As filed with the Securities and Exchange Commission on November 27, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission File No.:
June 30, 2000 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 32086
St. Augustine, Florida (Zip Code)
(Address of principal executive offices)
(904) 808-0503
(Issuer's telephone number including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Redeemable Class A Warrants and Redeemable Class B Warrants
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 past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
Issuer's revenues for the fiscal year ended June 30, 2000 were $1,302,964. The
aggregate market value of the common stock of the registrant, $.00025 par value
per share (the "Common Stock"), held by non- affiliates of registrant was
$76,012 as of June 30, 2000. As of June, 30 2000, the issuer had outstanding
7,615,045 shares of Common Stock.
Documents Incorporated by Reference
None.
Introductory Note
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Conversion Technologies International, Inc., a Delaware Corporation (the
"Company" or "Conversion") is engaged in developing, manufacturing, marketing
and processing various substrates and advanced materials. As used herein, the
term Company includes each of the Company's subsidiaries, unless the context
otherwise requires.
This report on the Form 10-KSB (this "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), including, without limitation, statements
regarding the Company's cash needs and ability to fund its ongoing working
capital requirements, efforts to shift its focus away from the sales of its
abrasives to manufacture and sell, on a commercial scale, its decorative
particles and the possibility to out source ALUMAGLASS(R) production. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. See "Item 1. Description of Business - Risk Factors"
for a discussion of these risks. When used in this Report, statements that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "anticipates," "plans,"
"intends," "expects" and similar expressions are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
Report. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Part I
Item 1. Description of Business
Overview
For a discussion of certain recent developments concerning the Company and its
business, see "- Certain Recent Events."
The Company is engaged in the business of manufacturing and processing various
substrates and advanced materials that visually and texturally enhance
structural materials. These substrates and advanced materials include (1)
decorative particles (exposed aggregates) that visually enhance structural
materials such as plasters, tiles, grouts, wall systems and roofing and
flooring; and (2) 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.
Advanced Particle Technologies, Inc. ("APT"), also a wholly-owned subsidiary of
the Company, was formed in October 1996 by the Company and a former joint
venture partner for the purpose of applying color coatings to particles. In June
1997, the Company purchased all of its former joint venture partner's 50%
interest in APT.
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The Company's decorative particles include CERAMAGLASS(R) and CERAMAQUARTZ(R).
In 1996, the Company constructed a semi-works, low-volume production facility in
St. Augustine, Florida (the "St. Augustine facility") to produce these
materials. Market introductions of these products were made concurrently with
construction. The St. Augustine facility began operating in the spring of 1997
and the Company began accepting orders for production level quantities in June
1998. The Company's performance aggregates, fillers and enhancers are currently
produced in the Company's St. Augustine facility. Market introductions of
fillers and enhancers were made in St. Augustine concurrently with construction
of the St. Augustine facility. The Company began accepting orders for production
level quantities of these products in May and June 1998.
Products
Decorative Particles
The Company's St. Augustine facility color coats various glass substrates to
produce decorative particles. Decorative particles are widely used in the
construction industry to visually enhance structural materials such as plasters,
tiles, grouts, wall systems and roofing and flooring. Decorative particles are
also incorporated into countertops and cabinetry. The Company believes that its
color coating process yields a coating of superior visual quality and endurance
compared to competing products and believes that there is a potential market for
these products.
Performance Aggregates
ALUMAGLASS(R) and the Company's other glass and ceramic products, individually
or in blended combinations, can also be used as structural or textural
enhancers, fillers and additives. These products, which can be sized according
to industry standards, can be used to strengthen and add consistency to
materials such as cements, plasters, grouts, mortars, roofing and flooring and
other glass and ceramic materials.
Manufacturing and Recycling Processes
Through October 1998, the Company crushed and screened its abrasives and
performance aggregate products at its Dunkirk facility in Dunkirk, New York. The
Company utilized its equipment, principally its post-melting, abrasives
finishing equipment, to sort, clean and/or grind and crush the material into the
desired form. The material was then packaged and shipped to customers. Currently
the Company is not crushing and screening the material but is using its existing
inventory to fill customer's orders.
The Company's St. Augustine facility is used to color coat and package
decorative particles and performance aggregates. The proprietary manufacturing
process consists of applying various pigments and other coating materials in a
thermodynamic process to particles that are purchased locally or supplied by
customers. The material is then packaged on site and shipped to customers.
Research and Development
The Company has temporarily curtailed its research and development efforts until
the Company can achieve
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an acceptable return on equity for its existing products. The Company has an
on-site laboratory at its St. Augustine facility where various analyses, tests
and other research and development activities can be conducted. The Company
maintains a relationship with the Center for Advanced Ceramic Technology
("CACT") at Alfred University for any additional research and development needs.
CACT is the Company's primary outside research and development partner, and
works on various matters from time to time as requested by the Company. In
December 1998, the Company entered into a consulting agreement with 4C
Technologies, Inc. for research and development of new plaster products on an as
needed basis.
Although the Company's research and development activities are presently
limited, the Company plans to continue to engage in research and development
activities from time to time. It is anticipated that such efforts will be
focused in the near term on ALUMAGLASS(R) licensing possibilities and expanding
color coating markets for the Company's decorative particles.
Markets for Products and Services
Decorative Particles
The Company believes that there is a large market for decorative particles. End
users for decorative substrates or particles include ceramic tile manufacturers,
producers of swimming pool plasters, decorative roofing and wall systems,
pottery and porcelain producers and others.
The production of plasters, mortars, terrazzo, and ceramic tiles requires large
quantities of fillers and expanders. While crushed marble, white sand, kaolin or
similar low cost white calcium based materials have traditionally been used as
fillers and expanders, the high cost of coloring agents, pigments and the
process to coat substrates makes it non-economical to color coat large volumes
of these fillers. As a substitute, the construction industry adds small
quantities of previously color coated particles into the fillers. The resulting
mixture, when viewed over a large surface area and from a distance, appears to
have a consistent color or hue.
The Company believes that market acceptance of colored particles is largely a
function of the brilliance and endurance of the color, which results from the
level of translucence or reflectivity of the substrate. In most applications,
the coated surface of a particle is subject to erosion. Consequently, colored
substrates must have translucent properties in order to maintain their color
characteristics with a translucent or clear particle, in order to ensure that as
the color is eroded from the exposed surface of the particle embedded in the
mortar or plaster, the color on the back side of the particle will remain
visible, thereby extending the life of the color application significantly.
Traditionally quartz and high quality silica sands have been used as substrates
to produce translucent colored particles. The Company believes that its
proprietary coating process will produce a coating of superior endurance and
visual appeal.
Performance Aggregates
The Company believes that there is a large market for performance aggregates.
Materials such as plasters, mortars, terrazzo, flooring tiles, and other ceramic
or cement based mixtures require fillers, expanders or particulates that will
add consistency or texture for functional purposes. The Company has the ability,
if necessary, to size its aggregates within narrow specifications for specialty
applications. The Company has only recently begun to explore the use of its
various substrates for this market. The Company believes that its fired ceramic
substrates will also have applicability in these markets, particularly as filler
for tiles and plasters. The Company further believes that because many of its
substrates are produced from waste material, it may have production cost
advantages over certain materials traditionally used in this market, such as
mined substrates.
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Dependence on Certain Customers
The Company has a limited number of customers for all its products. For the year
ended June 30, 2000 ("fiscal 2000"), 78.8 % of the Company's revenues was
derived from three major customers. Revenue generated from each of these
customers amounted to $581,000, $261,000 and $184,500, which represents 44.6%,
20.1.% and 14.1%of the total revenue, respectively.
The Company's main purchaser of decorative particles, Southern Grouts and
Mortars Inc. ("SGM"), accounted for 44.6% of the Company's total revenue.
Sales and Marketing
After the termination of the distributor agreement with VANGKOE Industries Inc,
("VANGKOE") (covering decorative particles) in May 1998, the Company initiated a
direct sales and marketing effort which targeted select manufacturers of
swimming pool plasters and decking materials in the Southeastern United States.
In September 1999 the Company entered into a distribution agreement with TXI, a
major building products supplier for the sale and distribution of decorative
particles for the pool industry.
Intellectual Property
The Company has been granted two United States patents. The first patent was
issued in December 1993 and relates to the Company's process for manufacturing
abrasive particles from inorganic waste materials, including sludge from various
industrial processes and waste water treatment, emission control dusts from high
temperature industrial processes, fly ash from incineration of industrial and
residential wastes and certain other process specific effluents. Examples of
such inorganic wastes are: spent pot liner from the aluminum industry,
refractory wastes from smelting, melting or refining furnaces, various types of
slags and precipitants related to metal recovery operations, foundry sands,
glass wastes, including television and computer monitor CRT glass, and certain
wastes from the manufacture of ceramic products. The Company's second patent was
issued in October 1995 and relates to the pre-melting batching process involved
in the manufacture of the Company's abrasives. In addition, the Company has
filed jointly with another party an application for a U.S. patent on the X-ray
fluorescence technology that has been used in the Company's CRT glass recycling
operations. The Company has three additional patent applications on file. These
patent applications relate to ALUMAGLASS(R) and to the use of the Company's
products as aggregates in construction materials. The Company's logo and
ALUMAGLASS(R) are registered trademarks.
In connection with the agreement to terminate the distribution agreement with
VANGKOE, the Company
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purchased the trademarks for CERAMAGLASS(TM) and CERAMAQUARTZ(TM) from VANGKOE
for the sum of $50,000.
Additionally, the Company entered into a technology purchase agreement with
Vangkoe.
Competition
The Company's decorative particles and performance aggregates will also face
substantial competitive pressures. The Company believes that Minnesota Mining
and Manufacturing Company ("3M") has a significant share of the market for
decorative particles. 3M has available to it financial, technical and other
resources far superior to those of the Company. In addition, certain customers
of other products may be unwilling to switch to the Company's particles due to
factors such as personal preferences for a competitor's color selections,
consistency with colors previously sold, performance concerns or satisfaction
with its current products. The Company's performance aggregates will face
similar competitive pressures from producers of mined minerals, aluminum oxide
and other abrasives. These producers include 3M and Norton/St. Gobain, each with
resources superior to those of the Company. There can be no assurance that the
Company can stay in business in the face of strong competition from various
manufacturers with such advantages.
Environmental Matters
The federal environmental legislation and policies that the Company believes are
applicable to its manufacturing operations include the Comprehensive
Environmental Response, Compensation and Liability Act of 1978, as amended
("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), the Clean Air Act of 1970, as amended, the Federal Water Pollution
Control Act of 1976, as amended, the Superfund Amendments and Reauthorization
Act ("SARA") and the Pollution Prevention Act of 1990. The Company is also
subject to state air, water and solid and hazardous waste laws and regulations
that affect its manufacturing operations.
To maximize market acceptance of the Company's manufacturing technology, the
Company chose to focus its initial efforts on the development of recycling
processes, materials and products which are most likely to qualify for
exemptions or favorable regulatory treatment. For example, the Company used
materials that are not solid wastes and are not subject to RCRA permitting
requirements (as an example, reclaimed characteristically hazardous by-products
or sludge). The Company handled secondary materials in a manner that allows such
materials to qualify for exclusions under state or federal RCRA regulations (for
example, use of materials as effective substitutes for other products in a
manufacturing process), and the Company stored materials in an environmentally
sound manner (for example, within the manufacturing building or on a concrete
slab).
The New York State Department of Environmental Conservation ("NYSDEC") has been
delegated authority to administer the RCRA program in New York, and has adopted
regulations governing the treatment, storage and disposal of solid and hazardous
wastes. NYSDEC regulations require the Company to obtain regulatory exemptions
and/or beneficial use determinations for each hazardous waste material it
accepts for recycling purposes. Without these regulatory exemptions and/or
beneficial use determinations, the Company would be required to obtain a state
RCRA permit to operate its facility, and would become subject to onerous RCRA
regulatory requirements. CERCLA and subsequent amendments under SARA impose
continuing liability upon generators of hazardous substances and owners and
operators of facilities where hazardous waste is released or threatened to be
released, as well as upon parties who arrange for
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the transportation of hazardous substances to such facilities. CERCLA
effectively imposes strict, joint and several liability upon these parties.
Accordingly, although the Company strives to operate its facilities in
compliance with regulatory requirements, there can be no assurance that the
Company will not incur liability as an owner or operator for releases of
hazardous substances, or possibly as a hazardous waste generator.
During fiscal 1999, the Company was carrying a potential environmental liability
on its books which was caused by unprocessed materials at its Dunkirk facility.
This liability was reduced in fiscal 1999 as a result of an agreement that the
Company entered into with Dlubak which, in part, required the removal of all
inventory of unprocessed CRT materials from its Dunkirk facility which was
completed in November 1998. The Company intends to further reduce the liability
if and when it can decrease the quantities of the remaining unprocessed waste
materials on hand. In December, 1998, the Company was notified by NYSDEC that a
remedial plan needs to be submitted regarding the completion of its petroleum
storage tank removal project. The Company submitted its sampling plan and
analysis results to the NYSDEC and received a reply that NYSDEC does not require
any further remedial work at this time.
By June 30, 2000, all of the CRT materials had been removed from the Dunkirk
facility. There still remains a limited liability due to other inventories on
site. The Company is actively pursuing the sale of these materials or arranging
for the proper disposal of them.
Employees
As of June 30, 2000, the Company had 11 full-time employees consisting of 8
employees in manufacturing and 3 employees in finance and administration. None
of the Company's employees are subject to a collective bargaining agreement and
the Company has not experienced any work stoppages, nor to the Company's
knowledge, are any threatened.
Certain Significant Events
Private Placement
On September 24 and December 8, 1999, the Company sold in a Private Placement
4,819,634 shares of Series B Convertible Preferred Stock for which the Company
accepted $1,125,000 in cash and the conversion 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 which resulted in a gain on debt retirement. This
conversion, pay-off and forgiveness of debt totaling $2,987,980 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.
Extraordinary Item
On September 24, 1999 from the cash proceeds of the Private Placement 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, $165,500 was paid to the Company's former legal counsels
in full settlement of accrued liabilities of $223,816 for past due professional
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services. These forgivenesses resulted in a net pretax gain to the Company of
approximately $805,296, 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, 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, 2000, the Company has approximately $27.5 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.
Other Changes to Indebtedness
Dunkirk was obligated with respect to $1,888,000 outstanding aggregate principal
amount of equipment term notes made by Dunkirk to Key Bank of New York ("Key
Bank") in December 1994 and January 1995, which were guaranteed by the Empire
State Development Corporation/Job Development Authority (the "ESDC"). In July
1997, the ESDC agreed to honor its guarantee of such equipment term loans (in
full) and in December 1997 the ESDC paid such guarantee (in full) and Key Bank
assigned such notes to the ESDC. In connection with the assignment of the notes
to ESDC, the ESDC agreed to defer all interest and principal payments due under
the loans through July 1, 1998 until the maturity date of the notes, with
interest continuing to accrue on such deferred amounts payable at maturity. On
December 2, 1997, the ESDC forgave $500,000 in principal amount of the debt.
Also, the balance of the related debt service fund of $459,000 was applied
against outstanding principal and accrued interest, resulting in a principal
balance (after debt forgiveness) of $1,032,798. On June 22, 1998, the ESDC
agreed to defer principal payments due under the loan through January 1, 1999
until the maturity date of the note. From the cash proceeds of the Private
Placement, the Company paid $600,000 to ESDC in full satisfaction of the
equipment term note assumed from Key Bank with an adjusted principal balance of
$1,183,110 and also another Dunkirk subordinated note due ESDC with a principal
balance of $37,870. In consideration for this payment made by the Company, ESDC
agreed to assign the related security interests to the Company.
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Dunkirk Auction
The Company realized a gain of approximately $164,000 from an equipment auction
conducted in January 2000 at Dunkirk.
Amendment to Certificate of Incorporation
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.
Risk Factors
As described in the "Introductory Note," certain statements made herein that are
not historical are forward- looking within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve known
and unknown risks and uncertainties. Many factors could cause the actual
results, performance or achievements of the Company to be materially different
from any future statements, including, among others, those described below.
Accumulated Deficit; History of Operating Losses; Going Concern Paragraph in
Auditor's Report
The Company has experienced significant operating losses since its inception.
The Company had an accumulated deficit of approximately $(38,242,000) at June
30,2000. The Company had net income of approximately $48,000 after the
extraordinary gain of $805,000 for the fiscal year ended June 30, 2000, and a
net loss of approximately $(2,106,000) for the fiscal year ended June 30, 1999.
