1998, the Company has approximately $20 million of net operating
loss carry forwards, which expire, between 2006 and 2013. The Tax Reform Act of
1986 enacted a complex set of rules (Section 382) limiting the potential
utilization of net operating loss carry forwards in periods following a
corporate "ownership change". In general, an ownership change is deemed to occur
if the percentage of stock of a loss corporation owned (actually, constructively
and, in some cases, deemed) by one or more "5% stockholders" has increased by
more that 50 percentage points over the lowest percentage of such stock owned
during a three year testing period. Although a comprehensive evaluation has not
yet been performed, it is likely that due to prior shifts in ownership (the
Dunkirk merger and the completion of the IPO) and current shifts in ownership
(the Preferred Stock Offering), the Company's ability to utilize its net
operating loss carry forwards could be severely limited.
7. Capital Stock
In August, September and December of 1997, the Company sold 553,000 shares of
Series A 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 Series A Preferred Stock. The net proceeds to the Company were $4,523,302
after deducting the placement agent commissions and expenses and other
transaction expenses. Each share of Series A Preferred Stock is convertible into
twenty shares of common stock at a conversion price of $0.50 per share after
giving effect to anti-dilution adjustments resulting from the reset of the
conversion price of the Series A Preferred Stock on December 8, 1998. Commencing
in December 1998, the holders of the Series A Preferred Stock are entitled to
receive dividends payable in cash, or at the option of the Company,
11
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
in additional shares of Series A Preferred Stock at the rate of 10% per annum.
As of March 31, 1999, the holders of the Series A Preferred Stock had converted
6,330 shares of Series A Preferred Stock into 63,300 shares of Common Stock.
Since the Series A Preferred Stock is convertible at a discount, a Series A
Preferred Stock dividend of $757,997 ($.16 per Common Share) has been recorded
for the nine months ended March 31, 1999 for the difference between the
discounted conversion price of the Series A Preferred Stock and the fair market
value of the Company's Common Stock at the time of issuance. The Series A
Preferred Stock also contains a reset provision under which the conversion price
in effect immediately prior to the date that is 12 months after the final
closing date of the issuance and sale of the Series A Preferred Stock (the
"Reset Date") shall be adjusted and reset effective as of the Reset Date if the
average closing bid price of the Common Stock for the twenty (20) consecutive
trading days immediately preceding the Reset Date is less that 135% of the then
applicable conversion price (a "Reset Event"). Upon the occurrence of a Reset
Event, the conversion price shall be reduced to be equal to the greater of (A)
the 12-month trading price divided by 1.35, or (B) 50% of the then applicable
conversion price. As a result of this reset feature, a Series A Preferred Stock
dividend of $118,200 ($.02 per Common Share) has been recorded for the nine
months ended March 31, 1999 for the difference between the discounted conversion
price as reset and the fair market value of the Company's Common Stock at the
time of issuance. This reset feature resulted in the conversion price of the
Series A Preferred Stock being adjusted to $0.50 per share of Common Stock on
December 8, 1998.
8. DISCONTINUED OPERATIONS
In early 1999, management of the Company made a decision to discontinue the
operation of its subsidiary which had engaged in the recycling of CRT glass and
production of industrial abrasives in order to focus the Company's continuing
operations exclusively on the production of decorative particles and performance
aggregates. The assets of the discontinued subsidiary are expected to be sold
during 1999 at their carrying value in the financial statements.
Revenues of the discontinued operations were $24,580 and $705,193 for the three
months ended March 31, 1999 and 1998, respectively and $201,216 and $1,417,127
for the nine months ended March 31, 1999 and 1998 respectively.
12
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
The net liabilities of the discontinued operations included in the March 31,
1999 and June 30, 1998 consolidated balance sheets consist of the following:
March 31, June 30,
1999 1998
-------------- --------------
Cash and cash equivalents $ 74,083 $ 113,666
Accounts receivable 76,934 187,110
Inventories 352,466 304,073
Prepaid and other current assets 63,627 61,795
Property, plant and equipment held for sale
at estimated disposal value 1,000,000 1,000,000
Other assets, net of amortization 28,487 29,540
Accounts payable (756,355) (659,456)
Accrued expenses (412,577) (293,912)
Reserve for disposal (301,000) (515,000)
Investment tax credit payable (235,000) (235,000)
Capital lease obligations (19,608) (39,200)
Long-term debt (1,521,613) (1,521,613)
------------- -------------
Net liabilities of discontinued operations $ (1,650,556) $ (1,567,997)
============= =============
13
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Managements Discussion and Analysis of Financial Conditions and Results of
Operations
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998.
