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:
September 30, 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 October 31, 1999, the
Issuer had outstanding 7,565,045 shares of Common Stock, 514,930 shares of
Series A Convertible Preferred Stock, convertible into 10,298,600 shares of
Common Stock, 4,802,967 shares of Series B Convertible Preferred Stock,
convertible into 96,059,340 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 September 30, 1999 and June 30, 1999.........3
Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three month periods
ended September 30, 1999 and 1998........................................4
Consolidated Statement of Stockholders' Deficiency of Conversion
Technologies International, Inc. and Subsidiaries for the three
month period ended September 30,1999....................................5
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the three month periods
ended September 30, 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..................................................18
2
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 71,813 $ 60,954
Note receivable 100,000 --
Accounts receivable, less allowance for doubtful accounts of $68,146
at September 30, 1999 and June 30, 1999 77,886 104,350
Inventories 256,977 283,029
Prepaid expenses and other current assets 143,633 156,701
------------ ------------
Total current assets 650,309 605,034
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 675,000 675,000
Machinery and equipment 1,022,053 1,022,053
------------ ------------
1,772,053 1,772,053
Less accumulated depreciation (304,831) (269,841)
------------ ------------
1,467,222 1,502,212
Other assets, less accumulated amortization of $66,103
and $123,346 at September 30, 1999 and June 30, 1999 respectively 78,878 106,398
------------ ------------
$ 2,196,409 $ 2,213,644
============ ============
Liabilities and stockholders' deficiency
Notes payable $ 180,015 $ 121,915
Accounts payable 1,336,831 1,495,153
Reserve for disposal 285,000 301,000
Accrued expenses 793,503 994,559
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 11,147 14,688
Current portion of long-term debt 1,293,517 2,514,496
------------ ------------
Total current liabilities 4,135,013 5,676,811
Long-term debt, less current portion -- 1,528,085
Stockholders' deficiency
Series A Convertible Preferred Stock, $.001 par value, authorized
880,000 shares, issued and outstanding 514,930 and 545,830
shares at September 30, 1999 and June 30, 1999 respectively 515 546
Series B Convertible Preferred Stock, $.001 par value, authorized
6,000,000 shares, issued and outstanding 4,802,967 shares
at September 30, 1999 4,803 --
Common Stock, $.00025 par value, authorized 200,000,000 and
50,000,000 shares, issued and outstanding 7,565,045 and 6,947,045
shares at September 30, 1999 and June 30, 1999 respectively 1,891 1,737
Additional paid-in capital 35,948,813 33,353,485
Unearned stock compensation (51,309) (57,246)
Accumulated deficit (37,843,317) (38,289,774)
------------ ------------
Total stockholders' deficiency (1,938,604) (4,991,252)
------------ ------------
$ 2,196,409 $ 2,213,644
============ ============
</TABLE>
See Accompanying Notes.