As a result, the Company has experienced a deficiency in cash flows from
operations. Such losses have resulted principally from limited revenues from
operations and costs associated with the development of the Company's
technologies, general and administrative expenses and a number of large
one-time, non-cash charges to operations. The Company expects to incur a
substantial loss for the fiscal year ending June 30, 2001 and to continue to
incur operating losses until such time, if ever, as product sales generate
sufficient revenue to fund the Company's continuing operations. The Company
received an explanatory paragraph in the report of its independent auditor
accompanying its consolidated financial statements for the fiscal years ended
June 30, 2000 and 1999, indicating that there is substantial doubt as to the
ability of the Company to continue as a going concern. No assurance can be given
that the Company will ever achieve profitable operations.
Need for Additional Financing; Possibility of Bankruptcy
The Company is in need of significant additional financing. At June 30, 2000,
the Company had a net working capital deficiency of approximately $3,989,000.
The Company presently has large past due payables and is in default on principal
and interest payments with respect to substantially all of its indebtedness for
borrowed money. The Company's limited cash resources have strained relations
with suppliers and trade creditors and have caused certain suppliers to provide
products and services only on a cash basis. The Company's creditors, whether
lenders or trade creditors, could commence suit to enforce their debts (and
certain creditors have commenced litigation) or could force the Company into
bankruptcy. In the event of a bankruptcy, unless there are assets available
after the satisfaction in full of the claims of creditors, there will be no
recovery by the holders of equity. Furthermore, the Company's default on
indebtedness entitles the lenders to accelerate their debt, liquidate their
collateral and otherwise pursue the
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rights and remedies available to them pursuant to applicable law and their loan
documents. The Company has no commitments or other arrangements for any future
financing and there can be no assurance that any debt or equity financing will
be available within the needed time frame. Furthermore, the Company's
Certificate of Incorporation and the loan documents to which the Company is a
party restrict its ability to incur additional debt. Any equity financing will
be dilutive to the Company's stockholders and any debt finances will likely
contain restrictive covenants and additional debt service requirements, which
could adversely affect the Company's operating results. If the Company is not
able to obtain additional financing, the Company may be required to
significantly limit or even cease operations.
Substantial Indebtedness; Payment Defaults; Potential Loss of Collateral
At June 30, 2000, the Company had outstanding an aggregate of approximately
$1,292,000 of indebtedness (excluding amounts borrowed under the Line of Credit,
certain interim financing and capital lease obligations), substantially all of
which is secured by the assets of its wholly-owned subsidiary Dunkirk.
Accordingly, the Company is subject to all of the risks associated with
substantial indebtedness, including the risk that cash flow may not be
sufficient to make required payments of principal and interest on indebtedness.
To the extent that substantially all of the Company's assets continue to be
pledged, such assets will not be available to secure additional indebtedness,
which may adversely affect the Company's ability to borrow in the future. Of the
Company's $2,514,000 in indebtedness at June 30, 1999, $1,508,628 was owed to
the ESDC. 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 has negotiated with the ESDC and paid on September 24, 1999 a
reduced amount of $600,000 as a payment in full of all amounts owed on two of
the loans which had a principal balance of $1,220,980. The Company is currently
in default with respect to principal and interest payments on the remaining ESDC
loan with a principal balance of $287,648. In the event that the Company is
unable to reach a settlement with the ESDC with respect to the Company's
repayment of debt to the ESDC, ESDC, as a secured party, may be able to force a
sale of the property located at the Dunkirk facility which secures the debt. In
addition, most of the Company's indebtedness is subject to various covenants. In
the event of a default in payment of outstanding indebtedness (such as currently
exists), or in the event of a default arising out of a violation of any
covenants, the Company, APT and/or Dunkirk may lose all or a portion of its
assets and the Company, APT and/or Dunkirk may be forced to materially reduce
its business activities or cease its operations. Certain of the instruments
governing the Company's indebtedness also contain default provisions relating to
insolvency and the inability to pay debts as they become due. See "Certain
Relationships and Related Transactions."
Limited Revenues and Product Sales; Lack of Profitable Business; New Business
The Company presently lacks a profitable business initiative. The Company
commenced recycling CRT glass used in the manufacture of televisions in 1994 and
production of industrial abrasives in 1995. Substantially all of the Company's
limited revenues through fiscal year 1998 were derived from recycling CRT glass;
however, the Company has phased out its CRT recycling operations. Additionally,
the Company has generated only minimal revenues to date from sales of
ALUMAGLASS, its initial industrial abrasive product, which has received limited
acceptance in the marketplace. The Company has recently commenced production of
certain other glass and fired ceramic substrates and decorative particles that
visually embrace structured materials, which were substantially all of the
Company's revenue in fiscal 1999; however, there can be no assurance that these
products will generate significant sales. While attempting to commercialize its
products, the Company is subject to risks inherent in a new business generally,
such as marketing problems, unanticipated problems relating to environmental
regulatory compliance, manufacturing and the competitive environment in which
the Company operates, and additional costs and expenses that may exceed
estimates. There can be no assurance that, even after the expenditure of
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substantial funds and efforts, the Company will ever achieve or maintain a
substantial level of sales of its products.
Cancellation of Indebtedness; Possible Tax Effects
Due to certain debt forgiveness, the Company had a number of significant net
pretax gains during fiscal 1998. These net pretax gains could result in
significant tax obligations. The Company does not have sufficient working
capital to satisfy any such obligations. While the Company does have certain
loss carry forwards, the Company cannot be certain at this time whether the loss
carry forwards are usable to offset any of the Company's gains.
New Management; Dependence on Key Personnel
The Company is and will be dependent on its key management personnel, Eckardt C.
Beck, Acting President and Chairman of the Board, and Carl E. Rang, Chief
Financial Officer. There can be no assurance that such individuals will be able
to successfully implement the Company's strategies or that such individuals will
remain with the Company. The loss of one or more of these individuals could have
a material adverse effect on the business and operations of the Company. In
addition, the Company will need to attract and retain other qualified
individuals to satisfy its personnel needs. There can be no assurance that the
Company will be successful in retaining its key management personnel or in
attracting and retaining new employees.
Limited Sales and Marketing Experience
The Company has had limited experience in selling and marketing its products.
Furthermore, the Company has assembled only a small sales and marketing
organization. There can be no assurance that the Company will be able to
recruit, train or retain qualified personnel to sell and market its products or
that it will develop a successful sales and marketing strategy. In addition, for
certain applications, the Company has relied on distributors for primary
marketing efforts, which has resulted in only limited sales of ALUMAGLASS. In an
effort to achieve market acceptance of its products, the Company may seek to
enter into joint ventures, licensing or other collaborative arrangements to sell
and market its products. There can be no assurance that any sales and marketing
or other efforts undertaken by the Company will be successful.
Competition
The Company's products and services are subject to substantial competition. See
"Competition" for a detailed description of the competition that the Company
faces.
Dependence on Patents and Proprietary Technology; Risk of Infringement of
Third-Party Patents
The Company's success will depend, in part, on its ability to maintain
protection for its products and manufacturing processes under United States and
foreign patent laws, to preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. The Company has two issued
U.S. patents and two U.S. patent applications pending. There can be no assurance
that any patent applications will result in issued patents, that any issued
patents will afford adequate protection to the Company or not be challenged,
invalidated, infringed or circumvented or that any rights thereunder will afford
competitive advantages to the Company. Furthermore, there can be no assurance
that others have not independently developed, or will not independently develop,
similar products and technologies or otherwise duplicate any of the Company's
products and technologies.
Dependence on Environmental Regulation/Regulatory Status of Facilities
Federal, state and local environmental legislation and regulations mandate
stringent waste management and
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operations practices, which require substantial capital expenditures and often
impose strict liabilities for non-compliance. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
technology and services being developed or offered by the Company. Additionally,
the Company and its customers operate in a highly regulated environment and the
St. Augustine facility is and any future facilities may be required to have
various Federal, state and/or local government permits and authorizations,
registrations and/or exemptions.
Potential Environmental Liability
The Company's business exposes it to the risk that harmful substances may be
released or escape into the environment from its facilities, processes or
equipment, resulting in potential liability for the resultant exposures,
clean-up or remediation of the release, and/or potential personal injury
associated with the release. Liability for investigation and/or clean-up and
corrective action costs exists under the Comprehensive Environmental Response,
Compensation and Liability Act, the Resource Conversation and Recovery Act, the
New York State Environmental Conservation Law, and the Florida Air and Water
Pollution Control Act. Additionally, the Company is potentially subject to
regulatory liability for the generation, transportation, treatment, storage or
disposal of hazardous waste if it does not act in accordance with the
requirements of Federal or state hazardous waste regulations or facility
specific regulatory determinations, authorizations or exemptions. The Company is
also potentially subject to regulatory liability for releases into the air or
water under the Clean Air Act, the Clean Water Act and analogous state laws and
regulations, and various other applicable Federal or state laws and regulations.
Potential Conflicts of Interest Arising from Certain Related Party Transactions
The Company has entered into consulting agreements with Mr. Beck, and with
certain principal stockholders and affiliates of certain directors and principal
stockholders of the Company, pursuant to which, among other things, certain of
such persons received warrants and pursuant to which certain of such persons
will be entitled to receive success fees upon the completion of certain project
development activities. Such agreements may result in conflicts of interest for
the directors and principal stockholders who are, or whose affiliates are,
parties to such consulting agreements. The Company, however, does not believe
that the existence of such agreements will interfere with the ability of the
Company's directors to discharge their fiduciary duties to the Company's
stockholders. See "Certain Relationships and Related Transactions."
Outstanding Warrants, Options and Convertible Securities
As of June 30, 2000, the Company had outstanding 512,430 shares of Series A
Convertible Preferred Stock convertible into 10,248,600 shares of Common Stock
at a conversion price of $0.50 per share and 4,819,634 shares of Series B
Convertible Preferred Stock convertible into 96,392,680 shares of Common Stock
at a conversion price of $0.03 per share.
Also as of June, 30 2000, the Company had outstanding (1) 18,259,918 warrants to
purchase an aggregate of 18,259,918 shares of Common Stock at exercise prices
ranging from $0.66 to $5.28 per share; (2) options to purchase an aggregate of
1,052,257 shares of Common Stock at exercise prices ranging from $0.03 to $6.16
per share; and (3) non-qualified options to purchase 36,293,101 shares of Common
Stock at an exercise price of $0.03 per share (consisting of options to purchase
18,146,550 shares issued to Mr. Beck, options to purchase 10,434,267 issued to
five other directors of the Company, options to purchase 1,360,991 issued to one
other officer of the Company and options to purchase 6,351,293 issued to two
managers of the Company) which are not part of any of the Company's option
plans. See "Certain Relationships and Related Transactions". Also, the Company
had outstanding warrants to purchase 61,945 shares of Series A Preferred Stock
at a per share exercise price of $9.82. The Company has reserved an aggregate of
690,000 shares of Common Stock for issuance under the Stock Option Plans and
710,000
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shares of Common Stock under its Long-Term Plan (as defined below) as of the
date of this Report. Holders of such warrants and options are likely to exercise
them when, in all likelihood, the Company could obtain additional capital on
terms more favorable than those provided by such warrants and options. In
addition, the exercise of such warrants and options could have a material
adverse effect on the market price of, and liquidity in the market for, shares
of Common Stock. Further, while these warrants and options are outstanding, the
Company's ability to obtain additional financing on favorable terms may be
adversely affected.
Risks of Penny Stock
The Company's securities are subject to Rule 15g-9 under the Exchange Act, which
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
an annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by such rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of the holders of the Company's securities
to sell in the secondary market any of such securities.
SEC regulations define a "penny stock" to be any non-NASDAQ equity security that
has a market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure is also
required to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.
Possible Volatility of Market Price of Common Stock
The market price of the Company's securities, like that of many other of
development stage companies and many emerging companies, has been highly
volatile, experiencing wide fluctuations not necessarily related to the
operating performance of such companies. Factors such as the Company's operating
results, announcements by the Company or its competitors concerning
technological innovations and new products or systems may have a significant
impact on the market price of the Company's securities. In addition, the Company
has recently experienced limited trading volume in its Common Stock.
Item 2. Description of Properties
The Company owns its 230,000 square foot manufacturing facility in Dunkirk, New
York. Such facility is subject to a first mortgage held by the New York Job
Development Authority securing a promissory note issued to the Chautauqua Region
Industrial Development Corporation, with respect to which approximately $287,648
principal amount was outstanding on June 30, 2000. In addition, such facility is
subject to a second mortgage securing a promissory note issued to the former
owner of the property as part of the purchase price therefore, with respect to
which principal in the amount of approximately $253,638 was outstanding on June
30, 2000.
APT currently leases approximately 21,400 square feet of manufacturing and
warehouse space in St. Augustine, Florida. The leases have expired and the
Company is currently in negotiations to renew the lease.
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In the opinion of the management of the Company, all of the properties described
herein are adequately covered by insurance.
Item 3. Legal Proceedings
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.
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. On March 11, 1999, the Circuit Court entered a final judgement in
favor of Buchanan Ingersoll in the amount of $197,689. 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 action was dismissed on August 1, 2000.
Ferro Corporation filed a suit against the Company in St. Johns County Florida
for recovery of damages for goods valued at approximately $30,000. The Company
has reached an out of court settlement on May 9, 2000 with Ferro Corporation for
a payment schedule to satisfy the debt.
CLI Industries filed a suit against the Company in St. Johns County Florida for
recovery of damages for goods valued at approximately $15,000. The lawsuit with
CLI Industries has been dismissed on April 10, 2000 and both parties have agreed
to a payment schedule.
The Company has filed a complaint on March 21, 2000 against Dlubak Company in
Chautauqua County, New York seeking monetary damages in the amount of
approximately $230,000 for breach of contract pertaining to services performed
and failure to return company property. The Company has received the initial
response from Dlubak on May 7, 2000 and no resolution has been reached.
The Company is questioning the applicability of the technology agreement with
Vangkoe as it relates to our present production processes. Royalty payments
might be affected on this matter. This may go to arbitration.
On September 26, 2000, Niagra Mohawk Corporation filed a suit in Eire County,
New York for recovery of damages for services provided to Dunkirk International
Glass and Ceramics Corporation. These services are valued at approximately
$330,000. The parties have not commenced discovery, and therefore, it is
premature to evaluate Dunkirk's financial exposure at this time.
The Company is not involved in any other material legal proceedings.
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.
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Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock had been quoted on the Nasdaq SmallCap Market (the
"SmallCap Market") under the symbol "CTIX" since May 16, 1996, the effective
date of the Company's registration statement relating to its initial public
offering of Common Stock (the "IPO"). On October 23, 1998, the Common Stock was
delisted by Nasdaq and is currently listed on the Pink Sheets(R), a quotation
medium operated by the National Quotation Bureau, LLC (the "Pink Sheets") under
the symbol "CVTL". The following table sets forth, for each of the quarters
indicated, the high and low bid prices per share of Common Stock as quoted on
the SmallCap Market and the over- the-counter market (source, the Nasdaq-Amex
Market Group). The prices shown represent quotations among securities dealers,
do not include retail markups, markdowns or commissions and may not represent
actual transactions.
Quarter Ended High Low
--------------------------------------------------------------------------------
June 30, 1998 $1.375 $0.625
September 30, 1998 $1.09375 $0.15625
December 31, 1998 $0.3125 $0.001
March 31, 1999 $1.25 $0.0
June 30, 1999 $0.24 $0.001
September 30, 1999 $0.03 $0.02
December 31, 1999 $0.02 $0.01
March 31, 2000 $0.13 $0.0625
June 30, 2000 $0.01 $0.01
As of June 30, 2000, the Company had approximately 871 holders of record of
Common Stock.
No dividends have ever been declared or paid on the Company's Common Stock, and
the Company does not anticipate declaring or paying dividends in the foreseeable
future.
Sales of Unregistered Securities
There were no unregistered securities sold by the Company during the fiscal year
ended June 30, 2000.
On September 24, 1999 and December 8,1999; the Company sold pursuant to the
Private Placement an aggregate of 4,819,634 shares of Series B Convertible
Preferred stock for which the Company accepted $1,125,000 in cash and the
conversion 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.