Total revenues increased by $195,000 for the three months ended March 31, 1999
to $256,000 compared with $61,000 for the three months ended March 31, 1998.
This increase in the decorative particles and performance aggregates sales is as
a result of 1999 being regular operations and 1998 being a starting of
operations.
The increase, in cost of goods sold, of $195,000 to $312,000 in 1999 from
$117,000 in 1998 is due to the increased volume of production in the decorative
particles and performance aggregates business from the increased level of sales.
As a result of the above increases in revenue of $195,000 and in cost of goods
sold of $195,000, the Company's gross margin remained the same for the three
months ended March 31, 1999, compared to the three months ended March 31, 1998.
Selling, general and administrative expenses increased by $46,000 for the three
months ended March 31, 1999 to $407,000 , compared with $361,000 for the three
months ended March 31, 1998. This was a result of an increase of $195,000 in
legal fees during the period and of $30,000 in royalties which more than offset
the reductions of $144,000 in salaries and related fringe costs and of $43,000
in travel expenses related to the reduction in salaries and related fringe
benefits.
Net interest expense increased by $87,000 to $117,000 for the three months ended
March 31, 1999 compared to $30,000 for the three months ended March 31, 1998.
This increase was a result of the interest accrued and discount amortized on the
debt incurred under the line of credit in 1998.
The operations of the discontinued subsidiary resulted in a loss of $26,000 for
the three months ended March 31, 1999 as compared to a gain of $112,000 for the
three months ended March 31, 1998. This difference is mainly the result of the
change in revenues from discontinued operations decreasing to $25,000 for 1999
from $705,000 for 1998. Revenues for 1998 included $324,000 which was recognized
from deferred revenue upon the subcontracting of the CRT recycling operations to
another company.
14
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Managements Discussion and Analysis of Financial Conditions and Results of
Operations
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998.
Total revenues for the nine months ended March 31, 1999 were $548,000 compared
to $165,000 for the nine months ended March 31, 1998 or an increase of $383,000.
This increase in the decorative particles and performance aggregates sales is as
a result of 1999 being normal operations compared to 1998 being a start-up of
operations.
The increase in cost of goods sold of $410,000 to $894,000 for the nine months
ended March 31, 1999 from $484,000 for the nine months ended March 31, 1998 is
caused by the increased level of production in the decorative particles and
performance aggregates business due to the increased amount of sales.
As a result of the above increases in revenue of $383,000 and in cost of goods
sold of $410,000, the company's gross margin decreased by $27,000 to a loss of
$346,000 for the nine months ended March 31, 1999 from a loss of $319,000 for
the nine months ended March 31, 1998.
Selling, general and administrative expenses decreased by $261,000 for the nine
months ended March 31, 1999 to $1,158,000, compared with $1,419,000 for the nine
months ended March 31, 1998. This decrease was primarily the result of a
$233,000 decrease in salaries and related fringe costs, a $77,000 decrease in
compensation expenses relating to capital stock, a $90,000 decrease in travel
expenses related to the reduction in salaries and related fringe benefits and a
$152,000 increase in legal fees during the period.
Net interest expense increased by $170,000 to $324,000 for the nine months ended
March 31, 1999 compared to $154,000 for the nine months ended March 31, 1998.
This increase was the result of the interest accrued and discount amortized on
the debt incurred under the May 1998 line of credit.
The operations of the discontinued subsidiary resulted in a gain of $143,000 for
the nine months ended March 31, 1999 as compared to a loss of $558,000 for the
nine months ended March 31, 1998.. Revenues of the discontinued operations
decreased by $1,216,000 to $201,000 for the period ended in 1999 from $1,417,000
for the period ended in 1998. Cost of goods sold decreased by $1,442,000 to
$71,000 for the nine months ended March 31, 1999 from $1,513,000 for the nine
months ended March 31, 1998. This decrease was caused by a number of factors,
including (i) a decrease of $534,000 in depreciation due to the prior adjustment
of the discontinued assets to their estimated net realizable value, (ii) a
decrease of $629,000 in direct costs for labor, fringes and utilities due to the
subcontracting of the CRT recycling operations and discontinuance of other
operations, and (iii) a net decrease in the charge to operations of $101,000 for
the change in the reserve for disposal costs for the unprocessed waste materials
on hand.