3
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the three months ended
September 30,
1999 1998
----------- -----------
Revenue
Product sales $ 263,019 $ 221,721
Recycling fees -- 15,517
----------- -----------
Total revenues 263,019 237,238
Cost of goods sold 296,531 508,882
----------- -----------
Gross loss on sales (33,512) (271,644)
Selling, general and administrative 207,016 439,174
----------- -----------
Loss from operations (240,528) (710,818)
Interest expense, net 92,391 105,282
----------- -----------
Loss before extraordinary item (332,919) (816,100)
Extraordinary item - Gain on debt retirement 779,376 --
----------- -----------
Net income (loss) 446,457 (816,100)
Preferred stock dividends (111,682) (600,926)
----------- -----------
Net income (loss) applicable to Common Stock $ 334,775 $(1,417,026)
=========== ===========
Basic Earnings Per Common Share:
Loss before extraordinary item $ (0.07) $ (0.29)
Extraordinary item 0.12 --
-------------------------
Net income (loss) applicable to Common Stock $ 0.05 $ (0.29)
=========================
Weighted average number of common shares outstanding 6,426,312 4,860,339
See Accompanying Notes
4
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' Deficiency
Three Months Ended September 30, 1999
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock
----------------- ------------------ ------------------ Additional Unearned
Number Number Number Paid-In Stock
of Shares Amount of Shares Amount of Shares Amount Capital ompensation
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 545,830 $546 6,947,045 $1,737 $33,353,485 $(57,246)
Series A Preferred Stock
converted into Common Stock (30,900) (31) 618,000 154 (123)
Stock compensation 5,937
Issuance of Series B Preferred
Stock, net of issuance costs 4,802,967 $4,803 2,707,133
Preferred Stock dividends (111,682)
Net Income
-----------------------------------------------------------------------------------------
Balance at September 30, 1999 514,930 $515 4,802,967 $4,803 7,565,045 $1,891 $35,948,813 $(51,309)
=========================================================================================
<CAPTION>
Total
Accumulated Stockholders
Deficit Deficiency
---------------------------
<S> <C> <C>
Balance at June 30, 1999 $(38,289,774) $(4,991,252)
Series A Preferred Stock
converted into Common Stock --
Stock compensation 5,937
Issuance of Series B Preferred
Stock, net of issuance costs 2,711,936
Preferred Stock dividends (111,682)
Net Income 446,457 446,457
---------------------------
Balance at September 30, 1999 $(37,843,317) $(1,938,604)
===========================
</TABLE>
See accompanying notes
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
September 30,
1999 1998
--------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 446,457 $(816,100)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation expense 34,990 34,802
Amortization expense 6,213 6,384
Amortization of discount on notes payable -- 32,400
Extraordinary item (779,376) --
Stock compensation expense 5,937 18,876
Changes is operating assets and liabilities:
Decrease in accounts receivable 26,464 124,943
Decrease in inventories 26,052 32,931
(Increase) in prepaid expenses and other current assets (159,321) (3,567)
Increase (decrease) in accounts payable, reserve for disposal
and other accrued expenses (101,116) 62,173
--------------------------
Net cash used in operating activities (493,700) (507,158)
Investing activities
Issuance of notes receivable (100,000) --
Capital expenditures -- (34,733)
--------------------------
Net cash used in investing activities (100,000) (34,733)
Financing activities
Issuance of notes payable 93,100 530,000
Principal payments on long-term debt (600,000) (9,758)
Principal payments under capital lease obligations (3,541) (7,150)
Issuance of Series B Preferred Stock 1,115,000 --
--------------------------
Net cash provided by financing activities 604,559 513,092
--------------------------
Increase (decrease) in cash and cash equivalents 10,859 (28,799)
Cash and cash equivalents at beginning of period 60,954 168,483
--------------------------
Cash and cash equivalents at end of period $ 71,813 $ 139,684
==========================
Supplemental disclosure of cash flow information
Interest paid $ 16,312 $ 23,945
==========================
Supplemental disclosure of non cash transactions
Preferred stock converted into common stock 453,774 32,131
Amortization of discount on Series A Preferred Stock -- 600,926
Dividends accrued on Series A Preferred Stock 111,682 --
Long-term debt and accrued interest converted
into Series B Preferred Stock 1,766,778 --
</TABLE>
See accompanying notes
6
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 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, 1999 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 and as a result all of the Company's debt has been classified as
a current liability at September 30, 1999.
On September 24, 1999 (see Note 7), the Company sold in a Private Placement
4,802,967 shares of Series B Convertible Preferred Stock for which the Company
accepted $1,115,000 in cash and the cancellation of $1,767,000 of debt including
accrued interest. From the cash proceeds, $600,000 was paid to Empire State
Development Corporation ("ESDC") in full satisfactions of loans with principal
balances of $1,220,980. This conversion and pay-off of debt totaling $2,987,980
of the Company's total debt of $4,164,496 will significantly reduce interest
expense which was approximately $477,000 for the year ended June 30, 1999. In
September 1999, the Company leased a portion of its Dunkirk plant and is
exploring various alternatives for the use of the remaining portion of the plant
to generate additional revenues. Also in September 1999 the Company entered into
a distribution agreement with a major building products supplier for the sale
and distribution of decorative particles for the pool industry which could
significantly increase that business.