Each share of Series B Preferred has a par value of $.001, a stated value of
$0.60 and is convertible into
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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 a least two-thirds of the Series B Preferred
will be required for (1) the issuance of securities senior to or on a parity
with the Series B Preferred with respect to dividends, voting or liquidation,
(2) any alterations to the rights of the Series B Preferred, (3) a liquidation,
dissolution or sale of substantially all of the assets of the Company, (4) the
incurrence of over $100,000 of indebtedness (other than borrowing under working
capital lines of credit), and (5) 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.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since inception through June 30, 2000, the Company sustained cumulative losses
of approximately $38,242,000. Such amount includes (1) a one-time, non-cash
charge to operations of approximately $6,232,000 relating to the write-off of
research and development (in-process) technologies that had not reached
technological feasibility and, in the opinion of management, had no alternative
use, which were purchased in conjunction with the Company's acquisition of
Dunkirk in 1994,( 2) approximately $2,528,000 expensed as process development
costs related to research and development of the Company's CRT glass processing
and ALUMAGLASS(R) product lines, (3) a non-cash charge to operations of
approximately $5,712,000 relating to the write-off of non-productive fixed
assets during the quarter ended June 30, 1997, (4) an extraordinary item from
the gain on debt retirement of approximately $6,425,000 during the fiscal year
ended June 30, 1998, (5) a non-cash charge to operations of approximately
$4,913,000 for the write down of property, plant and equipment held for sale
during the quarter ended June 30, 1998, and (6) other operating losses including
preferred stock dividends of $3,909,000. The Company will continue to incur
losses until such time as revenues are sufficient to fund its continuing
operations.
During fiscal 2000 the Company took a number of steps in an effort to preserve
cash, reduce its costs and increase revenues. Raw material costs were reduced
through the application of lower cost alternative substrates and coating
materials. Investments in product development have been curtailed in fiscal 2000
and investments in sales and marketing were decreased for the year ending June
30, 2000. Manufacturing and operating overhead have also been reduced through
payroll reductions and savings associated with non-productive equipment and
processes that have been shut-down, such as the Company's Dunkirk facility. The
Company is selling decorative particles produced by APT and hopes to increase
revenue from this product line. The Company will also strive to increase sales
of other abrasives and aggregates as it implements new marketing efforts.
Implementation of the Company's business plan, however, is subject to obtaining
the necessary financing.
In September 1999, the Company sold in a private placement 4,819,634 shares of
Series B Convertible
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Preferred Stock ("Series B Preferred") with a par value of $.001 per share and a
stated value $0.60 per share. The Company accepted $1,125,000 in cash and the
conversion of $1,767,000 of debt including accrued interest for the sale of the
Series B Preferred. From the cash proceeds, $600,000 was paid to ESDC in full
satisfaction of loans having aggregate principal balance of $1,221,000 and
$160,000 was paid in settlement of past due professional services with an
accrued liability of $229,110.
Because the Company has had limited revenue and has incurred significant losses
which has resulted in a working capital deficiency and a stockholders'
deficiency at June 30, 2000, the Report of Independent Auditors includes an
explanatory paragraph indicating there is substantial doubt as to the Company's
ability to continue as a going concern.
Results of Operations
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999.
Consolidated revenues for fiscal 2000 were approximately $1,303,000 consisting
primarily of decorative particles and performance aggregates sales of
approximately $1,275,000 and ALUMAGLASS(R) sales of approximately $28,000. For
fiscal 1999 consolidated revenues were approximately $1,119,000 consisting
primarily of decorative particles and performance aggregates sales of
approximately $912,000, ALUMAGLASS(R) sales of approximately $133,000 and CRT
glass recycling fees and related clean cullet sales of approximately $74,000.
This increase in revenue of $184,000 is primarily a result of an increase of
$363,000 in sales of decorative and performance aggregates, the Company's
present primary focus, and $133,000 decrease in CRT glass recycling fees and
related clean cullet sales and a $175,000 decrease in ALUMAGLASS(R) sales as a
result of ceasing operations at the Dunkirk plant in the second quarter of
fiscal 1999.
Cost of goods sold was approximately $1,166,000 for fiscal 2000 versus
approximately $1,251,000 for the prior fiscal year, representing a decrease of
approximately $85,000. The slight decrease was caused by a favorable product
margin due to product mix and production efficiencies in the decorative
particles and performance aggregates business.
As a result of the above increases in revenue of $184,000 and a decrease in cost
of goods sold of $85,000, the Company's gross margin improved by $269,000 to
$137,000 for fiscal 2000 compared to a loss of $131,000 for fiscal 1999. The
increased level of sales and production of decorative particles and performance
aggregates brought about this improved gross margin of $269,000.
Selling, general and administrative expenses decreased by $598,000 to $908,000
for fiscal 2000, as compared to $1,506,000 for fiscal 1999. This decrease was
primarily the result of a $42,000 decrease in compensation expenses relating to
capital stock; a $156,000 decrease for salaries, payroll taxes and fringe
benefits due to a reduction in staffing; a $265,000 decrease in professional
fees paid to consultants, legal and accounting; a $20,000 decrease in
compensation expense related to the issuance of employee options; a $65,000
decrease in travel expense for the Corporate office; and a $50,000 decrease in
expenses for the Corporate office including rent, telephone and office supplies.
Interest expense decreased by $239,000 to $238,000 for fiscal 2000 from $477,000
for fiscal 1999. The decrease was primarily attributable to the reduction in
debt from the repayment and forgiveness described below which was partially
offset by the interest accrued and discount amortized on the debt issued in 2000
and 1999.
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The Company recorded an extraordinary item for the gain on debt retirement of
$805,000 in 1999 as a result of a gain of $747,000 on the satisfaction of two
loans paid to the ESDC and a gain of $58,000 for the accounts payable
forgiveness granted to the Company by its former legal counsels.
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
from 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.
Net cash used in operating activities for the twelve months ended June 30, 2000
was $650,107. Net income for the period used cash of $674,998 net of non-cash
charges for depreciation and amortization, the gain on debt retirement reported
as an extraordinary item, write-off of impaired inventory, bad debt expense and
stock compensation expense. In addition, cash was used for the net change of
$(30,549) in our operating assets and liabilities, consisting primarily of an
increase in accounts receivable, a decrease in prepaid expenses and other
current assets, a decrease in inventories, a decrease in reserve for disposal
and a decrease in accounts payable and other accrued expenses.
Net cash provided by investing activities of $352,248 for the twelve months
ended June 30, 2000 represents $34,779 for capital expenditures offset by the
net proceeds from the disposal of fixed assets for $387,027. Net cash provided
by financing activities for the period was $250,462. Of this amount, $953,077
was received from the cash sales of Series B Preferred net of offering costs and
$35,000 was received from the issuance of debt. This cash provided was offset by
the $600,000 payment to ESDC and $137,615 in payments on notes payable and
capital lease obligations.
On May 8, 1998, the Company entered into the Credit Agreement with the Aries
Funds which provided for a line of credit for up to $1,200,000 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
borrowing 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 from September 1998 through in February 1999, Eckardt C. Beck,
the Acting President and Chief Executive Officer of the Company, provided loans
totaling $130,000 to the Company. The loans accrued interest at the rate of 12%
per year and became due on September 1, 1999. The combined amount of principal
and interest of $114,000 due Eckardt C. Beck at September 1, 1999 was converted
to Series B Preferred Stock in September 1999. The remaining principal balance
of $26,915 due Eckardt C. Beck was paid February 2000. As of June 30, 2000,
Eckardt C. Beck was owed consulting fees and expenses aggregating $212,880.
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In September and December of 1999, the Company raised $1,125,000 in cash and
$1,766,778 in the form of conversion of debt (as described above) and accrued
interest in the Private Placement of 4,819,634 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. 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.
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, $165,500 was paid to the Company's former legal counsels
in full settlement of accrued liabilities of $223,816 for past due professional
services.
The Company's capital lease payments were approximately $4,200 for the year
ended June 30, 2000. The Company has no material commitments for capital
expenditures.
The Company has federal net operating loss carry forwards that amounted to
approximately $27.5 million at June 30, 2000, which expire between 2006 and
2020. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), utilization of net operating loss carry forwards is limited if
there has been a change in control (ownership) of the Company. Although a
comprehensive evaluation has not yet been performed, it is likely that due to
historical equity finances, the Company's ability to utilize its net operating
loss carry forwards could be severely limited.
Reserve for Disposal
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), a wholly owned
subsidiary of the Company, began accepting waste materials (primarily CRT glass)
in early 1994. Upon accepting the waste materials, Dunkirk established a reserve
for the probable disposal and cleanup costs for the unprocessed waste materials
on hand in the event that the conversion processes being developed were not
successful. To date, the Company has disposed of 2,357 tons of waste materials
which it had not been able to process, of which 1,220 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 less than 700 tons at June 30, 2000
From July 1, 1999 to June 30, 2000, the Company decreased the reserve by $28,000
from $301,000 to $273,000. The decrease in the reserve resulted from the cleanup
costs of waste material storage areas. The Company intends to adjust the reserve
for disposal if and when it can further reduce the quantities of unprocessed
waste materials on hand.
Pending Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 requires companies to recognize all
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derivatives contracts as either assets or liabilities in the balance sheet and
to measure them at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (1) the changes in the fair value of the hedged changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk or (2)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133, as amended by SFAS No. 137 is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on July 1, 2000 to affect its financial
statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation an Interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25 for (a)
the definition of employee for the purposes of applying APB Opinion No. 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
2, 2000 but certain conclusions cover specific events that occur after either
December 15,1998 or January 12, 2000. The Company believes that adoption of FIN
44 will not have a material effect on the Company's historical financial
position or results of operations but may impact the accounting for grants or
awards in future periods
On December 3, 1999 the SEC issued Staff Accounting Bulletin 101 ("SAB 101"),
Revenue Recognition in Financial Statements. SAB 101 summarizes some of the
SEC's interpretations of the application of generally accepted accounting
principles to revenue recognition. Revenue recognition under SAB101 was
initially effective for the Company's first fiscal of fiscal year beginning
after December 15, 1999. However, SAB 101B was released June 26, 2000, delayed
adoption of SAB 101 until no later than the fourth fiscal quarter of fiscal
years beginning after December15, 1999. The Company believes that its revenue
recognition practices are in substantial compliance with SAB 101 and that
adoption of its provisions would not be material to its annual or quarterly
results of operations.
Item 7. Financial Statements
See Financial Statements annexed.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
20
<PAGE>
PART III
Item 9. Directors, Executive Officers; Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Eckardt C. Beck, Douglas M. Costle, Stephen D. Fish, Peter H. Gardner, Alexander
P. Haig, and Irwin M. Rosenthal are the members of the Board of Directors of the
Company.
The Officers of the Company are:
Eckardt C. Beck Chairman of the Board, Acting President and
Chief Executive Officer
Carl E. Rang Acting Chief Financial Officer and Controller
The name, business address, present principal occupation of employment and
five (5) year employment history of each of the directors and executive officers
of the Company are set forth below. All such individuals are citizens of the
United States unless otherwise indicated.
Position(s) with the Company; Principal
occupation or Employment; Five (5) Year-
Name, Age and Business Address Employment History
------------------------------ ------------------
21
<PAGE>
Eckardt C. Beck (57) Mr. Beck has been serving as acting
President and Chief Executive Officer of
Conversion Technologies International, the Company since October, 1998. Mr.
Inc. Beck has been a director of the Company
7 San Bartola Drive since February 1995 and Chairman of the
St. Augustine, FL 32086 Board since February 1997. Mr. Beck
also served as Acting President and
Chief Executive Officer from June to
August 1997. Mr. Beck served as the
Chairman and Chief Executive Officer of
Air & Water Technologies Corporation
from October 1987 through June 1994 and
as director from June 1990 through
November 1994. Mr. Beck has served as
Chairman and Chief Executive Officer of
other environmental technologies
companies prior to 1987. Mr. Beck also
served as the Assistant Administrator of
the United States Environmental
Protection Agency in charge of the
national water and waste programs and as
the Regional Administrator of EPA Region
2.
Douglas M. Costle (61) Mr. Costle was appointed to the
Company's Board of Directors in October
Rural Route #2, Box 480 1997. Mr. Costle has been a director of
Woodstock, VT 05091 Niagara Mohawk Power Corporation, a
publicly-held utility company, since
January 1991. Mr. Costle is currently a
director of several privately-held
technology companies and is an
Independent Trustee of John Hancock
Mutual Funds. Retired since 1992, Mr.
Costle served as Dean of Vermont Law
School from 1987 to 1992 and is a former
Administrator of the U.S. Environmental
Protection Agency. Currently, Mr. Costle
is inactive on medical leave.
Stephen D. Fish (54) Mr. Fish was appointed to the Company's
Board of Directors in October 1997. Mr.
Fish Enterprises Fish has been President of Fish
302 West Main Street, Suite 155 Enterprises, a privately-held real
Avon, CT 06001 estate development and management
company, since 1970. Mr. Fish also
serves on the Advisory Board of Fleet
Bank of Connecticut.
22
<PAGE>
Peter H. Gardner (34) Mr. Gardner has been a director of the
Company since October 1995. Since
Media Technology Ventures January 1998, Mr. Gardner has been a
1 First Street, Suite 2 principal of Media Technology Ventures,
Los Altos, CA 94022 a privately-held venture capital firm.
From July 1994 through December 1997,
Mr. Gardner was a Vice President of
Technology Funding Inc., the Managing
General Partner of two investment funds
which are stockholders of and
consultants to the Company. See
"Security Ownership of Certain
Beneficial Owners, Directors and
Management" and "Certain Relationships
and Related Transactions." Mr. Gardner
held the position of Project Leader and
Project Scientist at Roy F. Weston,
Inc., an environmental engineering firm,
from June 1990 through August 1993.
Mr. Gardner was pursuing a graduate
degree in business administration
between September 1993 and June 1995.
Alexander P. Haig (48) Mr. Haig has been a director of the
Company since May 1996. Since February
Sky Station International 1996, Mr. Haig has been President and
1824 "R" Street, N.W. Chief Operating Officer of Sky Station
Washington, D.C. 20009 International Inc., a privately-held
telecommunications company. Mr. Haig
has served since 1988 as a principal and
legal counsel to Worldwide Associates,
Inc., a privately-held business adviser
to both United States and foreign
countries for marketing and sales
activities. Prior to 1988, Mr. Haig was
an attorney in private practice.
23
<PAGE>
Irwin M. Rosenthal (71) Mr. Rosenthal has been a director of the
Company since May 1996. Mr. Rosenthal
Graham & James LLP is an attorney and since 1960 has
885 Third Avenue, 21st Floor specialized in securities law. He is
New York, N.Y. 10022 currently a partner at Graham & James
llp. Prior to July 1998, Mr. Rosenthal
was a partner at Rubin Baum Levin
Constant & Friedman. Mr. Rosenthalis
also a director of Magna-Lab, a
publicly-traded chemical and medical
technology company. He is also a
director of Life Medical Sciences, Inc.,
a publicly-traded medical technology
company, and Echocath, Inc., a
publicly-traded medical technology
company.
Carl E. Rang (65) Mr.Rang has been the Acting Chief
Financial Officer of the Company since
Conversion Technology International, December 1999. From July 1994 to
Inc. November 1999, Mr. Rang was Chief
7 San Bartola Drive Financial Officer for Richey
St. Augustine, FL 32086 International, Ltd
All directors of the Company are elected by the stockholders, or in the case of
a vacancy, by the directors then in office, to hold office until the next annual
meeting of stockholders of the Company and until their successors are elected
and qualified or until their earlier resignation or removal.
Board Committees
The Board of Directors has established four committees - the Audit Committee,
the Compensation Committee, the Fairness Committee and the Nominating Committee.
The Audit Committee oversees the activities of the Company's independent
auditors and reviews the Company's internal accounting procedures and controls.
The Compensation Committee makes recommendations to the Board with respect to
general compensation and benefit levels for employees, determines the
compensation and benefits for the Company's executive officers and administers
the Company's stock option and incentive plans. The Nominating Committee makes
recommendations to the Board with respect to candidates to
fill vacancies on the Board, recommends an appropriate slate of candidates for
election each year, and reviews senior officer candidates. Stockholders wishing
to nominate director candidates for consideration may do so by writing to the
Nominating Committee at the Company at 7 San Bartola Drive, St. Augustine,
Florida, 32086. The Fairness Committee makes recommendations to the Board with
respect to transactions involving relating parties, oversees trading and SEC
compliance procedures and addresses corporate governance issues. The current
members of these Committees are:
Audit Committee: Irwin M. Rosenthal and Douglas M. Costle
24
<PAGE>
Compensation Committee: Peter H. Gardner and Douglas M. Costle
Fairness Committee: Alexander P. Haig and Stephen D. Fish
Nominating Committee: Peter H. Gardner and Douglas M. Costle
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation contains provisions to indemnify its
directors and officers to the fullest extent permitted by Delaware law, and also
includes provisions to eliminate the personal liability of the directors and
officers of the Company and its stockholders to the fullest extent permitted by
Delaware law. Under current law, such exculpation would extend to an officer's
or director's breaches of fiduciary duty, except for (1) breaches of such
person's duty of loyalty, (2) those instances where such person is found not to
have acted in good faith and (3) those instances where such person received an
improper personal benefit as a result of such breach.
