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, 1998 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 March 31, 1999, the
Issuer had outstanding 5,603,045 shares of Common Stock, 613,030 shares of
Series A Convertible Preferred Stock, convertible into 12,260,600 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.
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Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of September 30, 1998
and June 30, 1998.........................................................3
Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three month periods
ended September 30, 1998 and 1997.........................................4
Consolidated Statement of Stockholders' Equity (Deficiency) of
Conversion Technologies International, Inc. and Subsidiaries for
the three month period ended September 30,1998............................5
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the three month periods
ended September 30, 1998 and 1997.........................................6
Notes to Consolidated Financial Statements..................................7
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................12
Part II - Other Information ..................................................16
2
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
September 30, June 30,
1998 1998
------------- ------------
(Unaudited)
Assets
Cash and cash equivalents $ 139,684 $ 168,483
Accounts receivable, less allowance
for doubtful accounts of $18,000
at September 30, 1998 and June 30, 1998 134,047 258,990
Inventories 524,361 557,292
Prepaid expenses and other current assets 98,163 94,596
------------ ------------
Total current assets 896,255 1,079,361
Property, plant and equipment:
Land -- --
Building and improvements -- --
Machinery and equipment 737,347 702,614
Construction in progress -- --
------------ ------------
737,347 702,614
Less accumulated depreciation (182,859) (148,057)
------------ ------------
554,488 554,557
Property, plant and equipment held for
sale at estimated disposal value 1,000,000 1,000,000
Other assets, less accumulated
amortization of $104,195 and
$97,811 at September 30, 1998
and June 30, 1998 respectively 126,399 132,783
------------ ------------
$ 2,577,142 $ 2,766,701
============ ============
Liabilities and stockholders' deficiency
Notes payable $ 1,064,400 $ 502,000
Accounts payable 1,210,246 1,193,624
Reserve for disposal 512,000 515,000
Accrued expenses 442,716 394,163
Investment tax credit payable 235,000 235,000
Current portion of capital lease
obligations 29,586 23,965
Current portion of long-term debt 2,514,497 2,524,255
------------ ------------
Total current liabilities 6,008,445 5,388,007
Capital lease obligations, less
current portion 2,464 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 September 30,
1998 and June 30, 1998 respectively 613 614
Common Stock, $.00025 par value, authorized
50,000,000 and 25,000,000 shares, issued and
outstanding 5,603,045 and 5,600,545 shares
at September 30, 1998 and June 30, 1998
respectively 1,401 1,400
Additional paid-in capital 33,477,200 32,876,274
Unearned stock compensation (188,124) (207,000)
Accumulated deficit (36,724,857) (35,307,829)
------------ ------------
Total stockholders' deficiency (3,433,767) (2,636,541)
------------ ------------
$ 2,577,142 $ 2,766,701
============ ============
See Accompanying Notes.
3
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For the three months ended
September 30,
1998 1997
----------- -----------
Revenue
Product sales $ 221,721 $ 242,096
Recycling fees 15,517 83,046
----------- -----------
Total revenues 237,238 325,142
Cost of goods sold 563,225 685,776
----------- -----------
Gross loss on sales (325,987) (360,634)
Selling, general and administrative 384,831 685,562
----------- -----------
Loss from operations (710,818) (1,046,196)
Interest expense, net 105,282 308,991
----------- -----------
Loss before extraordinary item (816,100) (1,355,187)
Extraordinary item - Gain on debt
retirement -- 5,862,018
----------- -----------
Net income (loss) (816,100) 4,506,831
Preferred stock dividends (600,926) (1,573,500)
----------- -----------
Net income (loss) applicable to
Common Stock $(1,417,026) $ 2,933,331
=========== ===========
Basic Earnings Per Common Share:
Loss before extraordinary item $ (0.29) $ (0.61)
Extraordinary item -- 1.22
-----------------------------
Net income (loss) applicable to
Common Stock $ (0.29) $ 0.61
=============================
Weighted average number of common
shares outstanding 4,860,339 4,799,186
See Accompanying Notes
4
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficiency)
Three Months Ended September 30, 1998
<TABLE>
<CAPTION>
Series A Preferred Stock Common Stock
------------------------------- ------------------------------ Total
Additional Additional Unearned Stockholders'
Number Paid-In Number Paid-In Stock Accumulated Equity
of Shares Amount Capital of Shares Amount Capital Compensation Deficit (Deficiency)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <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) $(35,307,829) $(2,636,541)
Series A Preferred
Stock converted into
Common Stock (250) (1) (3,670) 2,500 1 3,670 --
Stock compensation 18,876 18,876
Adjustment of prior
conversions of
Series A Preferred
Stock into Common
Stock (28,460) -- 28,460 --
Preferred Stock
dividends 600,926 (600,926) --
Net Loss (816,100) (816,100)
----------------------------------------------------------------------------------------------------------
Balance at
September 30, 1998 613,030 $ 613 $8,726,603 5,603,045 $ 1,401 $24,750,597 $(188,124) $(36,724,855) $(3,433,765)
==========================================================================================================
</TABLE>
See accompanying notes
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended
September 30,
1998 1997
---------------------------
Operating activities