Although management believes that as a result of the above Private Placement and
if all of the foregoing courses of action are 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 all of these plans
and eliminating the substantial doubt as to its ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the
7
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
realization of assets and liquidation of liabilities that might be necessary
should the Company be unable 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:
September 30, 1999 June 30, 1999
------------------ -------------
Raw materials $ 18,271 $ 35,562
Work-in-process 26,071 20,707
Finished goods 212,635 226,760
-------- --------
$256,977 $283,029
======== ========
3. Revenue Recognition
With respect to revenue from product sales, including products created from
processed waste materials, revenue is recognized only upon shipment to
customers. For the three months ended September 30, 1999 ("1999"), 79.4% of the
Company's revenue was derived from three major customers. Revenue generated from
each of these customers amounted to $113,612, $64,896 and $30,314, which
represents 43.2%, 24.7% and 11.5% of total revenue, respectively.
For the three months ended September 30, 1998 ("1998"), 48.5% of the Company's
revenue was derived from two major customers. Revenue generated from each of
these customers amounted to $58,181 and $56,902, which represents 24.5% and
24.0% 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
8
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
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 1,220
tons were disposed of during the year ended June 30, 1999. The amount of
unprocessed waste materials on hand was 843 tons at June 30, 1999 and at
September 30, 1999. From July 1, 1998 to September 30, 1998, the Company
decreased the reserve by approximately $3,000 from $515,000 to $512,000 . From
July 1, 1999 to September 30, 1999, the Company decreased the reserve by
approximately $16,000 from $301,000 to $285,000. The decreases in the reserve,
which resulted from the cleanup costs of waste material storage areas, 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.
5. Net Income (Loss) Per Common Share
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 antidilutive. Common shares that could be potentially
dilutive include 37,345,358 stock options, 29,376,661 warrants, 10,298,600
shares underlying the Series A Preferred Stock, and 96,059,340 shares underlying
the Series B Preferred Stock.
6. Extraordinary Item
On September 24, 1999 from the cash proceeds of the Private Placement (see Note
7), the Company paid $600,000 to ESDC in full satisfaction of the Dunkirk-Term
loan with the New York State Job Development Authority with a $1,183,110
principal balance and the Dunkirk-New York Job Development Authority (Al Tech)
subordinated note with a principal balance of $37,870. The Company also wrote
off approximately $24,000 of deferred financing costs and $150,000 of accrued
interest relating to such debt. In addition, $160,000 was paid to the Company's
former legal counsel in full settlement of an accrued liability of $197,689 for
past due professional services. These forgivenesses resulted in a net pretax
gain to the Company of approximately $779,000, which is reported as an
Extraordinary Item.
To the extent that Dunkirk is deemed to be insolvent immediately prior to such
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 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
9
<PAGE>
Conversion Technologies International, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
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, 2000. 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, 1999, the Company has approximately $24 million of net operating
loss carryforwards, which expire, between 2006 and 2019. The Tax Reform Act of
1986 enacted a complex set of rules (Section 382) limiting the potential
utilization of net operating loss carryforwards 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, the completion of the IPO and the Series A Preferred Stock offering) and
current shifts in ownership (the Series B Preferred Stock offering), the
Company's ability to utilize its net operating loss carryforwards could be
severely limited.