The Company's bylaws provide that the Company may indemnify any person,
including officers and directors, with regard to any action or proceeding to the
fullest extent permitted under Delaware law.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company knows of no late filings pursuant to Section 16(a) of the Exchange
Act during fiscal 1999..
Item 10. Executive Compensation.
Summary Compensation Table
The following summary compensation table sets forth the aggregate compensation
paid or accrued by the Company for the fiscal years ended June 30, 1999, 1998
and 1997 to Eckardt C. Beck, the Company's Acting President and Chief Executive
Officer and who served as the Company's chief executive officer during a portion
of fiscal 1999 and 1998, and William L. Amt, who also served as the Company's
chief executive officer during a portion of fiscal 1999 and 1998 (collectively,
the "Named Executive Officers"). No other executive officer received annual
compensation in excess of $100,000 for fiscal 1999.
25
<PAGE>
<TABLE>
<CAPTION>
Long Term
Compensation
Awards Payouts
Securities
Other Underlying All
Name and Fiscal Salary Annual Options/ LTIP Other
Principal Year ($) Bonus Compensatio SARs Payouts Compensa
Position ($) n tion
----------------- -------------------- ------------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Eckardt C. 2000 -- -- 120,000(1) -- --
Beck 1999 -- -- 120,000(1) --
Acting 1998 -- 85,677(1) 300,000(2) --
President & 1997 52,000(1) 10,121(3)
Chief Executive
Officer from
October 1998 to
date and from
June 1997 to
August 1997
</TABLE>
-----------------
(1) Mr. Beck has served as Chairman since February 1997, and as Acting
President and Chief Executive Officer from June 1997 to August 1997 and
from October 1998 through the present. Compensation represents consulting
fees pursuant to his Consulting Agreement with the Company. See "Certain
Relationships and Related Transactions." Mr. Beck currently has accrued
for his benefit $10,000 per month under the Consulting Agreement.
(2) Represents options granted in July and August 1997 pursuant to the
Company's 1996 Long-Term Plan which vest 20% at date of grant and 20% for
each of the next four years, expire on the seventh anniversary of the
dates of grant and have an exercise price of $0.78 per share.
(3) Represents options granted in July and October 1996 pursuant to the
Company's Non-Employee Plan. All options vest one year from date of grant
and have an exercise price of $0.78 per share.
Option Plans
The Company maintains an Employee Stock Option Plan (the "Employee Plan"), a
Non-Employee Director Stock Option Plan (the "Non-Employee Plan") and a Long
Term Employee Incentive Plan (the "Long-Term Plan"). Under the Employee Plan and
the Non-Employee Plan stock options may be granted at the discretion of the
Board of Directors. Under the Long-Term Plan, stock options, stock awards or
cash awards may be granted at the discretion of the Board of Directors.
26
<PAGE>
The Company has reserved 440,000, 250,000 and 710,000 shares, respectively, of
its Common Stock for issuance upon the exercise of options and awards granted
under the Employee, Non-Employee and Long-Term Plans, respectively. At June 30,
2000, the Company has reserved 1,414,392 shares of Common Stock for the exercise
of all options.
Under the Non-Employee Plan, options to purchase an aggregate of 167,918 shares
are outstanding as of June 30, 2000. These options vest in full one year after
the date of grant and expire ten years from the date of grant.
Under the Employee Plan, options to purchase an aggregate of 257,639 shares are
outstanding as of June 30, 2000. These options vest one-third on each of the
first three anniversaries of the date of grant and expire on the seventh
anniversary of the date of grant.
Under the Long-Term Plan, options to purchase an aggregate of 305,000 shares are
outstanding and an additional 90,000 shares have been granted, exercised, and
are outstanding. The options granted under the Long-Term Plan vest 20% at date
of grant and 20% for each of the next four years and expire on the seventh
anniversary of the date of grant.
The Company grants stock options for the Employee Plan and Non-Employee Plan at
exercise prices equal to or greater than the fair market value of the Common
Stock on the date of grant.
At the closing of the Private Placement, the Company granted options outside of
the Employee Plan, the Non-Employee Plan and the Long-Term Plan to members of
the Board of Directors and Officers of the Company. See "Certain Relationships
and Related Transactions".
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth information (on an aggregate basis) concerning
exercises of stock options during fiscal 2000 by each of the Named Executive
Officers and the final year-end value of unexercised options.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
unexercised "In-the-Money"
Options/SARs at Options/SARs at
Fiscal Year-End Fiscal Year-End (1)
--------------------------------------------------
Shares
Acquired Value Unexercis- Unexercis-
Name on Exercise Realized Exercisable Able Exercisable Able
---- ----------- -------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Eckardt C. Beck -- -- 18,337,888 120,000 $ - $ -
</TABLE>
(1) Calculated based on the difference between the exercise price and the
closing price of a share of the Common Stock on the over-the- counter
market on June 30, 2000.
401(k) Plan
The Company established a 401(k) defined contribution plan covering
substantially all employees meeting certain minimum age and service requirements
effective August 1, 1998. The Company's contribution to the plan is determined
by the Board of Directors and is limited to a maximum of 100% of the employee's
contribution and 6% of the Employee's compensation. Contributions made to the
plan for the fiscal year ended June 30, 2000 were $4,845.
27
<PAGE>
Compensation of Directors
In fiscal 2000, directors who were full-time employees of the Company received
no cash compensation for services rendered as members of the Board or committees
thereof. Directors who were not full-time employees of the Company received
reimbursement of out-of-pocket expenses for attendance at Board meetings. Non-
Employee directors received no other compensation for their services as
directors.
Employment and Consulting Arrangements
The Company entered into a Consulting Agreement with Eckardt C. Beck in March
1995, which was amended in February 1997, August 1997 and July 1998 (as amended,
the "Consulting Agreement") (formal documentation of the July 1998 amendment has
not been fully executed). Pursuant to the Consulting Agreement, Mr. Beck has
agreed to, among other things, assist the Company in strategic planning,
business development, investor relations, fund raising and such other activities
as shall be reasonably requested by the Board and within Mr. Beck's areas of
expertise. Mr. Beck will accrue and/or receive a monthly salary of $10,000
pursuant to the Consulting Agreement until its expiration in August 2000. Mr.
Beck has also received stock options in connection with the Private Placement.
See "Certain Relationships and Related Transactions".
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of June 30, 2000, certain information as to
the stock ownership and voting power of all persons (or groups of persons) known
by the Company to be the beneficial owner of more than five percent (5%) of the
Common Stock, each director of the Company, each of the executive officers
included in the Summary Compensation Table and all directors and executive
officers as a group.
28
<PAGE>
Number of Shares Percentage of Voting
Name of Beneficial Owner(1) Beneficially Owned (2) Power (3)
-------------------------- --------------------- ---------
Eckardt C. Beck (4) 10,278,021 9.0
Peter H. Gardner (5) 164,754 *
Alexander P. Haig (6) 133,537 *
Douglas M. Costle (7) 133,416 *
Stephen D. Fish (8) 3,492,425 3.1
Irwin M. Rosenthal (9) 133,537 *
John G. Murchie (10) 524,060 *
All officers and directors as 14,859,750 13.0
a group (7) persons) (11)
Lancaster Investment Partners (12) 10,000,000 8.8
500 N. Gulph Road
Suite 110
King of Prussia, PA 19406
The Aries Master Fund, 40,651,591 35.5
a Cayman Islands Trust (13)
787 7th Avenue- 48th Floor
New York, New York 10019
Aries Domestic Fund, L.P. (14) 17,885,617 15.6
787 7th Avenue, 48th Floor
New York, New York 10019
Porter Partners, L.P. (15) 17,786,680 15.6
100 Shoreline, Suite 211B
Mill Valley, California 94941
P.A.W. Offshore Fund, Ltd. (16) 6,120,000 5.4
90 Mees Pierson
904 East Bay Street
P.O. Box 55-6233
Nassau, Bahamas
--------------------
* Less than one percent.
(1) Unless otherwise indicated and subject to applicable community property
laws, each stockholder has sole voting and investment power with respect
to all shares of Common Stock beneficially owned by such stockholder.
Unless otherwise indicated, the address of each stockholder is c/o
Conversion Technologies International, Inc., 7 San Bartola Drive, St.
Augustine, Florida 32086.
(2) The number of shares beneficially owned by each person named in the table
includes shares held by each individual of (i) the Company's Common Stock;
(ii) the Company's Series A Preferred Stock, as converted into Common
Stock; (iii) Series A Preferred Stock subject to warrants that are
presently exercisable, as converted into Common Stock; (iv) the Company's
Series B Convertible Preferred Stock, as converted into Common Stock; and
(v) Common Stock subject to options or warrants that are presently
exercisable or exercisable within 60 days of June 30, 2000.
29
<PAGE>
(3) Applicable percentage of voting power is based on the 114,256,325 shares
of Common Stock outstanding as of June 30, 2000. That number is comprised
of 7,615,045 outstanding shares of Common Stock, 10,248,600 shares of
Common Stock issuable upon conversion of 512,430 outstanding shares of
Series A Preferred Stock and 96,392,680 shares of Common Stock issuable
upon conversion of 4,819,634 outstanding shares of Series B Convertible
Preferred Stock. Shares of Series A Preferred Stock and Common Stock
subject to options and warrants that are presently exercisable or
exercisable within 60 days are deemed to be beneficially owned by the
person holding such options and warrants for the purpose of computing the
percentage of ownership of such person but are not treated as outstanding
for the purpose of computing the percentage of any other person.
(4) Includes 13,833 shares of Common Stock held, 224,000 shares of Common
Stock issuable upon conversion of 11,200 outstanding shares of Series A
Preferred Stock and 3,800,000 shares of Common Stock issuable upon
conversion of 190,000 outstanding shares of Series B Convertible Preferred
Stock. Also includes currently exercisable options to purchase 6,240,188
shares of Common Stock. Excludes options to purchase 12,217,700 shares of
Common Stock which are not exercisable within 60 days. The address of such
stockholder is 6345 NW 26th Terrace, Boca Raton, Florida 33496.
(5) Includes currently exercisable options to purchase164,754 shares of Common
Stock. Excludes options to purchase 231,832 shares of Common Stock which
are not exercisable within 60 days. Mr. Gardner was formerly an Investment
Officer at Technology Funding, Inc. ("TFI"), the Managing General Partner
of Technology Funding Partners III, L.P. ("TFP III") and Technology
Funding Partners V, an Aggressive Growth Fund, L.P. ("TFVP V"). Mr.
Gardner disclaims beneficial ownership of all securities of the Company
owned by TFP III and TFVP V.
(6) Includes currently exercisable options to purchase 133,537 shares of
Common Stock. Excludes options to purchase 231,832 shares of Common Stock
which are not exercisable within 60 days.
(7) Includes currently exercisable options to purchase 133,416 shares of
Common Stock. Excludes options to purchase 231,832 shares of Common Stock
which are not exercisable within 60 days.
(8) Includes 448,000 shares issuable upon conversion of 22,400 shares of
Series A Preferred Stock and currently exercisable options to purchase
3,044,425 shares of Common Stock. Excludes options to purchase 6,053,850
shares of Common Stock which are not exercisable within 60 days.
(9) Includes currently exercisable options to purchase 133,537 shares of
Common Stock. Excludes options to purchase 236,832 shares of Common Stock
which are not exercisable within 60 days.
(10) Includes currently exercisable options to purchase 524,060 shares of
Common Stock. Excludes options to purchase 940,661 shares of Common Stock
which are not exercisable within 60 days.
(11) Calculation excludes options to purchase 20,145,539 shares of Common Stock
which are not exercisable within 60 days.
(12) Includes 10,000,000 shares of Common Stock issuable upon conversion of
500,000 shares of Series B Convertible Preferred Stock.
(13) Paramount Capital Asset Management, Inc. ("PCAM") is the Investment
Manager to The Aries Master Fund, a Cayman Islands Trust (the "Aries
Trust"). Lindsay A. Rosenwald, M.D. is President and sole shareholder of
PCAM. PCAM and Dr. Rosenwald may be considered to beneficially own the
securities owned by the Aries Trust by virtue of their authority to vote
and/or dispose of the securities. Securities held by the Aries Trust
consist of 1,478,400 shares of Common Stock issuable upon conversion of
73,920 shares of Series A Preferred Stock, 38,475,700 shares of Common
Stock issuable upon conversion of 1,923,785 outstanding shares of Series B
Convertible Preferred Stock, 148,728 shares of Common Stock issuable upon
exercise of Class A Warrants (includes the Class B Warrants underlying
such Class A Warrants); 400,903 shares of Common Stock underlying
additional warrants, and 147,860 shares of Common Stock underlying Series
A Preferred Stock subject to warrants. In addition, Dr. Rosenwald
beneficially owns 205,134 shares of the Company's Common Stock and
warrants to purchase 44,727 shares of the Company's Common Stock.
(14) PCAM is the General Partner of the Aries Domestic Fund L.P. Dr. Rosenwald
is the President and sole shareholder of PCAM. PCAM and Dr. Rosenwald may
be considered to beneficially own the securities owned by the Aries
Domestic Fund, L.P. by virtue of their authority to vote and/or dispose of
the securities. PCAM and Dr. Rosenwald beneficially own all securities of
the Company held by the Aries Domestic Fund, L.P. Securities held by Aries
Domestic Fund, L.P. consist of
(footnotes continued on next page)
30
<PAGE>
761,600 shares of Common Stock issuable upon conversion of 38,080 shares
of Series A Preferred Stock, 16,616,920 shares of Common Stock issuable
upon conversion of 830,846 outstanding shares of Series B Convertible
Preferred Stock, 247,882 shares of Common Stock issuable upon exercise of
Class A Warrants (including the Class B Warrants underlying such Class A
Warrants); warrants to purchase an additional 183,035 shares of Common
Stock, and warrants to purchase Series A Preferred Stock which is
convertible into 76,180 shares of Common Stock. In addition, Dr. Rosenwald
beneficially owns 205,134 shares of the Company's Common Stock and
warrants to purchase 44,727 shares of the Company's Common Stock.
(15) Includes (A) securities held by Porter Partners, L.P. consisting of
896,000 shares of Common Stock issuable upon conversion of 44,800 shares
of Series A Preferred Stock and 13,333,340 shares of Common Stock issuable
upon conversion of 666,667 outstanding shares of Series B Convertible
Preferred Stock, and (B) securities held by EDJ Limited consisting of
224,000 shares of Common Stock issuable upon conversion of 11,200 shares
of Series A Preferred Stock and 3,333,340 shares of Common Stock issuable
upon conversion of 166,667 outstanding shares of Series B Convertible
Preferred Stock. Jeffrey H. Porter is the Managing General Partner of
Porter Partners, L.P. and EDJ Limited. Mr. Porter may be considered a
beneficial owner of the securities owned by Porter Partners, L.P. and EDJ
Limited by virtue of his authority to vote and/or dispose of the
securities held by Porter Partners, L.P. and EDJ Limited. Mr. Porter
disclaims beneficial ownership of all securities of the Company held by
Porter Partners, L.P. and EDJ Limited.
(16) Includes 1,120,000 shares of Common Stock underlying 56,000 shares of
Series A Preferred Stock and 5,000,000 shares of Common Stock issuable
upon conversion of 250,000 outstanding shares of Series B Convertible
Preferred Stock. Peter Wright is the Investment Manager for the P.A.W.
Offshore Fund, Ltd. Mr. Wright may be considered the beneficial owner of
the securities owned by the P.A.W. Offshore Fund, Ltd. by virtue of his
authority to vote and/or dispose of the Company's securities held by
P.A.W. Offshore Fund, Ltd. Mr. Wright disclaims beneficial ownership of
all securities of the Company held by P.A.W. Offshore Fund, Ltd
Item 12. Certain Relationships and Related Transactions.
During the period from September 1998 to February 1999, Eckardt C. Beck, the
Chairman of the Board and Acting President and Chief Executive Officer of the
Company, provided loans to the Company or did not receive accrued compensation
aggregating $190,000, which loans were represented by that certain Promissory
Note dated February 23, 1999. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." Mr. Beck converted $114,000 of
principal and accrued interest into Series B Preferred Stock on September 24,
1999.
For a description of the terms of the Consulting Agreement between the Company
and Mr. Beck, see "Executive Compensation - Employment and Consulting
Arrangements".
On May 8, 1998, the Company entered into the Credit Agreement with the Funds,
two significant stockholders of the Company. The Credit Agreement provided for a
line of credit (the "Line of Credit") of up to $1,200,000 pursuant to which the
Company could draw down up to $300,000 per month, although draw downs beyond the
initial $300,000 were at the discretion of the Funds. 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%. The Line of Credit matured on the earlier of May 8, 1999 or upon the
completion of any financing of at least $1,500,000. The Credit Agreement
contained 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 were 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 could 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 up to $1,290,000. As of January 13, 1999, the Company had
drawn down all amounts under the Line of Credit.