15
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Managements Discussion and Analysis of Financial Conditions and Results of
Operations
Liquidity and Capital Resources
The Company's business is capital intensive. The Company has funded its
operations principally from private debt and equity financing and the proceeds
of the IPO. Presently, the Company has limited revenue, has suffered recurring
losses from operations and has a net capital deficiency. The Company is also in
default on principal and interest payments with respect to substantially all of
its outstanding indebtedness for borrowed money other than indebtedness under
the Line of Credit. The Company has an immediate need for financing. Management
has implemented operational changes and has restructured certain debt; however,
management cannot predict the success of these operational changes. These
conditions, among others, raise substantial doubt about the Company's ability to
continue as a going concern. These issues also create an uncertainty as to the
recoverability of recorded assets and satisfaction of liabilities. At March 31,
1999, the Company had approximately $2,514,000 in principal amount of
indebtedness (excluding amounts borrowed under the Line of Credit and capital
lease obligations) and net working capital deficiency of approximately
$5,928,000. As of March 31, 1999, the Company had cash and marketable securities
of approximately $113,000.
The Empire State Development Corporation/Job Development Authority (the "ESDC")
agreed to defer all interest payments due under its loan (principal balance of
$1,032,798) through July 1, 1998 and to defer all principal payments due under
the loan through January 1, 1999, with interest continuing to accrue on such
deferred amounts and payable monthly beginning July 1998 through December 2001.
The Company is currently in payment default on amounts owed to ESDC.
On May 8, 1998, the Company entered into a Senior Secured Line of Credit
Agreement (as amended, the "Credit Agreement") with two significant stockholders
of the Company (the "Funds"). The Credit Agreement provides for a line of credit
for up to $1,290,000 principal amount of loans pursuant to which the Company had
borrowed $1,290,000 as of January 13, 1999. The Line of Credit is secured by the
receivables and inventory of the Company and its subsidiaries. Amounts borrowed
under the Line of Credit accrue interest at an annual rate of 12%. In connection
with the Line of Credit (including an amendment increasing the amount available
thereunder by $90,000 (discussed below), the Company issued to the Funds
warrants to purchase an aggregate of 385,075 shares of Common Stock at an
exercise price equal to $0.67 per share (after giving effect to antidilution
adjustments resulting from a reset of the conversion price of the Company's
Series A Convertible Preferred Stock (the "Series A Preferred Stock") on
December 8, 1998). Of such warrants, warrants to purchase 29,850 shares of
Common Stock vest upon each $100,000 (or ratable portion thereof) being drawn
under the Credit Agreement. The Line of Credit matures on the earlier of May 8,
1999 or upon the completion of any financing of at least $1,500,000. The Credit
Agreement contains customary covenants and default provisions. In addition, upon
an Event of Default (as defined in the Credit Agreement), but only after a
60-day cure period, the Funds will be entitled to appoint a majority of the
Company's Board of Directors. In addition, upon an Event of Default, but only
after a 90-day cure period, the Funds may convert any outstanding principal
amount plus interest, into shares of Common Stock of the Company at the then
fair market value of the Common Stock. As of December 15,
16
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Managements Discussion and Analysis of Financial Conditions and Results of
Operations
1998, the Line of Credit was amended to increase the amount available thereunder
by $90,000 to $1,290,000.
On February 22, 1999, the Funds agreed to provide interim financing to the
Company in the amount of up to $150,000 (all of which has been drawn upon). In
consideration for interim financing, the Company agreed that in the event that
the Company is unable to obtain additional financing of at least $1,500,000 by
April 1, 1999, the Funds will have the right to, in exchange for their right to
repayment of the interim financing, convert any outstanding principal amount
plus interest, into either (i) shares of Common Stock of the Company at the then
fair market value of the Common Stock or (ii) shares of Advanced Particles
Technologies, Inc. ("APT"), a wholly owned subsidiary of the Company, equal to
10% of the issued and outstanding shares of the common stock of APT. In further
consideration for the interim financing, the Company agreed to amend the Line of
Credit in order to allow the Funds to have the option to exchange their full
right to payment for 90% of the issued and outstanding shares of APT. As of the
date of this report the Funds have not exercised their right to convert any of
the outstanding principal plus interest into shares of either the Company or
APT.