7. Capital Stock
On September 24, 1999, the Company sold in a Private Placement 4,802,967 shares
of Series B Convertible Preferred Stock (the "Series B Preferred") with a par
value of $.001 per share and a stated value of $0.60 per share. Each share of
the Series B Preferred is convertible into twenty shares of Common Stock at a
conversion price of $0.03 per share. Commencing twelve months from the closing
of the Private Placement, the holders of the Series B Preferred are entitled to
receive dividends payable in cash or in Series B Preferred at the option of the
Company, at the rate of 10% per annum. The affirmative vote of the holders of at
least two-thirds of the Series B Preferred is required for the issuance of
senior securities, the incurrence of indebtedness, the repurchase of securities
and certain other restrictions.
The Company accepted $1,115,000 in cash and cancellation of debt and accrued
interest in the amount of $1,766,778 as consideration for the sale of the Series
B Preferred. Of the debt converted, $1,652,778 was from two significant
stockholders of the Company (the "Funds") who converted all of the debt and
accrued interest owed to them under the Senior Secured Line of Credit Agreement
(as amended, the "Credit Agreement"), the interim financing of February 22, 1999
and the July 7, 1999 borrowing. Also the Acting President and Chief Executive
Officer converted $114,000 of the debt and accrued interest owed him under the
promissory note dated February 23, 1999.
10
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
The Funds have agreed to give the Company an option to repurchase their shares
of Series B Preferred at a rate per share of the equivalent Common Stock of $.03
per share during the first year from the date of closing of the Private
Placement, $.04 per share during the second year from such date and $.05 per
share during the third year from such date.
Also on September 24, 1999, upon the consummation of the Private Placement, the
Company granted 36,293,101 non-qualified stock options to directors, officers
and key employees of the Company at an exercise price of $0.03 per share (the
conversion price of the Common Stock in the Private Placement). Such options
vested one-third upon grant, one-third on the first anniversary of the date of
grant and one-third on the second anniversary of the date of grant and expire on
the tenth anniversary of the date of grant.
On September 24, 1999, the Company's Certificate of Incorporation was amended to
increase the number of shares of Common Stock it is authorized to issue from 50
million to 200 million.
8. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. FAS 133, as amended by FAS 137, is effective for
periods beginning after June 15, 2000. Historically, the Company has not entered
into derivative contracts. Accordingly, FAS 133 is not expected to affect the
Company's financial statements.
9. Industry Segments
The Company's operations are classified into two business segments; decorative
particles and performance aggregates ("particles") and industrial abrasives and
recycling cathode ray tube glass ("abrasives and CRT").
The particle segment manufacturers, processes and markets decorative particles
that visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring and performance aggregates which can be used as
structural and textural enhancers, fillers and additives, and to strengthen and
add consistency to materials such as cements, plasters, grouts, roofing and
flooring, and glass and ceramic materials.
The abrasives and CRT segment manufacturers, processes and markets industrial
abrasives which can be used for surface cleaning and preparation applications
such as in cleaning steel structures, railcars, aircraft parts, and equipment.
During the three month periods ended September 30, the Company has
11
<PAGE>
continued to shift its focus away from industrial abrasives in favor of
decorative particles and performance aggregates due to the increased costs of
production for industrial abrasives relative to their market sales price. The
Company was also engaged in recycling CRT glass produced in the manufacture of
televisions for resale to television manufacturers and others. In March 1998 the
Company agreed to subcontract its recycling operations which has resulted in a
decrease in CRT revenue in the 1998 period and no revenue in the 1999 period.