In connection with the Line of Credit, as amended, 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 Preferred Stock on December 8, 1998). Of such warrants, warrants to
purchase 29,850 shares of Common Stock vested upon each $100,000 (or ratable
portion thereof) that was drawn under the Credit Agreement.
31
<PAGE>
On February 22, 1999, the Company having drawn down an aggregate of $1,290,000
on the Line of Credit, in default on its interest payments due thereunder and in
need of financing, entered into a series of agreements with the Funds which
amended the Line of Credit Agreement and the notes evidencing the amounts drawn
down on the Line of Credit. Under such amendments, if the Company failed to
raise an aggregate of $1,500,000 by April 1, 1999, the Funds could accelerate
the amounts due under the Line of Credit Agreement and exercise its repayment
right by requiring the Company to repay such amount by delivering either (1) the
amount of shares of Common Stock equal to the principal and interest due under
the Line of Credit or (2) 90% of the shares of the common stock of APT.
Contingent upon the Company raising an aggregate of $1,500,000 by April 1, 1999,
the Funds delayed their right to payment of principal and interest under the
Line of Credit until September 1, 1999 or the completion of finances by the
Company raising an aggregate of $2,790,000. In addition, on February 22, 1999,
in exchange for a working capital loan of up to the amount of $150,000, the
Company delivered an unsecured convertible promissory note (the "Convertible
Note") in the amount of $150,000 in favor of the Funds due on September 1, 1999
and bearing interest at the rate of 12% per annum. Under the Convertible Note,
upon either an event of default or the inability of the Company to raise
$1,500,000 by April 1, 1999, the Funds could (1) convert the debt into the
amount of shares of Common Stock equal to the principal and interest due under
the Convertible Note or (2) exchange the debt for 10% of the shares of common
stock of APT. The Funds also agreed that the right to payment for the
Convertible Note and the amounts drawn down on the Line of Credit would be
subordinated to the right of payment under loans aggregating $190,000 made to
the Company by Mr. Beck during 1998 and 1999.Also on July 7, 1999, the Funds
provided additional financing to the Company in the amount of $20,000.
On September 24 and December 8, 1999, the Company sold in a Private Placement
4,819,634 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 $1,125,000 in cash and the $1,766,778 in cancellation of
debt and accrued interest. 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.
As part of the Private Placement, Mr. Beck purchased 190,000 shares of the
Series B Preferred for cancellation of debt and accrued interest of $114,000,
Lancaster Investment Partners purchased 500,000 shares of Series B Preferred for
$300,000 cash, The Aries Master Fund purchased 1,923,785 shares of Series B
Preferred for cancellation of debt and accrued interest of $1,154,271, Aries
Domestic Fund, L.P. purchased 830,846 shares of Series B Preferred for
cancellation of debt and accrued interest of $498,508, Porter Partners, L.P. and
EDJ Limited purchased 833,334 shares of Series B Preferred for $500,000 cash,
and P.A.W. Offshore Fund, Ltd. purchased 250,000 shares of Series B Preferred
for $150,000 cash in the Private Placement.
From the cash proceeds of the Private Placement, the Company paid $600,000 to
ESDC in full satisfaction of the equipment term note assumed from Key Bank with
an adjusted principal balance of $1,183,110 and also another Dunkirk
subordinated note due ESDC with a principal balance of $37,870. In consideration
for this
32
<PAGE>
payment made by the Company, ESDC agreed to assign the loans and related
security interests (the "Security Interests") to the Company. The Company has
agreed to give a security interest in the Security Interests to Messrs. Beck and
Fish and Graham & James LLP (the "G & J Security Interest") to secure
indebtedness owing to them.
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 initial 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 vest 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.
In July and August of 1997, the Company borrowed from the Funds an aggregate of
$500,000 (the "1997 Bridge Loan") which was used by the Company for general
working capital purposes. On September 8, 1997, the Company repaid the 1997
Bridge Loan together with accrued interest at the rate of 12% per annum, and in
connection therewith, the Company issued to the Funds warrants to purchase
198,863 shares of Common Stock at an exercise price equal to $0.66 (after giving
effect to antidilution adjustments resulting from the sale of Series A Preferred
Stock, the issuance of the additional shares of Series A Preferred Stock in
April 1998, and the reset of the conversion price of the Series A Preferred
Stock on December 8, 1998).
On December 8, 1997, the Company consummated the final closing of a private
placement of the Company's Series A Preferred Stock. The Company sold an
aggregate of 553,000 shares of Series A Preferred Stock in the private
placement. Each share of Series A Preferred Stock is currently convertible into
twenty shares of Common Stock (after giving effect to an anti-dilution
adjustment resulting from the reset of the conversion price of the Series A
Preferred Stock on December 8, 1998). PCAM acted as placement agent for the
private placement and received an aggregate placement fee of $497,700, and an
aggregate expense allowance of $232,700. In addition, the Company granted to
PCAM, and/or its designees, warrants to purchase 61,945 shares of Series A
Preferred Stock at an exercise price equal to $9.82 per share (after giving
effect to an anti- dilution adjustment resulting from the reset of the
conversion price of the Series A Preferred Stock on December 8, 1998). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The proceeds of the offering were used to (1) redeem $8 million principal amount
IDA Bonds for approximately $1.6 million; (2) repay the $500,000 principal
amount 1997 Bridge Loan, including interest; (3) pay transaction costs incurred
in connection with the offering; and (4) provide working capital for the
Company's operations.
On July 22, 1997, Messrs. Beck and Pappas were granted non-qualified stock
options to purchase 300,000 and 20,000 shares, respectively, of Common Stock at
an exercise price of $1.375. Mr. Beck's options vest twenty percent (20%) at
issuance and twenty percent (20%) on the first, second, third and fourth
anniversary of the date of issuance. Mr. Pappas' options were vested upon
issuance.
33
<PAGE>
On August 6, 1997, Messrs. Gardner and Katzmann were each granted stock options
to purchase 20,000 shares of Common Stock at an exercise price of $1.875 under
the Stock Option Plan for Non-Employee Directors. Twenty percent (20%) of such
options vested upon issuance and twenty percent (20%) vest on the first, second,
third and fourth anniversary of the date of issuance. Mr. Katzmann ceased to be
a director of the Company in December 1997 and all options granted to Mr.
Katzmann under the Stock Option Plan for Non-Employee Directors have expired.
On August 29, 1997, Mr. Fish purchased 20,000 shares of Series A Preferred Stock
for $200,000, and on September 5, 1997, Mr. Beck purchased 10,000 shares of
Series A Preferred Stock for $100,000 in the Series A Preferred Stock Private
Placement.
On January 27, 1998, Messrs. Costle, Fish and Gardner were each granted stock
options to purchase 25,000 shares of Common Stock at an exercise price of $0.78
(the closing price of the Common Stock on the Nasdaq SmallCap Market on such
date) under the Stock Option Plan for Non-Employee Directors. Forty percent
(40%) of such options vested upon issuance and twenty percent (20%) vest on the
first, second and third anniversary of the date of issuance. Also on January 27,
1998, Messrs. Rosenthal and Haig were each granted stock options to purchase
20,000 shares of Common Stock at an exercise price of $0.78 under the Stock
Option Plan for Non- Employee Directors. Twenty-five percent (25%) of such
options vested upon issuance and twenty-five percent (25%) vest on the first,
second and third anniversary of the date of issuance. In addition, Scott A.
Katzmann, a former director of the Company, was granted an option to purchase
15,000 shares of Common Stock with an exercise price of $0.78 outside of the
Company's stock option plans.
Also on January 27, 1998, Messrs. Murchie and Jellum were each granted stock
options to purchase 100,000 shares of Common Stock at an exercise price of
$0.78. Thirty-three percent (33%) of such options vest on the first, second and
third anniversary of the date of issuance. Mr. Jellum's options expired in
connection with the termination of his employment with the Company in October
1998.
Also on January 27, 1998, the Board repriced options to purchase 300,000 shares
of Common Stock held by each of Mr. Beck and Mr. Amt from $1.375 to $0.78 per
share (the last reported sale price of the Common Stock as of such date) under
its 1996 Long-Term Employee Incentive Plan, and options to purchase an aggregate
of 21,580 shares of Common Stock outstanding under the Stock Option Plan for
Non-Employee Directors held by Mr. Beck, Mr. Haig and Mr. Rosenthal from
exercise prices ranging from $3.125 to $5.00 to an exercise price of $0.78 per
share.
Irwin M. Rosenthal, a director of the Company, is a partner of Graham & James
llp, special counsel to the Company. As of June 30, 2000, the Company is
indebted to Graham & James llp for legal fees in excess of $162,000 for which
the Company has agreed to give a security interest. See also "Executive
Compensation - Compensation of Directors" and "Security Ownership of Certain
Beneficial Owners and Management."
34
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
----- -----------------------
2.1* Agreement and Plan of Reorganization dated August 16, 1994,
among the Company, CTI Acquisition Corporation, Dunkirk and
certain stockholders of Dunkirk listed on the signature
pages thereto
3.1* Amended and Restated Certificate of Incorporation of the
Company
3.2** Certificate of Designation of Series A Convertible Preferred
Stock
3.2.1**** Certificate of Designation of Series B Convertible Preferred
Stock
3.3 * By-laws of the Company
3.4**** Certificate of Amendment to the Restated Certificate of
Incorporation of the Company
3.5**** Certificate of Merger of CTI Subsidiary Corp. With and Into
the Company and Agreement and Plan of Merger between the
Company and CTI Subsidiary Corp..
4.3 * Term Note No. 2 dated as of January 27, 1995, between Key
Bank of New York and Dunkirk
4.4* Security Agreement dated as of January 27, 1995, between Key
Bank of New York and Dunkirk
10.1* Conversion Technologies International, Inc. 1994 Employee
Stock Option Plan, As Amended
35
<PAGE>
10.2* Conversion Technologies International, Inc. 1994 Stock
Option Plan for Non-Employee Directors, As Amended
10.3** Conversion Technologies International, Inc. 1996 Long-Term
Employee Incentive Plan, As Amended
10.4** Consulting Agreement dated March 1, 1995 between the Company
and Eckardt C. Beck,As Amended
10.5** Employment Agreement dated as of August 1, 1997 between the
Company and William L. Amt.
10.18* Project Development Assistance Agreement dated July 13,
1995, among the Company, Technology Funding Partners III,
L.P. and Technology Funding Venture Partners V, An
Aggressive Growth Fund, L.P.
10.19** Technology Purchase Agreement dated as of June 30, 1997
between Advanced Particle Technologies, Inc. and Vangkoe
Industries, Inc.
10.20** Distributor Agreement dated as of June 30, 1997 between
Advanced Particle Technologies, Inc. and Vangkoe Industries,
Inc.
10.21* Consulting Agreement dated as of May 5, 1995, among the
Company, Technology Funding Partners III, L.P. and
Technology Funding Venture Partners V, An Aggressive Growth
Fund, L.P.
10.22* Registration Rights Agreement dated as of May 5, 1995, among
the Company, Technology Funding Partners III, L.P. and
Technology Funding Venture Partners V, An Aggressive Growth
Fund, L.P.
10.25** Warrant for the Purchase of Shares of Series A Convertible
Preferred Stock issued to Paramount Capital, Inc. by the
Company
10.26* Series A Preferred Stock Purchase Agreement dated as of May
5, 1995, among the Company, Technology Funding Partners 111,
L.P. and Technology Funding Venture Partners V, An
Aggressive Growth Fund, L.P.
10.27** Form of Placement Agency Agreement between the Company and
Placement Agent.
10.28** Form of Subscription Agreement between the Company and
various subscribers of Series A Preferred Stock.
10.29** Form of Placement Agent Warrant.
36
<PAGE>
10.30** Form of Financial Advisory Services Agreement between the
Company and Placement Agent.
10.31** Form of Warrant issued in connection with Senior Secured
Line of Credit Agreement.
10.32** Letter from Empire State Development Corporation ("ESDC") to
Dunkirk dated July 22, 1997 confirming its guarantee of the
Key Bank Note
10.33** Letter from Key Bank to ESDC dated July 30, 1997 confirming
that it will not exercise any remedies under the Key Bank
Note and will execute documents to assign the Key Bank Note
to ESDC
10.34*** Senior Secured Line of Credit Agreement dated as of May 8,
1998 by and among Aries Domestic Fund, L.P., The Aries Fund,
Dunkirk, APT and the Company
10.34.1 Form of Senior Secured Notes issued to The Aries Master Fund
aggregating $910,000 in principal amount.
10.34.2 Form of Senior Secured Notes issued to the Aries Domestic
Fund, L.P. aggregating $380,000 in principal amount
10.35**** Security Agreement dated as of May 8, 1998 among the
Company, Dunkirk, APT and Paramount Capital Asset
Management, Inc.
10.36**** Subsidiary Guarantee dated as of May 8, 1998 by Dunkirk and
APT in favor of The Aries Fund and Aries Domestic Fund, L.P.
10.37**** Promissory Note dated as of February 23, 1999 issued by the
Company in favor of Eckardt C. Beck
10.38**** Termination Agreement dated as of January 1, 1998 by and
between the Company and Jack D. Hays, Jr.
10.39**** Termination Agreement dated as of January 1, 1998 by and
between the Company and Richard H. Hughes
10.40**** Consulting Agreement dated December 22, 1998 by and between
the Company and 4C Technologies, Inc.
10.41**** Amendment dated as of May 8, 1998 to the Technology Purchase
Agreement dated as of June 30, 1997 by and between APT and
VANGKOE
10.42**** Termination Agreement dated as of May 8, 1998 by and between
APT and VANGKOE
37
<PAGE>
10.43**** Materials Bill of Sale Agreement dated as of May 8, 1998 by
and between the Company and VANGKOE
10.44**** Ceramaglass Trademark & Intellectual Property Agreement
dated as of May 8, 1998 by and between the Company and
VANGKOE
10.45**** Ceramaquartz Trademark & Intellectual Property Agreement
dated As of May 8, 1998 by and between the Company and
VANGKOE
10.46**** Letter Agreement of the Company dated March 11, 1998 with
Dlubak
10.47**** Lease dated April 1, 1998 by and between 312 Industrial Park
and the Company
10.48**** Lease dated April 1, 1998 by and between Willard Park Inc.
and the Company
10.49**** Manufacturer Representative Agreement dated as of January 1,
1998 by and between the Company and Engineered Products
Sales Associates
10.50**** Manufacturer Representative Termination Agreement dated as
of January 1, 1998 by and between the Company and Engineered
Products Sales Associates
10.51***** Form of Subscription Agreement between the Company and
various Subscribers of the Series B Convertible Preferred
Stock.
10.52.1***** Form of Convertible Promissory Note issued by the Company in
favor of The Aries Master Fund aggregating $109,500 in
principal amount.
10.52.2***** Form of Convertible Promissory Note issued by the Company in
favor of the Aries Domestic Fund, L.P. aggregating $60,500
in principal amount.
10.53***** Lease dated September 17, 1999 by and between Dunkirk
International Glass & Ceramics Corp. And Red Wing Company,
Inc.
16. Letter, dated October 4, 2000 concerning the change in the
Registrant's Certifying Accountant.
21** Subsidiaries of the Company
27 Financial Data Schedule for the year ended June 30, 2000
* Incorporated by reference to the exhibits to the Company's
Registration Statement on form SB-2, Registration No.
333-00756.
38
<PAGE>
** Incorporated by reference to the exhibits to the Company's
Annual Report on form 10-KSB for fiscal 1997.
*** Incorporated by reference to the exhibits to the Company's
Annual Report on form 10-QSB for the quarterly period ended
March 31, 1998.
**** Incorporated by reference to the exhibit to the Company's
Annual Report on form 10-KSB for fiscal 1998.
***** Incorporated by reference to exhibits to the Company's
Annual Report on form 10-KSB for Fiscal Year 1999.
All other Exhibits herewith:
(b) Reports on Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report : October 4 , 2000
------------------
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-28198 13-3754366
-------------- -------------- --------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
7 San Bartola Drive
St. Augustine Florida 32086
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 808-0503
------------------
39
<PAGE>
Item 4. Changes in Registrant's Certifying Accountant.