During the period commencing September 1998 and terminating in February 1999,
Eckardt C. Beck, the Acting President and Chief Executive Officer of the
Company, provided loans to the Company or did not receive accrued compensation,
aggregating $190,000. The loans accrue interest at the rate of 12% per year and
are due upon demand but in no event later than September 1, 1999.
As of March 31, 1999, the Company had approximately $2,514,000 in principal
amount of indebtedness (excluding amounts borrowed under the Line of Credit and
capital lease obligations), consisting of (i) approximately $1,183,000
outstanding principal amount under the term loan with the ESDC, which bears
interest at the prime rate and is payable in monthly installments through
December 2001 (subject to the deferral through July 1, 1998 described above),
(ii) approximately $627,000 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 indebtedness is secured by liens on its
fixed assets. The Company's indebtedness has been used to finance its facility,
equipment and related capital expenditures. Certain of the agreements related to
such indebtedness contain customary covenants and default provisions.
The Company's capital lease payments were approximately $20,000 for the nine
months ended March 31, 1999 and are estimated to be approximately $27,000 and
$16,000 for the fiscal years ending June 30, 1999 and 2000, respectively, under
current commitments. The Company has no other material commitments for capital
expenditures.
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
17
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Managements Discussion and Analysis of Financial Conditions and Results of
Operations
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 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 843 tons of unprocessed waste materials on hand as of March 31,
1999, compared to 2,035 tons on June 30, 1998. The Company's disposal reserve
was $301,000 as of March 31, 1999, compared to $515,000 at June 30, 1998. The
decrease in the reserve, which resulted from reduction in the quantities of
unprocessed waste materials on hand, has been credited against operations.
The Company has federal net operating loss carry forwards that amounted to
approximately $20 million at June 30, 1998, which expire between 2006 and 2013.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), utilization of net operating loss carry forwards 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
historical equity financing, as well as currently contemplated equity financing,
the Company's ability to utilize its net operating loss carry forwards could be
severely limited.
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 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
nonproductive 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
which 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) risks associated with being able to
obtain requisite supplies of raw materials for its products, (vii) risks
associated with its ability to protect its intellectual property and proprietary
rights, and (viii) risks associated with the failure to comply with applicable
environmental laws and regulations.
18
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In October 1998, the Company received threats of litigation from Stephen Archer,
former Vice-President of Sales and Marketing - Industrial Materials, and Gary
Jellum, former Vice President of Administration. Both Mr. Archer and Mr. Jellum
allege that they were constructively terminated by the Company. The Company
believes that the threats of Messrs. Archer and Jellum are without merit and is
prepared to defend itself against any claims made.
On October 22, 1998, MWW/Strategic Communications, Inc., a public relations
firm, filed a demand for arbitration against the Company with the American
Arbitration Association. MWW alleges that the Company owes it professional fees
in the amount of $22,192.86 for services rendered. The matter is scheduled for
an arbitration hearing in May, 1999.
In November 1998, Buchanan Ingersoll Professional Corporation filed a complaint
in the Orange County Circuit Court of Florida (the "Circuit Court") against the
Company. Buchanan Ingersoll, which until September 1998 acted as legal counsel
to the Company, alleged that the Company owes it legal fees in the amount of
$192,204.01. On March 11, 1999, the Circuit Court entered a final judgement in
favor of Buchanan Ingersoll in the amount of $197,689.28
The Company is not involved in any other material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Dunkirk was obligated with respect to $1,888,000 outstanding aggregate principal
amount of equipment term notes made by Dunkirk to Key Bank of New York ("Key
Bank") in December 1994 and January 1995, which were guaranteed by the Empire
State Development Corporation/Job Development Authority (the "ESDC"). In July
1997, the ESDC agreed to honor its guarantee of such equipment term loans(in
full) and in December 1997 the ESDC paid such guarantee (in full) and Key Bank
assigned such notes to the ESDC. In connection with the assignment of the notes
to ESDC, the ESDC agreed to defer all interest and principal payments due under
the loans through July 1, 1998 until the maturity date of the notes, with
interest continuing to accrue on such deferred amounts payable at maturity. On
December 2, 1997, the ESDC forgave $500,000 in principal amount of the debt.