The following table shows revenues and operating income (loss) and other
financial information by segment as of and for the periods ended September 30,
1999 and 1998:
1999 1998
---- ----
Revenue
Particles $ 252,609 $ 116,555
Abrasives and CRT 10,410 120,683
---------- ----------
$ 263,019 $ 237,238
========== ==========
Operating Income (Loss)
Particles $ (57,550) $(332,642)
Abrasives and CRT (37,083) (14,473)
Corporate Expenses (145,895) (363,703)
---------- ----------
$(240,528) $(710,818)
========== ==========
Depreciation and Amortization
Particles $ 32,761 $ 32,605
Abrasives and CRT 5,379 5,550
Corporate Expenses 3,063 3,031
---------- ----------
$ 41,203 $ 41,186
========== ==========
Interest and Other Income
Particles $ 140 $ --
Abrasives and CRT 3,850 5,121
Corporate Expenses 365 3,140
---------- ----------
$ 4,355 $ 8,261
========== ==========
Interest Expense
Particles $ 22 $ --
Abrasives and CRT 53,011 52,431
Corporate 43,713 61,112
---------- ----------
$ 96,746 $ 113,543
========== ==========
12
<PAGE>
Extraordinary Item - Gain on Debt Retirement
Particles $ -- $ --
Abrasives and CRT 747,172 --
Corporate 32,204 --
---------- ----------
$ 779,376 $ --
========== ==========
Identifiable Assets
Particles $ 732,782 $ 791,864
Abrasives and CRT 1,180,303 1,667,730
Corporate 283,324 117,548
---------- ----------
$2,196,409 $2,577,142
========== ==========
Capital Expenditures
Particles $ -- $ 27,908
Abrasives and CRT -- --
Corporate -- 6,825
---------- ----------
-- $ 34,733
========== ==========
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months ended September 30, 1999 Compared to Three Months Ended September
30, 1998.
Consolidated revenues for 1999 were approximately $263,000 consisting of
decorative particles and performance aggregates sales of approximately $253,000
and ALUMAGLASS sales of approximately $10,000. For the same three-month period
of 1998, the Company's consolidated revenues were approximately $237,000
consisting of decorative particles and performance aggregates sales of
approximately $115,000, ALUMAGLASS sales of approximately $64,000 and CRT glass
recycling fees of approximately $58,000. The increase of $138,000 in sales of
decorative particles and performance aggregates is as a result of the continuing
growth in that business which the Company is focusing upon. The decrease of
$54,000 in sales of ALUMAGLASS is as a result of ceasing operations at the
Dunkirk plant in the second quarter of fiscal 1999 and the CRT sales stopped as
a result of the Company subcontracting those operations to a third party.
The decrease in cost of goods sold of approximately $212,000 to $297,000 in 1999
from $509,000 in 1998 is as result of a decrease of $87,000 relating to costs at
the Dunkirk plant which was not in operation in 1999 and was operating in 1998
and a decrease of $125,000 for the costs of decorative particles and performance
aggregates business which incurred many expenses in 1998 as it started normal
production. These expenses have been reduced or eliminated in 1999.
As a result of the above increase in revenues of $26,000 and decrease in cost of
goods sold of $212,000, the Company's gross margin improved by $238,000 to a
loss of $34,000 for 1999 compared to a loss of $272,000 for 1998. The increased
sales and reduced costs of production for decorative particles and performance
aggregates resulted in an improved gross margin of $263,000 while the shutdown
of operations at the Dunkirk plant resulted in an reduced gross margin of
$25,000.
Selling, general and administrative expenses decreased by $232,000 to
approximately $207,000 for 1999 as compared to approximately $439,000 for the
same 1998 period. This decrease was primarily the result of a $110,000 decrease
in Corporate salaries, payroll taxes and fringe benefits, a $46,000 decrease in
professional fees paid to consultants, legal and accounting, a $23,000 decrease
in travel expenses for the Corporate office, a $13,000 decrease in compensation
expenses relating to capital stock and a $32,000 decrease in expenses for the
Corporate office including rent, telephone and office supplies.
Net interest expense decreased by $13,000 to approximately $92,000 for 1999 from
approximately $105,000 for 1998. The decrease was primarily attributable to the
amortization of debt discount of $32,000 in 1998 with no amortization expense in
1999 which was partially reduced by the interest on the increased amount of debt
in 1999 as compared to 1998
The Company recorded an extraordinary item (see Note 6) for the gain on debt
retirement of $779,000 in 1999 as a result of a gain of $747,000 on the
satisfaction of two loans paid-off to the ESDC and a gain of $32,000 for the
accounts payable forgiveness granted to the Company by its former legal counsel.