Effective September 28, 2000, Conversion Technologies International, Inc.(the
"Registrant") has engaged the accounting firm of Gallogly, Fernandez and Riley,
LLP as independent certified public accountants for the Registrant. Previously,
the Registrant had engaged the accounting firm of BDO Seidman, LLP. Effective
July l, 2000, the partners in the Orlando, Florida accounting practice of BDO
Seidman, LLP purchased the Orlando accounting practice of BDO Seidman, LLP and
are continuing the practice under the name of Gallogly, Fernandez and Riley, LLP
as an independent member of the BDO Alliance. A resolution was passed by the
board on September 13, 2000 to accept the audit committee's recommendation and
dismiss BDO Seidman, LLP and a motion was passed by the board to allow the audit
committee to engage the firm of Gallogly, Fernandez and Riley LLP as the
Registrant's new accounting firm. The Registrant advised the former accountant
of its decision to dismiss them on September 28, 2000 and the former accountant
resigned on the same date.
During the past two years and any subsequent interim period prior to the
dismissal of BDO Seidman, LLP, there were no reports on the financial statements
of the Registrant containing any adverse opinion, or modified as to uncertainty,
audit scope or accounting principles, except for the report on the financial
statements for the years ended June 30, 1998 and June 30, 1999, which were
modified as to a going concern uncertainty. There were no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedure, which disagreement, if not
resolved to the satisfaction of the former auditor, would have caused them to
make reference to the subject matter of the disagreement in connection with its
report. The company has authorized the former accountant to respond fully to the
inquires.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits.
16. Letter, dated October 4, 2000, concerning the change in the
Registrant's Certifying Accountant.
40
<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 hereunto duly authorized.
Conversion Technologies International, Inc
Registrant
By: /s/ Eckardt C. Beck
----------------------------------
Eckardt C. Beck
Acting President & Chief Executive Officer
DATED: October 4, 2000
41
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15 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.
Dated: November 17, 2000 Conversion Technologies International, Inc.
By: /s/ Eckardt C. Beck
--------------------
Eckardt C. Beck
Acting President and Chief
Executive Officer
Pursuant to the requirements of the
Securities Exchange Act of 1934, this
report has been signed below by the
following persons on behalf of the
Registrant and in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/Eckardt C. Beck Acting President, Chief November 17, 2000
-------------------- Executive Officer and Director
Eckardt C. Beck (principal executive officer)
/s/ Carl E. Rang Acting Chief Financial Officer November 17, 2000
-------------------- and Controller (principal
Carl E. Rang accounting officer)
/s/ Eckardt C. Beck Chairman of the Board November 17, 2000
--------------------
Eckardt C. Beck
/s/ Stephen D. Fish Director November 17, 2000
--------------------
Stephen D. Fish
/s/ Peter H. Gardner Director November 17, 2000
--------------------
Peter H. Gardner
/s/ Alexander P. Haig Director November 17, 2000
--------------------
Alexander P. Haig
Director
-------------------------
Douglas M. Costle
/s/Irwin M. Rosenthal, Esq. Director November 17, 2000
-------------------------
Irwin M. Rosenthal, Esq.
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
16. Letter, dated October 4, 2000 concerning the change in the
Registrant's Certifying Accountant.
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors ..............................................F-2
Report of Independent Auditors ..............................................F-3
Consolidated Balance Sheets of Conversion Technologies International,
Inc. and Subsidiaries as of June 30, 2000 and June 30, 1999 ............F-4
Consolidated Statements of Operations of Conversion Technologies
International, Inc, and Subsidiaries for the years ended
June 30, 2000 and June 30, 1999 ........................................F-5
Consolidated Statements of Stockholders' Deficiency of Conversion Technologies
International, Inc. and Subsidiaries for the years ended June 30, 2000
and June 30, 1999.......................................................F-6
Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the years ended June 30,
2000 and June 30, 1999. ................................................F-7
Notes to Consolidated Financial Statements...................................F-9
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Conversion Technologies International, Inc.
We have audited the accompanying consolidated balance sheet of Conversion
Technologies International, Inc. and Subsidiaries as of June 30, 2000 and the
related consolidated statement of operations, stockholders' deficiency and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Conversion
Technologies International, Inc. and Subsidiaries as of June 30, 2000 and the
consolidated results of their operations and cash flows for the year then ended
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has generated only minimal revenue, has incurred significant losses, has
a working capital deficit, stockholders' deficiency, and is in default in
payment of substantially all of its debt. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
Gallogly, Fernandez & Riley, LLP
October 27, 2000
Orlando, Florida
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Conversion Technologies International, Inc.
We have audited the accompanying consolidated balance sheet of Conversion
Technologies International, Inc. and Subsidiaries as of June 30, 1999 and the
related consolidated statement of operations, stockholders' deficiency and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Conversion
Technologies International, Inc. and Subsidiaries as of June 30, 1999 and the
consolidated results of their operations and cash flows for the year then ended
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has generated only minimal revenue, has incurred significant losses, has
a working capital deficit, stockholders' deficiency, and is in default in
payment of substantially all of its debt. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
BDO Seidman, LLP
October 7, 1999
Orlando, Florida
F-3
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
2000 1999
---------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13,557 $ 60,954
Accounts receivable, less allowance for doubtful accounts of $79,974
and $68,146 170,788 104,350
Inventories 193,605 283,029
Prepaid expenses and other current assets 31,202 156,701
----------------- -------------
Total current assets 409,152 605,034
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 749,010 675,000
Furniture and fixtures 16,245 -
Machinery and equipment 759,990 1,022,053
----------------- -------------
1,600,245 1,772,053
Less accumulated depreciation (426,472) (269,841)
---------------------------------
1,173,773 1,502,212
Other assets, less accumulated amortization of $42,171 and $123,346 87,876 106,398
---------------------------------
$ $1,670,801 $ 2,213,644
================= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Notes payable $ - $ 121,915
Accounts payable 1,162,663 1,495,153
Reserve for disposal 273,000 301,000
Accrued expenses 1,221,625 994,559
Due to related party 212,880 -
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 10,496 14,688
Current portion of long-term debt 1,282,008 2,514,496
---------------------------------
Total current liabilities 4,397,672 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 512 546
512,430 and 545,380 shares
Series B Convertible Preferred Stock, $.001 par value, authorized
6,000,000 shares, issued and outstanding
4,819,634 shares 4,820 -
Common Stock, $.00025 par value, authorized 200,000,000
shares, issued and outstanding 7,615,045
and 6,947,045 shares 1,904 1,737
Additional paid-in capital 35,541,031 33,353,485
Unearned stock compensation (33,496) (57,246)
Accumulated deficit (38,241,642) (38,289,774)
----------------------------------
Total Stockholders' deficiency (2,726,871) (4,991,252)
----------------------------------
$ 1,670,801 $ 2,213,644
================= =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
2000 1999
------------------ ------------------
<S> <C> <C>
Revenue
Product sales $ 1,302,964 $1,103,965
Recycling fees 15,517
---------------------------------------
Total revenue 1,302,964 1,119,482
Cost of goods sold 1,165,898 1,250,762
---------------------------------------
Gross profit 137,066 (131,280)
Selling, general and administrative expenses 907,558 1,506,241
---------------------------------------
Loss from operations (770,492) (1,637,521)
Interest expense (209,380) (477,019)
Interest income 1,254 3,550
Gain on sale of equipment 163,769 -
Rental income 78,260 -
Other income (expense) (20,575) 5,242
---------------------------------------
Loss before extraordinary item (757,164) (2,105,748)
Extraordinary item - gain on debt retirement 805,296 -
---------------------------------------
Net income ( loss) 48,132 (2,105,748)
Preferred stock dividends (527,355) (1,182,102)
---------------------------------------
Net loss applicable to Common Stock $ (479,223) $(3,287,850)
=======================================
Basic Loss Per Common Share:
Loss before extraordinary item $ (0.19) $(0.64)
Extraordinary item 0 .12 -
---------------------------------------
Net Loss applicable to Common Stock $ (0.07) $(0.64)
=======================================
Weighted average number of common shares outstanding 6,748,557 5,133,200
=======================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED JUNE 30, 2000 AND JUNE 30, 1999
<TABLE>
<CAPTION>
Series A Preferred Stock Series B Preferred Stock
------------------------------------------------------------------------------
Number Additional Number Additional
of Paid-In of Paid-In
Shares Amount Capital Shares Amount Capital
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July, 1998 613,280 $ 614 $ 8,157,807
Series A Preferred Stock converted
into Common Stock (67,450) (68) (1,018,910)
Stock Compensation - - -
Common Stock options canceled - - -
Dividend attributable to beneficial
conversion feature of convertible
preferred stock - - 876,197
Preferred Stock dividends - - (305,905)
Net Loss - - -
---------------------------------------------------------------------------------
Balance at June 30, 1999 545,830 $ 546 $ 7,709,189
Series A Preferred Stock converted
into Common Stock (33,400) (34) (490,454)
Stock compensation - - -
Issuance of Series B Preferred Stock
for cash and conversion of long term
debt and accrued interest
net of issuance costs - - - 4,819,634 $ 4,820 $ 2,715,034
Preferred Stock dividends - - (527,355)
Net Income - - -
----------------------------------------------------------------------------------
Balance at June 30, 2000 512,430 $ 512 $ 6,691,380 4,819,634 $ 4,820 $ 2,715,034
==================================================================================
<CAPTION>
Common Stock
-----------------------------------------
Number Additional Unearned
of Paid-In Stock
Shares Amount Capital Compensation
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at July, 1998 5,600,545 $ 1,400 $24,718,467 $(207,000)
Series A Preferred Stock converted
into Common Stock 1,346,500 337 1,018,641 -
Stock Compensation - - - 56,942
Common Stock options canceled (92,812) 92,812
Dividend attributable to beneficial
conversion feature of convertible
preferred stock - - - -
Preferred Stock dividends - - - -
Net Loss - - - -
----------------------------------------------------------------
Balance at June 30, 1999 6,947,045 $ 1,737 $ 25,644,296 $ (57,246)
Series A Preferred Stock converted
into Common Stock 668,000 167 -
Stock compensation - - - 23,750
Issuance of Series B Preferred Stock
for cash and conversion of long term
debt and accrued interest
net of issuance costs - - -
Preferred Stock dividends - - - -
Net Income - - - -
--------------------------------------------------------------
Balance at June 30, 2000 7,615,045 $ 1,904 $ 26,134,617 $(33,496)
===============================================================
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
---------------------------------
<S> <C> <C>
Balance at July, 1998 $(35,307,829) $ (2,636,541)
Series A Preferred Stock converted
into Common Stock - -
Stock Compensation - 56,942
Common Stock options canceled - -
Dividend attributable to beneficial
conversion feature of convertible
preferred stock (876,197) -
Preferred Stock dividends - (305,905)
Net Loss (2,105,748) (2,105,748)
---------------------------------
Balance at June 30, 1999 $(38,289,774) $ (4,991,252)
Series A Preferred Stock converted
into Common Stock -
Stock compensation - 23,750
Issuance of Series B Preferred Stock
for cash and conversion of long term
debt and accrued interest
net of issuance costs - 2,719,854
Preferred Stock dividends - (527,355)
Net Income 48,132 48,132
---------------------------------
Balance at June 30, 2000 $(38,241,642) $ (2,726,871)
================================
</TABLE>
See accompanying notes
F-6
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year ended June 30,
--------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
Cash flow from operating activities
Net income ( loss) $ 48,132 $ (2,105,748)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation expense 139,960 138,455
Amortization expense 10,871 25,535
Amortization of discount on notes payable - 108,000
Bad debt expense 24,534 53,691
Gain on disposal of equipment (163,769) -
Extraordinary item (805,296) -
Write-off of impaired inventory 46,820 80,180
Stock compensation expense 23,750 56,942
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (90,972) 100,949
Decrease in inventories 42,604 102,853
(Increase) decrease in prepaid expenses and other current assets 125,499 (62,105)
(Increase) decrease in other assets (16,350) 850
(Decrease) increase in accounts payable, reserve for
disposal, other accrued expenses and due to related party (35,890) 473,250
--------------------- ---------------------
Net cash used in operating activities (650,107) (1,027,148)
Cash flow from investing activities
Capital expenditures (34,779) (87,321)
Proceeds from disposals of equipment 387,027 1,211
--------------------- ---------------------
Net cash provided by (used in) investing activities 352,248 (86,110)
Financing activities
Issuance of notes payable - 1,062,778
Payment of notes payable (133,422) (22,778)
Proceeds from long term debt 35,000 -
Principal payments on long-term debt (600,000) (9,759)
Principal payments under capital lease obligations (4,193) (24,512)
Issuance of series B preferred stock, net of offering costs 953,077 -
--------------------- ---------------------
Net cash provided by financing activities 250,462 1,005,729
--------------------- ---------------------
Decrease in cash and cash equivalents (47,397) (107,529)
Cash and cash equivalents at beginning of period 60,954 168,483
--------------------- ---------------------
Cash and cash equivalents at end of period $ 13,557 $ 60,954
===================== =====================
</TABLE>
F-7
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
Supplemental disclosure of cash flow information
Interest paid $ 92,654 $ 74,297
===================== =====================
Non-cash investing and financing activities
Preferred stock converted into common stock $ 490,488 $ 1,018,978
Amortization of discount on series A preferred stock - 876,197
Reclassification of property, plant and equipment held for sale to
property, plant and equipment - 1,000,000
Long term debt and accrued interest converted to Series B Preferred 1,766,777 -
Stock
Dividends accrued on Series A Preferred Stock 527,355 305,905
</TABLE>
See accompanying notes.
F-8
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
June 30, 2000
1. Organization and Going Concern
Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing and processing various substrates and advanced
materials. These substrates and materials include (1) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (2) 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 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. On September 24, 1999 and December 8, 1999 (see Note 7), the
Company sold in a Private Placement 4,819,634 shares of Series B Convertible
Preferred Stock for which the Company accepted $1,125,000 in cash and the
conversion 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 satisfaction 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 vacant 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 operations are improved as result of the foregoing courses of action, 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 realization of assets and liquidation of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
F-9
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
2.Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of Conversion Technologies International, Inc. and its wholly-owned
subsidiaries, Dunkirk International Glass and Ceramics Corporation ("Dunkirk")
and Advanced Particle Technologies, Inc. (APT). Intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
which effect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Major Customers
For the year ended June 30, 2000, 78.8% of the Company's revenue was derived
from three major customers. Revenue generated from each of those customers
amounted to $581,000, $261,000 and $184,500, which represents 44.6%, 20.1% and
14.1% of total revenue, respectively.
For the year ended June 30, 1999, 57.9% of the Company's revenue was derived
from two major customers. Revenue generated from each of these customers
amounted to $382,622 and $265,792, which represents 34.2% and 23.7% of total
revenue, respectively.
Reserve for Disposal
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 the conversion
processes being developed were not successful. To date, the Company has disposed
of 2,440 tons of the waste materials, which it had not been able to process, of
which 1,220 tons were disposed of during the year ended June 30, 2000 and 1,137
tons were disposed of during the year ended June 30, 1999. The amount of
unprocessed waste materials on hand was 700 tons at June 30, 2000 and 843 tons
at June 30, 1999. From July 1, 1998 to June 30, 1999, the Company decreased the
reserve by approximately $214,000, from $515,000 to $301,000. From July 1, 1999
to June 30, 2000, the
F-10
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
2. Summary of Significant Accounting Policies (continued)
Company reduced the reserve by approximately $28,000 from $301,000 to $273,000.
The decreases in the reserve have resulted from actual costs for disposal and
cleanup incurred during the periods. The Company intends to adjust the reserve
for disposal if and when it can further reduce the quantities of unprocessed
waste materials on hand.
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:
June 30,
2000 1999
---- ----
Raw Materials $ 26,065 $ 35,562
Work-in-process 1,708 20,707
Finished goods 165,832 226,760
---------- ----------
$ 193,605 $ 283,029
========== ==========
Impairments
Assets are evaluated for impairment when events change or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. When any such impairment exists, the related assets are written
down to fair value.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
June 30,
2000 1999
---- ----
Private placement expenses $ - $ 98,561
Prepaid insurance and other
expenses 22,250 39,779
Other 8,952 18,361
---------- ---------
$31,202 $156,701
========== =========
F-11
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
2. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation and amortization
are computed on the straight-line method over the estimated useful lives of the
assets. Amortization on assets under capital leases is provided on a
straight-line basis over the lesser of the useful lives of the related assets or
the terms of the leases. The estimated useful lives of the assets are as follows
Buildings and Improvements 5 to 31 1/2 years
Furniture and Fixtures 5 years
Machinery and Equipment 2 to 10 years
In October of 1998, the Company ceased operations at the Dunkirk plant and
decided to dispose of all the property, plant and equipment at that facility and
was actively searching for a buyer. In the fourth quarter of 1998, pursuant to
FAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", the Company had adjusted those assets to their
estimated net realizable value. This resulted in a write down of land and
building and improvements during fiscal 1998 of approximately $716,000 to
$750,000 and machinery and equipment of approximately $4,197,000 to $250,000
resulting in a combined estimated disposal value of $1,000,000.