Net (loss) income $ (816,100) $ 4,506,831
Adjustments to reconcile loss to net
cash used in operating activities:
Depreciation expense 34,802 197,664
Amortization expense 6,384 11,302
Amortization of discount on
notes payable 32,400
Extraordinary item -- (5,862,018)
Stock compensation expense 18,876 58,184
Changes is operating assets and
liabilities:
Decrease (increase) in accounts
receivable 124,943 (66,094)
Decrease (increase) in inventories 32,931 (106,479)
(Increase) decrease in prepaid expenses
and other current assets (3,567) 27,116
(Increase) in other assets -- (7,091)
(Decrease) in deferred revenue -- (51,996)
Increase (decrease) in accounts payable,
reserve for disposal and other
accrued expenses 62,173 (379,892)
---------------------------
Net cash used in operating activities (507,158) (1,672,473)
Investing activities
Issuance of notes receivable -- --
Capital expenditures (34,733) (84,820)
---------------------------
Net cash used in investing activities (34,733) (84,820)
Financing activities
Decrease in deferred finance charges -- 1,750
Issuance of notes payable 530,000 500,000
Payment of notes payable -- (500,000)
Decrease in restricted assets -- 220,361
Principal payments on long--term debt (9,758) (1,647,575)
Principal payments under capital lease
obligations (7,150) (6,546)
Issuance of Series A Preferred Stock,
net of offering costs -- 3,501,717
---------------------------
Net cash provided by financing activities 513,092 2,069,707
---------------------------
(Decrease) increase in cash and
cash equivalents (28,799) 312,414
Cash and cash equivalents at
beginning of period 168,483 325,092
---------------------------
Cash and cash equivalents at
end of period $ 139,684 $ 637,506
===========================
Supplemental disclosure of cash
flow information
Interest paid $ 23,945 $ 270,323
===========================
See accompanying notes.
6
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
(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 of September 30, 1998
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
September 30, 1998
(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:
September 30, 1998 June 30, 1998
------------------ -------------
Raw materials $271,796 $216,639
Work-in-process 87,036 147,291
Finished goods 165,529 193,362
-------- --------
$524,361 $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
8
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
accepting the waste material. With respect to revenue from product sales,
including products created from processed waste materials, revenue is recognized
only upon shipment of products to customers.
For the three months ended September 30, 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. For the three months ended September 30, 1997,
89.6% of the Company's revenue was derived from four major customers. Revenue
generated from each of these customers amounted to $160,856, $52,266, $41,607,
and $36,442 which represents 49.5%, 16.1%, 12.8%, and 11.2% 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 1,179 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 42 tons was disposed of during the three months
ended September 30, 1998. The amount of unprocessed waste materials on hand was
2,035 tons at June 30, 1998 and 2,021 tons at September 30, 1998. From July 1,
1997 to September 30, 1997, the Company decreased the reserve by approximately
$62,000 from $713,000 to $651,000 . From July 1, 1998 to September 30, 1998, the
Company decreased the reserve by approximately $3,000 from $515,000 to $512,000.
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.
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
9
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
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 antidilutive. Common shares that could be potentially
dilutive include 1,519,252 stock options, 29,376,661 warrants and 12,323,900
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. 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 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.
10
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
At June 30, 1998, the Company has approximately $20 million of net operating
loss carryforwards, 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 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 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 carryforwards 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, in
additional shares of Series A Preferred Stock at the rate of 10% per annum. As
of September 30, 1998, 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 $522,097 ($.11 per Common Share) has been recorded
for the three months ended September 30, 1998 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,
11
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1998
(Unaudited)
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 $78,829 ($.02 per Common Share) has been recorded for the three
months ended September 30, 1998 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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months ended September 30, 1998 Compared to Three Months Ended September
30, 1997.
Consolidated revenues for the three months ended September 30, 1998 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. For the same
three-month period of 1997, the Company's consolidated revenues were
approximately $325,000 consisting of CRT glass recycling fees of approximately
$258,000 and ALUMAGLASS sales of approximately $67,000. In March 1998, as part
of the shift in the Company's focus away from the CRT recycling business in
favor of decorative particles and performance aggregates, the Company agreed to
subcontract its CRT recycling operations which has resulted in the decline in
CRT sales of approximately $200,000. The decorative particles and performance
aggregates business had sales of approximately $115,000 in 1998 was not
operating in 1997.