14
<PAGE>
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 its IPO. Presently, the Company has limited revenue, has suffered recurring
losses from operations and has a net capital deficiency. The Company has a 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 September 30, 1999, the Company had
approximately $1,294,000 in principal amount of indebtedness (excluding amounts
borrowed under notes payable and capital lease obligations) and net working
capital deficiency of approximately $3,485,000. As of September 30, 1999, the
Company had cash and cash equivalents of approximately $72,000.
Net cash used in operating activities for the three months ended September 30,
1999 was $493,700. Net income for the period used cash of $285,779, net of
non-cash charges for depreciation and amortization, the gain on debt retirement
reported as an extraordinary item and stock compensation expense. In addition,
cash was used for the net change of $207,921 in our operating assets and
liabilities, consisting primarily of an increase in prepaid expenses and other
current assets and a decrease in accounts payable, reserve for disposal and
other accrued expenses.
Net cash used in investing activities for the three months ended September 30,
1999 was $100,000 for the issuance of a note receivable. Net cash provided by
financing activities for the period was $604,559. Of this amount, $1,115,000 was
received from the cash sales of Series B Preferred and $93,100 was received from
the issuance of notes payable. This cash provided was offset by the $600,000
payment on long-term debt and $3,541 in payments on capital lease obligations.
On May 8, 1998, the Company entered into the Credit Agreement with the Funds
which provided for a line of credit for up to $1,200,000 principal amount of
loans pursuant to which the Company had fully borrowed as of January 13, 1999.
The line of credit was secured by the receivables and inventory of the Company
and its subsidiaries. Amounts borrowed under the line of credit accrued 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 adjustment as of December 8, 1998), subject
to vesting as the borrowings occurred. As of December 15, 1998, the line of
credit was amended to increase the amount available thereunder by $90,000. On
February 22, 1999, the Funds provided the Aries Interim Financing to the Company
in the amount of up to $150,000 (which the Company has borrowed). Also on July
7, 1999, the Funds provided additional financing to the Company in the amount of
$20,000.
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
became due on September 1, 1999.
In September 1999, the Company raised $1,115,000 in cash and $1,766,778 in the
form of cancellation of debt and accrued interest in the Private Placement of
4,802,967 shares of the Series B Preferred with a par value of $.001 per share
and a stated value of $0.60 per share. Each share of Series B Preferred is
convertible into twenty shares of Common Stock at a conversion price of $0.03
per share.
15
<PAGE>
Commencing twelve months from the closing of the Private Placement, the holders
of the Series B Preferred are entitled to receive dividends payable in cash or
in shares of Series B Preferred stock at the option of the Company at the rate
of 10% per annum.
The Company accepted cash and the cancellation of debt as consideration for the
sale of the Series B Preferred. Of the total proceeds $1,115,000 was in cash and
$1,766,778 was in the form of cancellation of debt and accrued interest. Of the
debt converted, $1,652,778 was from the Funds who converted all of the principal
and accrued interest owed to them under the Credit Agreement, the Aries Interim
Financing and the July 7, 1999 borrowing. Also the Acting President and Chief
Executive Officer converted $114,000 of the principal and accrued interest owed
to him under the promissory note dated February 23, 1999.
From the cash proceeds of the Private Placement, $600,000 was paid to ESDC in
full satisfaction of the Dunkirk-Term loan with New York State Job Development
Authority with a $1,183,110 principal balance and the Dunkirk-New York Job
Development Authority (Al Tech) subordinated note with a principal balance of
$37,870. In addition, $160,000 was paid to the Company's former legal counsel in
full settlement of an accrued liability of $197,689 for past due professional
services.