On September 17, 1999 the Company leased a portion of the Dunkirk plant and is
currently exploring various alternatives for the use of the remaining portion or
sale of the facility. During the year ended June 30, 2000, the Company auctioned
off substantially all of the remaining equipment located at the Dunkirk
facility. Proceeds from the sale were approximately $387,000 resulting in a gain
on disposal of $163,769.
The Company is currently in negotiations with prospective buyers of the Dunkirk
facility.
Cash Equivalents
The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.
Other Assets
Other assets include deferred financing costs, trademarks and security deposits
for rental property. Deferred financing costs relate to various loan agreements
which have been capitalized and are
F-12
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
2. Summary of Significant Accounting Policies (continued )
being amortized over the term of the loans (See Note 4). Trademarks are carried
at cost and amortized on a straight-line basis over the estimated useful life of
the trademarks.
Accrued Expenses
Accrued expenses consisted of the following:
June 30,
2000 1999
------------ ----------
Accrued interest $ 293,799 $ 477,075
Accrued dividends 833,260 305,905
Accrued payroll taxes and employee benefits 5,164 65,919
Accrued audit and tax fees 43,492 66,000
Accrued salaries and wages 12,646 25,794
Accrued royalties 11,600 36,319
Accrued other 21,664 17,547
------------ ----------
$1,221,625 $ 994,559
------------ ----------
Income Taxes
Deferred income tax assets and liabilities are recorded for differences between
the financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Investment Tax Credit
The Company received a gross cash refund of $566,547 related to a New York State
investment tax credit in June 1997. However, the Company has recorded a $235,000
reserve against this amount as the Company may be required to refund such amount
pursuant to a recapture provision.
F-13
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
3. 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, $165,500 was paid to the Company's
former legal counsels in full settlement of accrued liabilities of $223,816 for
past due professional services. These forgivenesses resulted in a net pretax
gain to the Company of approximately $805,296,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, 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.
Net Loss Per Common Share
Basic net loss per common share is based on the net loss attributable to common
stockholders for the year, divided by the weighted average number of common
shares outstanding during the year (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, 29,307,484 warrants and 10,248,600 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) and 96,059,340 shares
underlying the Series B Preferred stock ( see Note 7).
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of June 30, 2000. The
respective carrying value of certain on balance sheet financial instruments
approximated their fair values. These financial instruments include cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses.
The fair value of the Company's long-term debt is estimated based upon the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
value approximates the fair value of the debt.
F-14
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (1) the changes in the fair
value of the hedged changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk or (2) the earnings effect of the
hedged forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS No. 133, as amended by SFAS No. 137 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on July 1, 2000 to affect its financial
statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions Involving Stock Compensation an Interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25 for (a)
the definition of employee for the purposes of applying APB Opinion No. 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
2, 2000 but certain conclusions cover specific events that occur after either
December 15,1998 or January 12, 2000. The Company believes that adoption of FIN
44 will not have a material effect on the Company's historical financial
position or results of operations but may impact the accounting for grants or
awards in future periods.
On December 3, 1999 the SEC issued Staff Accounting Bulletin 101 ("SAB 101"),
Revenue Recognition in Financial Statements. SAB 101 summarizes some of the
SEC's interpretations of the application of generally accepted accounting
principles to revenue recognition. Revenue recognition under SAB101 was
initially effective for the Company's first fiscal of fiscal year beginning
after December 15, 1999. However, SAB 101B was released June 26, 2000, delayed
adoption of SAB 101 until no later than the fourth fiscal quarter of fiscal
years beginning after December15, 1999. The Company believes that its revenue
recognition practices are in substantial compliance with SAB 101 and that
adoption of its provisions would not be material to its annual or quarterly
results of operations.
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.
F-15
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
4. Debt
Long-term debt consists of the following obligations as of June 30, 2000 and
1999:
<TABLE>
<CAPTION>
June 30,
2000 1999
---- ----
<S> <C> <C>
Company - Notes payable under a Senior Secured Line of Credit
Agreement and the interim financing agreement dated February 22, 1999 with
two stockholders which were converted into Series B
Convertible Preferred Stock (see Note 7) - $1,425,000
Company - Portion of note payable to the Acting President and Chief Executive
Officer which was converted into Series B Convertible
Preferred Stock (see Note 7) - 103,085
Dunkirk-Chautauqua Region Industrial Development Corporation (CRIDA) mortgage
note collateralized by a mortgage on real property, payable interest only
through December 1, 1998 and beginning January 1, 1999 in monthly
installments of $4,880 including interest at a variable rate (6% at June
30, 2000) through October 1, 2004. Repayment is
guaranteed by the Company. 287,648 287,648
Dunkirk-Term loan with the New York State Job Development Authority (JDA)
payable interest only through December 1, 1998 and beginning January 1,
1999 in monthly installments of $29,308 including principal and interest
at the prime rate (7.75% at June 30, 1999) through December 27, 2001. A
portion of this loan was paid off and the
remaining balance forgiven (see Note 3 and 7). - 1,183,110
Dunkirk- Subordinated mortgage note collateralized by a mortgage on real
property, payable in monthly installments of $4,956 including interest
at 10% through January 21, 2004. 253,638 253,638
Dunkirk-Chautauqua County Industrial Development Agency (CCIDA) subordinated
note payable in monthly payments of $1,485 including interest at 7% and
was due June 1, 1999. The note contains various restrictive covenants, is
guaranteed by the former Dunkirk president and is collateralized by a
subordinated security interest in certain machinery
and equipment. 1,476 12,984
</TABLE>
F-16
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
4. Debt (continued)
<TABLE>
<CAPTION>
June 30,
2000 1999
---- ----
<S> <C> <C>
Dunkirk-Southern Tier Enterprise Development Organization (STEDO)
subordinated note payable in monthly payments of $1,169 including interest
at 8% through July 1, 2002. The note contains various restrictive
covenants, is guaranteed by the former Dunkirk president and is
collateralized by a subordinated security interest in certain equipment. 35,457 35,457
Dunkirk-New York Job Development Authority (Al Tech) subordinated note
payable interest only through December 1, 1998 and beginning January 1,
1999 in monthly payments of $4,296 including interest at 5% through
September 1, 1999. The note contained various restrictive covenants, was
guaranteed by the Company and by the former Dunkirk president and was
collateralized by a subordinated security interest in certain equipment. A
portion of this loan was paid off and the remaining balance forgiven
during 2000. (See Notes 2 and 6) - 37,870
</TABLE>
F-17
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
4. Debt (continued)
<TABLE>
<CAPTION>
June 30,
2000 1999
---- ----
<S> <C> <C>
Dunkirk-Subordinated unsecured debt from various electronic companies;
0I-NEG TV Products, Inc. (Techneglas), Thomson Consumer Electronics, Sanyo
Manufacturing Corp., Toshiba Display Devices and Hitachi Electronic
Devices (USA), begin with quarterly payments of interest only at prime
plus 2% (9.75% at June 30, 1999) through a range of dates ending January
1, 1999. Beginning between March 31, 1998 and April 1, 1999 and going
through a range of dates with the final subordinate debt issue ending
January 1, 2004 quarterly installments of principal plus interest at prime
plus 2% are payable. The first five quarterly interest payments for a
portion of the debt has been converted by the Company into subordinated
notes ($43,789 converted at June 30, 1999) payable in quarterly payments
of interest only at 8% for nineteen quarters and the principal amount plus
interest being due between April 1, 1999 through April 1, 2000. 703,789 703,789
Total Debt 1,282,008 4,042,581
Less Current Maturities 1,282,008 2,514,496
--------- ----------
Total Long Term Debt $ - $1,528,085
--------- ----------
</TABLE>
The Company has agreed to indemnify and hold harmless the former Dunkirk
president with respect to guarantees made by him for obligations of Dunkirk. In
addition, the Company has agreed to use its reasonable efforts to cause the
release of such guarantees. At June 30, 2000 and 1999, the Company was in
violation of certain loan covenants and was in default in payment of principal
and interest, related to the above debt, and as a result, all of the above
Dunkirk debt has been classified as a current liability at June 30, 2000.
5. Notes Payable
During the period from September 1998 to February 1999, the acting President and
Chief Executive Officer of the Company, provided loans to the Company or did not
receive accrued compensation aggregating $190,000, which loans are represented
by a promissary note dated February 23, 1999. 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.
On September 24, 1999 the amounts borrowed under the Credit Agreement and the
interim financing and $103,085 of the promissory note dated February 23, 1999
along with accrued interest of $203,694 were
F-18
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
5. Notes Payable (continued)
converted into Series B Convertible Preferred Stock. The remaining balance of
the promissory note was repaid during 2000.
On June 26, 1999, a director of the Company, loaned the Company $35,000 which
accrues interest at the rate of 12% per year and is due upon demand but not
later than September 1, 1999. This note was satisfied from the proceeds of the
Dunkirk auction in January 2000.
6. Commitments and Contingencies
Litigation
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.
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. On March 11, 1999, the Circuit Court entered a final judgement in
favor of Buchanan Ingersoll in the amount of $197,689. 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 action was dismissed on August 1, 2000.
Ferro Corporation filed a suit against the Company in St. Johns County Florida
for recovery of damages for goods valued at approximately $30,000. The Company
has reached an out of court settlement on May 9, 2000 with Ferro Corporation for
a payment schedule to satisfy the debt.
CLI Industries filed a suit against the Company in St. Johns County Florida for
recovery of damages for goods valued at approximately $15,000. The lawsuit with
CL Industries has been dismissed on April 10, 2000 and both parties have agreed
to a payment schedule.
The Company has filed a complaint on March 21, 2000 against Dlubak Company in
Chautauqua County, New York seeking monetary damages in the amount of
approximately $230,000 for breach of contract pertaining to services performed
and failure to return company property. The Company has received the initial
response from Dlubak on May 7, 2000 and no resolution has been reached.
The Company is questioning the applicability of the technology agreement with
Vangkoe as it relates to its present production processes. Royalty payments
might be affected on this matter. This may go to arbitration.
F-19
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
6. Commitments and Contingencies (Continued)
On September 26, 2000, Niagra Mohawk Corporation filed a suit in Eire County,
New York for recovery of damages for services provided to Dunkirk International
Glass and Ceramics Corporation. These services are valued at approximately
$330,000. Management is unable to predict the outcome of the suit.
In addition to the above matters and in the normal course of conducting its
business, the Company is involved in various other litigation. The Company is
not a party to any litigation of governmental proceeding which its management
believes could result in any judgments or fines against it that would have a
material adverse affect on the Company's financial position, liquidity or
results of operations.
Lease Agreements
The Company has entered into capital leases for machinery and equipment that may
be purchased on expiration of the leases on various dates through 2000.
Future minimum lease payments required under operating leases together with the
present value of the net minimum lease payments for capitalized leases as of
June 30, 2000 are as follows:
Capitalized Operating
Leases Leases
---------- ---------
June 30,
2001 $10,636 $4,011
2002 - 1,337
---------------------------
Total net minimum lease payments 10,636 5,348
Less amount representing interest 140 -
---------------------------
Present value of net minimum lease payments $10,496 $5,348
Total rent expense of the Company for the periods ended June 30, 2000 and 1999
was $165,671 and $206,995, respectively.
F-20
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
6. Commitments and Contingencies (Continued)
Consulting Agreement
The Company entered into a Consulting Agreement with the Acting President to
assist the Company in strategic planning, business development, investor
relations, fund raising and such other activities as shall be reasonably
requested by the Board. Fees will accrue under the Agreement at $10,000 per
month until its expiration in August 2000. Amounts due under this agreement were
$120,000 at June 30, 2000 and is included in Due to Related Parties.
7. Capital Stock
In connection with the Company's May 16, 1996 initial public offering, 740,559
shares of the Company's Common Stock and options to purchase 71,923 shares of
Common Stock (the "Escrow Securities") were deposited into escrow by the holders
thereof. The Escrow Securities will only be released from escrow when the
Company attains certain earnings levels or the market price of the Company's
Common Stock achieves certain levels. These Escrow Securities were subject to
cancellation if such conditions were not achieved by June 30, 2000. The shares
were canceled subsequent to year end.
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. The
affirmative vote of the holders of at least two- thirds of the Series A
Preferred Stock is required for the issuance of senior securities, the
incurrence of indebtedness, the repurchase of securities and certain other
restrictions. The placement agent received a cash commission of 9% and a
non-accountable expense allowance of 4% of the gross proceeds. The placement
agent also received warrants, which expire in June, 2008, to purchase 61,945
shares of the Company's Series A Preferred Stock at an exercise price of $9.82
per share (after giving effect to antidilution adjustments resulting from the
issuance of the additional shares of Series A Preferred Stock on April 10,1998).
The Series A Preferred Stock is convertible at a discount on various dates
beginning April 10, 1998 through January 10, 1999. As a result, a Series A
Preferred Stock dividend of $757,997 ($.11per Common Share) has been recorded
for year ended June 30, 1999 for the difference between the discounted
conversion price of the Series A Preferred Stock and the fair market value of
the Company's Common Stock at the time of issuance. The Series A Preferred Stock
also contains a reset provision under which the conversion price in effect
immediately prior to the date that is 12 months after the final closing date of
the issuance and sale of the Series A Preferred Stock (the "Reset Date")
F-21
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
7. Capital Stock (continued)
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
immediately preceding the Reset Date is less than 135% of the then applicable
conversion price (a "Reset Event"). Upon the occurrence of a Reset Event, the
conversion price shall be reduced to be equal to the greater of (A) the 12-month
trading price divided by 1.35, or (B) 50% of the then applicable conversion
price. As a result of this reset feature, a Series A Preferred Stock dividend of
$118,200 ($.02 per Common Share) has been recorded for the year ended June 30,
1999 for the difference between the discounted conversion price as reset and the
fair market value of the Company's Common Stock at the time of issuance. This
reset feature resulted in the conversion price of the Series A Preferred Stock
being adjusted to $0.50 per share of Common Stock on December 8, 1998.
Pursuant to the terms of the private placement agreement, the Company was
required to register the shares of Common Stock underlying the Series A
Preferred Stock within 90 days of the final closing of the private placement.
Those shares of Common Stock were not registered within 90 days of the final
closing, and accordingly, the Company issued an additional 66,360 shares of
Series A Preferred Stock (convertible into 1,327,200 shares of Common Stock) to
the purchasers of the private placement on April 10, 1998. These shares were
valued at $663,600 (the fair value of the Series A Preferred Stock) and were
recorded in selling, general and administrative expenses in fiscal 1998. As of
June 30,2000 the holders of the Series A Preferred Stock had converted 106,930
shares of Series A Preferred Stock into 2,075,300 shares of Common Stock.
At June 30, 2000 the Company had the following Common Stock purchase warrants
outstanding after giving effect to anti dilution provisions of the warrant
agreements and adjusted as a result of the reset of the conversion price of the
Series A Preferred Stock described above:
Number of
Underlying Shares Exercise Price Expiration Date
-----------------------------------------------------------
Class A Warrants 9,200,462 $2.95 May 16 & June 7, 2001
Class B Warrants 7,008,058 $3.93 May 16 & June 7, 2001
Lenders' Warrants 198,863 $0.66 July 21, 2002
(see Note 4)
Lenders' Warrants 385,075 $0.67 May 8, 2003
(see Note 4)
Others 250,027 $4.40-$5.28 July 13, 2000-May 5,
--------- 2005
17,042,485
At June 30, 2000, all of the warrants were exercisable. Upon exercise of the
Class A Warrants, the purchaser receives one share of Common Stock and one new
Class B Warrant.
In addition to the warrants listed above and in connection with the initial
public offering, the Company sold
F-22
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
7. Capital Stock (continued)
for a nominal fee on May 16, 1996 to the Underwriter the option to purchase up
to 306,700 shares of Common Stock at an exercise price of $6.16 and/or 608,204
Class A Warrants at an exercise price of $.07 and/or 609,229 Class B Warrants at
an exercise price of $.07, all of which expire on May 16, 2001. After purchase
the Class A Warrants will be exercisable at a price of $2.95 per share of Common
Stock and the Class B Warrants will be exercisable at a price of $3.93 per share
of Common Stock, subject to adjustment to protect against dilution.
The Company maintains an Employee Stock Option Plan (the "Employee Plan") and a
Non-Employee Director Stock Option Plan (the "Non-Employee Plan"). Stock options
may be granted at the discretion of the Board of Directors. The Company has
reserved 440,000 and 250,000 shares of its Common Stock for issuance upon the
exercise of options granted under the Employee and Non-Employee Plans,
respectively. The Non-Employee Plan options are generally exercisable in full
one year after the date of grant and expire ten years from the date of grant.