The decrease in cost of goods sold of approximately $123,000 to $563,000 in 1998
from $686,000 in 1997 reflects a number of factors, including (i) a decrease of
$178,000 in depreciation due to prior adjustment of the Dunkirk assets to their
estimated net realizable value, (ii) a decrease of $162,000 in direct costs for
labor, fringes and utilities at Dunkirk as a result of the subcontract of the
CRT recycling operations, and (iii) an increase of $165,000 from the decorative
particles and performance aggregates business which was not in production in
1997.
12
<PAGE>
As a result of the above revenue and cost changes, the Company's gross margin
improved to a loss of approximately $326,000 for the three months ended
September 30, 1998 from a loss of approximately $361,000 for the same period of
1997 as the decline in revenues of $88,000 was less than the decrease in cost of
goods sold of $123,000.
Selling, general and administrative expenses decreased by $301,000 to
approximately $385,000 for the three months ended September 30, 1998 compared to
approximately $686,000 for the same 1997 period. This decrease was primarily the
result of a $111,000 decrease in legal and accounting professional fees, a
$39,000 decrease in compensation expenses relating to capital stock, and a
$150,000 decrease as a result of closing the Dunkirk administrative offices at
the end of the third quarter of 1997.
Net interest expense decreased by $204,000 to approximately $105,000 for the
three months ended September 30, 1998 from approximately $309,000 for the same
prior year period. The decrease was primarily attributable to the reduction in
debt from the repayment and forgiveness described Note 6 to the consolidated
financial statements which was partially offset by the interest accrued and
discount amortized on the debt issued in 1998.
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 September
30, 1998, 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
$5,112,000. As of September 30, 1998, the Company had cash and marketable
securities of approximately $140,000.
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 $1,140,000 as of September 30,
13
<PAGE>
1998 and the balance during the second quarter of fiscal 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, 1998, the Line of Credit was amended to increase the amount
available thereunder by $90,000. As of January 13, 1999, the Company had drawn
down the full $1,290,000 available under the Line of Credit.
On February 22, 1999, the Funds agreed to provide interim financing to the
Company in the amount of up to $150,000 ($135,000 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 share 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 September 30, 1998, 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
14
<PAGE>
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 $7,000 for the three
months ended September 30, 1998 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 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 2,021 tons of unprocessed waste materials on hand as of
September 30, 1998, compared to 2,035 tons on June 30, 1998. The Company's
disposal reserve was $512,000 as of September 30, 1998, 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 carryforwards 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 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, as well as currently contemplated equity financing, the
Company's ability to utilize its net operating loss carryforwards 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 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
15
<PAGE>
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.
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 April, 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
16
<PAGE>
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.
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
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
Dated: May 6, 1999 /s/ Eckardt C. Beck
----------------------------------------
Eckardt C. Beck
Acting President and Chief
Executive Officer
(Principal Executive officer)
Dated: May 6, 1999 /s/ John G. Murchie
----------------------------------------
John G. Murchie
Acting Chief financial Officer and
Controller
(Principal financial officer)
18
Conversion Technologies International, Inc.
And Subsidiaries
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
For the three months ended September 30, 1998 and 1997
September 30, 1998 September 30, 1997
------------------ ------------------
Loss before extraordinary item $ (816,100) $ (1,355,187)
Preferred stock dividends (600,926) (1,573,500)
------------------ ------------------
Loss before extraordinary item
attributable to common
stockholders $ (1,417,026) $ (2,928,687)
================== ==================
Weighted average number of common
shares outstanding 4,860,339 4,799,186
================== ==================
Loss per common share
before extraordinary item $ (0.29) $ (0.61)
================== ==================
Extraordinary item $ -- $ 5,862,018
================== ==================
Income per share from extraordinary
item $ -- $ 1.22
================== ==================
Net income (loss) $ (816,100) $ 4,506,831
Preferred stock dividends (600,926) (1,573,500)
------------------ ------------------
Net income (loss) attributable to
common stockholders $ (1,417,026) $ 2,933,331
================== ==================
Net income (loss) per common share $ (0.29) $ 0.61
================== ==================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form 10-QSB
and is qualified in it's entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 139,684
<SECURITIES> 0
<RECEIVABLES> 152,047
<ALLOWANCES> 18,000
<INVENTORY> 524,361
<CURRENT-ASSETS> 896,255
<PP&E> 1,737,347
<DEPRECIATION> 182,859
<TOTAL-ASSETS> 2,577,142
<CURRENT-LIABILITIES> 6,008,445
<BONDS> 2,464
0
613
<COMMON> 1,401
<OTHER-SE> (3,435,781)
<TOTAL-LIABILITY-AND-EQUITY> 2,577,142
<SALES> 237,238
<TOTAL-REVENUES> 237,238
<CGS> 563,225
<TOTAL-COSTS> 948,056
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,282
<INCOME-PRETAX> (816,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (816,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (816,100)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> 0
</TABLE>