As of September 30, 1999, the Company had approximately $1,294,000 in principal
amount of indebtedness (excluding amounts borrowed under notes payable and
capital lease obligations), consisting of (i) approximately $590,000 aggregate
outstanding principal amount under various mortgage and secured equipment loans
and (ii) 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. At September 30, 1999, the
Company was in violation of certain loan covenants and was in default in payment
of principal and interest, related to the above $1,294,000 in debt, and as a
result all of the debt has been classified as a current liability at September
30, 1999.
The Company's capital lease payments were approximately $4,000 for the three
months ended September 30, 1999 and are estimated to be approximately $15,000
for the fiscal year ending June 30, 2000, under current commitments. The Company
has no other material commitments for capital expenditures.
The Company received 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 and cleanup costs of waste
material it has received which cannot be processed through the Company's current
processing methods. The Company recorded 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 September
30, 1999, and June 30, 1999. The Company's disposal reserve was $285,000 as of
September 30, 1999, compared to $301,000 at June 30, 1999. The decrease in the
reserve, which resulted from the cleanup costs of waste material storage areas,
has been credited against operations.
16
<PAGE>
The Company has federal net operating loss carryforwards that amounted to
approximately $24 million at June 30, 1999, which expire between 2006 and 2019.
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 historical
equity financing the Company's ability to utilize its net operating loss
carryforwards could be severely limited.
Year 2000 Compatibility
Although the Company believes that its computer systems are fully Year 2000
compliant, it is possible that certain computer systems of the Company's
suppliers and contractors may not accept input of, store, manipulate and output
dates prior to the Year 2000 or thereafter with out error or interruption. The
Company is requesting assurances from all software vendors from which it has
purchased or from which it may purchase software that such software will
correctly process all date information at all times. Furthermore, the Company is
querying its suppliers and contractors as to their progress in identifying and
addressing problems that their computer systems will face in correctly
processing date information as the Year 2000 approaches. However, there can be
no assurance that the Company will identify all date handling problems of its
suppliers and contractors in advance of their occurance, or that the Company
will be able to successfully remedy problems that are discovered. The expense of
the Company's efforts to identify and address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on 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 the 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
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.
17
<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. On May 27, 1999, an
arbitrator awarded $14,947.79 to MWW in full settlement and consideration of all
claims submitted.
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 owed 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. On September 24, 1999
the sum of $160,000 was paid to Buchanan Ingersoll in full settlement of the
judgement and the parties executed mutual releases.
On or about July 1, 1999 an action was commenced against the Company by The
Hartford in the Circuit Court of Orange County, Florida. The complaint seeks
monetary damages of approximately $56,000 plus prejudgement interest and
attorney's fees. The claims relate to premiums alleged to be owing under certain
insurance policies. The Company has filed a motion to dismiss the action. The
Company is not involved in any other material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
On September 24, 1999, the Company sold pursuant to the Private Placement an
aggregate of 4,802,967 shares of Series B Convertible Preferred Stock (the
"Series B Preferred") for which the Company accepted $1,115,000 in cash and the
cancellation of $1,767,000 of debt and accrued interest. The Series B Preferred
was sold pursuant to an exemption from registration provided by Section 4 (2) of
the Securities Act of 1933, as amended (the "Securities Act") and Regulation D
promulgated thereunder. In connection with the sale of the Series B Preferred,
the Company did not conduct any general advertisement or solicitation; each
purchaser of the Series B Preferred 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 Series B Preferred for investment
and not with a view to distributions. Appropriate legends were affixed to the
certificates representing the Series B Preferred. The Company has agreed to
file, not later than 120 days following the final closing of the Private
Placement, a registration statement under the Securities Act registering for
resale the Common Stock issuable upon conversion of the Series B Preferred.
18
<PAGE>
Each share of Series B Preferred has a par value of $.001, a stated value of
$0.60 and is convertible into twenty shares of Common Stock at a conversion
price of $0.03 per share. The holders of the Series B Preferred are entitled to
the number of votes equal to the number of shares of Common Stock of the Company
into which such shares of Series B Preferred are convertible, and are entitled
to vote together with the holders of the Series A Convertible Preferred Stock
and the Common Stock.