The Employee Plan options primarily vest one-third on each of the first three
anniversaries of the date of grant and expire on the seventh anniversary of the
date of grant. The Company grants stock options at exercise prices equal to or
greater than the fair market value of the Company's Common Stock on the date of
grant. On January 27, 1998, the Company reduced the exercise price of certain
options granted under the Non- Employee Plan for 21,580 shares to $0.78 per
share from exercise prices ranging from $3.125 to $5.00 per share.
The following table summarizes the activity in options under the Employee and
Non-Employee Plans:
Weighted Average
Number of Shares Exercise Price
-------------------------------------------------
Employee Plan Options
Outstanding at June 30, 1998 419,634 1.91
Granted above market value 25,000 .03
Canceled (184,435) 1.90
--------
Outstanding at June 30, 1999 260,199 1.73
Canceled (2,560) 4.40
--------
Outstanding at June 30, 2000 257,639 1.70
========
Non-Employee Plan Options
Outstanding at July 1, 1998 167,918 1.08
Outstanding at, June 30, 1999
and June 30, 2000 167,918 1.08
========
7. Capital Stock (continued)
F-23
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
at June 30, 2000 at June 30, 2000
------------------------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number Exercise Contractual Number Exercise
Range of Shares Price Life (Years) of Shares Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.03-$0.781 306,580 $0.720 6.1 233,247 $0.700
$1.375-$1.875 40,000 $1.625 5.6 40,000 $1.625
$3.125-$5.00 78,977 $4.245 3.2 78,977 $4.239
------- -------
TOTAL 425,557 $1.476 5.5 352,224 $1.600
======= =======
</TABLE>
Of the total options outstanding under the plans, 352,224 and 273,946 were
exercisable at June 30, 2000 and 1999, respectively.
Effective as of August 26, 1996 ("Effective Date"), the Company approved and
adopted the 1996 Long-Term Employee Incentive Plan (the "Plan"). Under the Plan,
payment of awards may be in cash or the Common Stock of the Company or a
combination of both, at the option of the Company. The maximum number of shares
of the Company's Common Stock available for awards under the Plan is 800,000,
subject to adjustments as provided in the Plan. The Plan will terminate without
further action of the board of directors on the tenth anniversary of the
Effective Date. In October 1996, the Company issued a total of 90,000 shares (at
par value and, accordingly, compensation expense was recognized) to two former
officers of the Company under the Plan which shares vested on January 1, 1998.
Effective in July 1997, the Company issued a total of 600,000 options at an
exercise price of $1.375 to two officers of the Company which vest 20% at date
of grant and 20% for each of the next four years. On January 27, 1998, the
Company reduced the exercise price of these options to $0.78 and granted a total
of 10,000 options at an exercise price of $0.78 to two other officers of the
Company which vest one-third on each of the first three anniversaries of the
date of grant. In October 1998, options for a total of 305,000 shares were
canceled upon the resignation of two officers of the Company. All options
granted under the Plan expire on the seventh anniversary of the dates of grant.
On January 27, 1998, the Company granted non-qualified options to purchase
15,000 shares of its Common Stock at an exercise price of $0.78 per share to a
former director which were vested at the date of grant and expire on the tenth
anniversary of the date of grant. These options are not part of the Employee
Plan, Non- Employee Plan or the 1996 Long-Term Employee Incentive Plan.
F-24
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
7. Capital Stock (continued)
In connection with the issuance of non-employee plan options, employee plan
options issued below market and the modification of option terms, $57,246 and
$33,496 of this amount is included in unearned stock compensation at June 30,
1999 and 2000.
At June 30, 2000, the Company has reserved 37,707,493 shares of Common Stock for
the exercise of all options granted.
The Company's Board of Directors authorized an increase of the authorized number
of common shares to 200 million shares, which was approved by the Company's
stockholders at the Company's Annual Meeting held on July 8, 1999.
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related interpretations in accounting for options issued to employees.
Accordingly, no compensation cost has been recognized for options granted to
employees at exercise prices, which equal or exceed the market price of the
Company's Common Stock at the date of grant. Options granted at exercise prices
below market prices are recognized as compensation cost measured as the
difference between market price and exercise price at the date of grant.
Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for
Stock-Based Compensation", requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's employee stock options had been determined in accordance with the fair
market value based on the method prescribed in FAS 123. The Company estimates
the fair value of each stock option at the date of grant by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend yield, an expected life of 10.0 years, expected
volatility of 45.86% and a risk-free interest rate of 5.4% for fiscal 2000.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and non-employee director stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
and non-employee director options.
For purposes of pro forma disclosures, the estimated fair value of the options
granted during 2000 and 1999 is amortized to expense over the options' vesting
period. The weighted-average fair value of options granted during fiscal years
2000 and 1999 were $0.01 and $0.00 respectively. The Company's pro forma
information follows:
F-25
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
7. Capital Stock (continued)
2000 1999
-------------------------------------
Pro Forma net loss applicable to Common
Stock $(600,200) $(3,287,850)
Pro Forma effect on Net Income for the
value of the options issued $(120,977) -
Pro Forma loss per common share $(0.09) $(0.64)
On September 24 and December 8, 1999, the Company sold in a Private Placement
4,819,634 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 $1,125,000 in cash and the $1,766,777 in cancellation of
debt and accrued interest. as consideration for the sale of the Series B
Preferred. Of the debt converted, $1,652,777 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.
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 initial 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 vest 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.
F-26
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
8. Income Taxes
There was no income tax expense/benefit for the Company for the years ended June
30, 2000 and 1999. Following is a reconciliation of the expected income tax
benefit to the amount based on the combined U.S. and State statutory rate of 40%
for the years ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
For the year ended June 30,
2000 1999
---- ----
<S> <C> <C>
Income tax expense (benefit) based on U.S. statutory rat $19,253 $(854,392)
Current year reduction to the valuation allowance (19,253) 854,392
---------------------------------
Provision for income taxes $ - $ -
=================================
</TABLE>
The significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
June 30,
2000 1999
---------------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserve for disposal $ 109,200 $ 120,400
Start-up costs & other 127,498 8,977
Property, plant and equipment 303,316 1,816,613
Allowance for doubtful accounts 29,396 27,258
Accruals 123,782 177,180
Stock options and warrants 129,976 120,476
Net operating loss carryforward 11,249,918 9,821,435
---------------------------------------------
Total deferred tax assets 12,073,086 12,092,339
Valuation allowances 12,073,086 (12,092,339)
---------------------- ----------------------
Net deferred tax assets $ - $ -
=============================================
</TABLE>
F-27
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
8. Income Taxes (continued)
The Company's valuation allowance decreased by approximately $19,000 for the
year ended June 30,2000 which represents the effect of changes to the temporary
differences and net operating losses. The Company has recorded a valuation
allowance to state its deferred tax assets at estimated net realizable value due
to the uncertainty related to realization of these assets through future taxable
income.
At June 30, 2000 the Company has approximately $27.5 million of net
operating loss carry forwards, which expire between 2006 and 2020 The Tax
Reform Act of 1986 enacted a complex set of rules (Section 382) limiting
the potential utilization of net operating loss carry forwards in periods
following a corporate "ownership change". In general, an ownership change
is deemed to occur if the percentage of stock of a loss corporation owned
(actually, constructively and, in some cases, deemed) by one or more "5%
stockholders" has increased by more than 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 Series A
Preferred Stock Offering), the Company's ability to utilize its net
operating loss carry forwards could be severely limited.
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 manufactures, processes and markets decorate
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 manufactures, 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 two years ended June 30, 2000,
the Company 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 revenues
in calendar 1998 and no revenue in the fiscal years 2000 and 1999.
F-28
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999
----------------------------------
Revenue
Particles $ 1,274,134 $ 916,441
Abrasives and CRT 28,830 203,041
----------------------------------
$ 1,302,964 $ 1,119,482
==================================
Operating Income (Loss)
Particles $ (67,852) (574,803)
Abrasives and CRT (133,078) 30,618
Corporate Expenses (569,562) (1,093,336)
----------------------------------
$ (770,492) $ (1,637,521)
==================================
Depreciation and Amortization
Particles $ 131,403 $ 129,805
Abrasives and CRT 7,536 22,199
Corporate Expenses 12,252 11,986
----------------------------------
$ 151,191 $ 163,990
==================================
Interest Expense
Particles $1,116 $ 772
Abrasives and CRT 157,925 207,998
Corporate 50,339 268,249
----------------------------------
$ 209,380 $ 477,019
==================================
Extraordinary Item - Gain on Debt Retirement
Particles $ - $ -
Abrasives and CRT 746,980 -
Corporate 58,316 -
----------------------------------
$ $805,296 $ -
==================================
F-29
<PAGE>
Identifiable Assets
Particles $ 834,749 $ 911,812
Abrasives and CRT 816,619 1,144,203
Corporate 19,433 157,629
----------------- ----------------
$ 1,670,801 $ 2,213,644
================= ================
Capital Expenditures
Particles $ $34,780 $ 76,277
Abrasives and CRT - 4,269
Corporate - 6,825
----------------- ----------------
$ $34,780 $ 87,371
================= ================
10. Employee Benefit Plan
The Company established a 401(K) defined contribution plan covering
substantially all employees meeting certain minimum age and service requirements
effective August 1, 1998. The Company's contribution to the plan is determined
by the Board of Directors and is limited to a maximum of 100% of the employee's
contribution and 6% of the Employee's compensation. Contributions made to the
plan for the fiscal year ended June 30, 2000 were $4,845, contributions made for
the fiscal year ended June 30, 1999 were $18,913.
F-30
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
2.1* Agreement and Plan of Reorganization dated August 16, 1994, among
the Company, CTI Acquisition Corporation, Dunkirk International
Glass and Ceramics Corporation ("Dunkirk") and certain stockholders
of Dunkirk listed on the signature pages thereto
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2** Certificate of Designation of Series A Convertible Preferred Stock
3.2.1**** Certificate of Designation of Series B Convertible Preferred Stock
3.3* By-laws of the Company
3.4**** Certificate of Amendment to the Restated Certificate of
Incorporation of the Company
3.5**** Certificate of Merger of CTI Subsidiary Corp. With and Into the
Company and Agreement and Plan of Merger between the Company and CTI
Subsidiary Corp.
4.3* Term Note No. 2 dated as of January 27, 1995, between Key Bank of
New York and Dunkirk
4.4* Security Agreement dated as of January 27, 1995, between Key Bank of
New York and Dunkirk
10.1* Conversion Technologies International, Inc. 1994 Employee Stock
Option Plan, As Amended
F-31
<PAGE>
10.2* Conversion Technologies International, Inc. 1994 Stock Option Plan
for Non-Employee Directors, As Amended
10.3** Conversion Technologies International, Inc. 1996 Long-Term Employee
Incentive Plan, As Amended
10.4** Consulting Agreement dated March 1, 1995 between the Company and
Eckardt C. Beck, As Amended
10.5** Employment Agreement dated as of August 1, 1997 between the Company
and William L. Amt.
10.18* Project Development Assistance Agreement dated July 13, 1995, among
the Company, Technology Funding Partners III, L.P. and Technology
Funding Venture Partners V, An Aggressive Growth Fund, L.P.
10.19** Technology Purchase Agreement dated as of June 30, 1997 between
Advanced Particle Technologies, Inc. and Vangkoe Industries, Inc.
10.20** Distributor Agreement dated as of June 30, 1997 between Advanced
Particle Technologies, Inc. and Vangkoe Industries, Inc.
10.21* Consulting Agreement dated as of May 5, 1995, among the Company,
Technology Funding Partners III, L.P. and Technology Funding Venture
Partners V, An Aggressive Growth Fund, L.P.
10.22* Registration Rights Agreement dated as of May 5, 1995, among the
Company, Technology Funding Partners III, L.P. and Technology
Funding Venture Partners V, An Aggressive Growth Fund, L.P.
10.25** Warrant for the Purchase of Shares of Series A Convertible Preferred
Stock issued to Paramount Capital, Inc. by the Company
10.26* Series A Preferred Stock Purchase Agreement dated as of May 5, 1995,
among the Company, Technology Funding Partners 111, L.P. and
Technology Funding Venture Partners V, An Aggressive Growth Fund,
L.P.
10.27** Form of Placement Agency Agreement between the Company and Placement
Agent.
10.28** Form of Subscription Agreement between the Company and various
subscribers of Series A Preferred Stock.
10.29** Form of Placement Agent Warrant.
10.30** Form of Financial Advisory Services Agreement between the Company
and Placement Agent.
10.31** Form of Warrant issued in connection with Senior Secured Line of
Credit Agreement.
10.32** Letter from Empire State Development Corporation ("ESDC") to Dunkirk
dated July 22, 1997 confirming its guarantee of the Key Bank Note
10.33** Letter from Key Bank to ESDC dated July 30, 1997 confirming that it
will not exercise any remedies under the Key Bank Note and will
execute documents to assign the Key Bank Note to ESDCA
10.34*** Senior Secured Line of Credit Agreement dated as of May 8, 1998 by
and among Aries Domestic Fund, L.P., The Aries Fund, Dunkirk, APT
and the Company
F-32
<PAGE>
10.34.1*** Form of Senior Secured Notes issued to The Aries Master Fund
aggregating $910,000 in principal amount.
10.34.2*** Form of Senior Secured Notes issued to the Aries Domestic fund,
L.P. aggregating $380,000 in principal amount.
10.35**** Security Agreement dated as of May 8, 1998 among the Company,
Dunkirk, APT and Paramount Capital Asset Management, Inc.
10.36**** Subsidiary Guarantee dated as of May 8, 1998 by Dunkirk and APT in
favor of The Aries Fund and Aries Domestic Fund, L.P.
10.37**** Promissory Note dated as of February 23, 1999 issued by the
Company in favor of Eckardt C. Beck
10.38**** Termination Agreement dated as of January 1, 1998 by and between
the Company and Jack D. Hays, Jr.
10.39**** Termination Agreement dated as of January 1, 1998 by and between
the Company and Richard H. Hughes
10.40**** Consulting Agreement dated December 22, 1998 by and between the
Company and 4C Technologies, Inc.
10.41**** Amendment dated as of May 8, 1998 to the Technology Purchase
Agreement dated as of June 30, 1997 by and between APT and
VANGKOE.
10.42**** Termination Agreement dated as of May 8, 1998 by and between APT
and VANGKOE
10.43**** Materials Bill of Sale Agreement dated as of May 8, 1998 by and
between the Company and VANGKOE
10.44**** Ceramaglass Trademark & Intellectual Property Agreement dated as
of May 8, 1998 by and between the Company and VANGKOE
10.45**** Ceramaquartz Trademark & Intellectual Property Agreement dated As
of May 8, 1998 by and between the Company and VANGKOE
10.46**** Letter Agreement of the Company dated March 11, 1998 with Dlubak
10.47**** Lease dated April 1, 1998 by and between 312 Industrial Park and
the Company
10.48**** Lease dated April 1, 1998 by and between Willard Park Inc. and the
Company
10.49**** Manufacturer Representative Agreement dated as of January 1, 1998
by and between the Company and Engineered Products Sales
Associates
10.50**** Manufacturer Representative Termination Agreement dated as of
January 1, 1998 by and between the Company and Engineered Products
Sales Associates
10.51***** Form of Subscription Agreement between the Company and various
Subscribers of the Series B Convertible Preferred Stock.
10.52.1***** Form of Convertible Promissory Note issued by the Company in favor
of The Aries Master Fund
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<PAGE>
aggregating $109,500 in principal amount.
10.52.2***** Form of Convertible Promissory Note issued by the Company in favor
of the Aries Domestic Fund, L.P. aggregating $60,500 in principal
amount.
10.53***** Lease dated September 17, 1999 by and between Dunkirk
International Glass & Ceramics Corp. And Red Wing Company, Inc..
16. Letter, dated October 4, 2000 concerning the change in the
Registrant's Certifying Accountant.
21** Subsidiaries of the Company
27 Financial Data Schedule for the year ended June 30, 2000
* Incorporated by reference to the exhibits to the Company's
Registration Statement on form SB-2, Registration No. 333-00756.
** Incorporated by reference to the exhibits to the Company's Annual
Report on form 10-KSB, fiscal 1997.
*** Incorporated by reference to the exhibits to the Company's Annual
Report on form 10-QSB for the quarterly period ended March 31,
1998.
**** Incorporated by reference to the exhibits to the Company's Annual
Report on form 10-KSB, fiscal 1998.
***** Incorporated by reference to exhibits of Company's Annual Report
on form 10 KSB for fiscal year 1999.
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