Also, the balance of the related debt service fund of $459,000 was applied
against outstanding principal and accrued interest, resulting in a principal
balance (after debt forgiveness) of $1,032,798. On June 22, 1998, the ESDC
agreed to defer principal payments due under the loans through January 1, 1999
until the maturity date of the notes. The Company is currently negotiating with
the ESDC to reduce the amounts owed to the ESDC in exchange for the Company
paying a reduced amount to the ESDC. Principal and interest payments on
substantially all of the Company's indebtedness for borrowed money other than
the Line of Credit are currently in default.
19
<PAGE>
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
20
<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: June 7, 1999 /s/ Eckardt C. Beck
-------------------
Eckardt C. Beck
Acting President and Chief
Executive Officer
(Principal executive officer)
Dated: June 7, 1999 /s/ John G. Murchie
--------------------
John G. Murchie
Acting Chief Financial Officer and
Controller
(Principal financial officer)
21
Exhibit 11
Conversion Technologies International, Inc.
and Subsidiaries
Statement of Computation of Basic Net Income (Loss) Per Share
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Loss from continuing operations $ (579,414) $ (447,689) $(1,827,763) $(1,891,499)
Preferred stock dividends (193,299) -- (1,045,644) (1,573,500)
----------- ----------- ----------- -----------
Loss from continuing operations
attributable to common stockholders (772,713) (447,689) (2,873,407) (3,464,999)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 4,862,486 4,799,186 4,861,765 4,799,186
=========== =========== =========== ===========
Loss per common share from
continuing operations (0.16) (0.09) (0.59) (0.72)
=========== =========== =========== ===========
Discontinued operations (25,602) 111,673 142,858 (557,700)
=========== =========== =========== ===========
Income (loss) per common share
from discontinued operations -- 0.02 0.03 (0.12)
=========== =========== =========== ===========
Loss before extraordinary item (605,016) (336,016) (1,684,905) (2,449,199)
Preferred stock dividends (193,299) -- (1,045,644) (1,573,500)
----------- ----------- ----------- -----------
Loss before extraordinary item
attributable to common stockholders (798,315) (336,016) (2,730,549) (4,022,699)
=========== =========== =========== ===========
Loss per common share before
extraordinary item (0.16) (0.07) (0.56) (0.84)
=========== =========== =========== ===========
Extraordinary item -- -- -- 6,354,356
=========== =========== =========== ===========
Income per share from
extraordinary item -- -- -- 1.33
=========== =========== =========== ===========
Net income (loss) (605,016) (336,016) (1,684,905) 3,905,157
Preferred stock dividends (193,299) -- (1,045,644) (1,573,500)
----------- ----------- ----------- -----------
Net income (loss) attributable
to common stockholders (798,315) (336,016) (2,730,549) 2,331,657
=========== =========== =========== ===========
Net income (loss) per
common share (0.16) (0.07) (0.56) 0.49
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schdule contains summary financial information extracted from Form 10QSB
and is qualified in it's entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 113,163
<SECURITIES> 0
<RECEIVABLES> 233,237
<ALLOWANCES> 18,000
<INVENTORY> 553,981
<CURRENT-ASSETS> 1,048,181
<PP&E> 1,794,127
<DEPRECIATION> 256,434
<TOTAL-ASSETS> 2,698,656
<CURRENT-LIABILITIES> 6,975,850
<BONDS> 0
0
613
<COMMON> 1,401
<OTHER-SE> (4,279,208)
<TOTAL-LIABILITY-AND-EQUITY> 2,698,656
<SALES> 548,195
<TOTAL-REVENUES> 548,195
<CGS> 893,930
<TOTAL-COSTS> 2,052,233
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 323,725
<INCOME-PRETAX> (1,827,763)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,827,763)
<DISCONTINUED> 142,858
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,684,905)
<EPS-BASIC> (0.56)
<EPS-DILUTED> 0
</TABLE>