The holders of the Series B Preferred are also entitled to certain voting rights
not shared by the holders of the Common Stock, so long as a majority of the
Series B Preferred sold in the Private Placement remains outstanding. The
affirmative vote of the holders of at least two-thirds of the Series B Preferred
will be required for (i) the issuance of securities senior to or on a parity
with the Series B Preferred with respect to dividends, voting or liquidation,
(ii) any alterations to the rights of the Series B Preferred, (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 Series B
Preferred are entitled to a liquidation preference in an amount per share equal
to $0.81 plus declared and/or accrued but unpaid dividends, if any. Finally, the
holders of the Series B Preferred are entitled to dividends, payable in cash or
in Series B Preferred, at an annual rate of 10% beginning in September 2000. The
Company must pay such dividend prior to any dividend declared on the Common
Stock. (For a detailed description of the terms of the Series B Preferred, see
the Certificate of Designation of Series B Convertible Preferred Stock, which
was filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1999.)
Item 3. Defaults Upon Senior Securities
The Company's indebtedness has been used to finance its facility, equipment and
related capital expenditures and is secured by liens on its fixed assets. The
agreements related to such indebtedness contain customary covenants and default
provisions. At September 30, 1999, the Company was in violation of certain loan
covenants and was in default in payment of principal and interest on its debt.
Item 4. Submission of Matters to a Vote of Security Holders
The Company received written consents of the holders of shares (the "Holders")
representing a majority of the voting power of the outstanding Common Stock and
preferred stock approving an increase in the authorized number of shares of
Common Stock from 50,000,000 to 200,000,000 shares. The Company received from
July 9, 1999 through July 15, 1999 written consents from the Holders
representing a total of 9,126,957 shares which represented 83.6% of the Common
Stock on July 15, 1999. The increase in authorized shares was effectuated by
means of a merger pursuant to which a newly formed wholly owned subsidiary of
the Company, CTI Subsidiary Corp. was merged with and into the Company and the
Company's restated certificate of incorporation was amended to effect the
increase in authorized shares.
Item 5. Other Information
None
19
<PAGE>
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: December 9, 1999 /s/ Eckardt C. Beck
-----------------------------
Eckardt C. Beck
Acting President and Chief
Executive Officer
(Principal Executive Officer)
Dated: December 9, 1999 /s/ John G. Murchie
-----------------------------
John G. Murchie
Acting Chief Financial
Officer and Controller
(Principal Financial Officer)
Exhibit 11
Conversion Technologies International, Inc.
And Subsidiaries
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
For the three months ended September 30, 1999 and 1998
September 30, 1999 September 30, 1998
------------------ ------------------
Loss before extraordinary item $ (332,919) $ (816,100)
Preferred stock dividends (111,682) (600,926)
------------------ ------------------
Loss before extraordinary item
attributable to common stockholders $ (444,601) $ (1,417,026)
================== ==================
Weighted average number of common
shares outstanding 6,426,312 4,860,339
================== ==================
Loss per common share
before extraordinary item $ (0.07) $ (0.29)
================== ==================
Extraordinary item $ 779,376 $ --
================== ==================
Income per share from extraordinary
item $ 0.12 $ --
================== ==================
Net income (loss) $ 446,457 $ (816,100)
Preferred stock dividends (111,682) (600,926)
------------------ ------------------
Net income (loss) attributable to
common stockholders $ 334,775 $ (1,417,026)
================== ==================
Net income (loss) per common share $ 0.05 $ (0.29)
================== ==================
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 71,813
<SECURITIES> 0
<RECEIVABLES> 246,032
<ALLOWANCES> 68,146
<INVENTORY> 256,977
<CURRENT-ASSETS> 650,309
<PP&E> 1,772,053
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5,318
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<SALES> 263,019
<TOTAL-REVENUES> 263,019
<CGS> 296,531
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<INCOME-PRETAX> (332,919)
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