SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission File No:
December 31, 1999 000-28198
-----------------
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
7 San Bartola Drive
St. Augustine, Florida 32086
(Address of principal executive offices)
(904) 808-0503
(Issuer's telephone number, including area code)
-----------------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of December 31, 1999, the
Issuer had outstanding 7,615,045 shares of Common Stock, 512,430 shares of
Series A Convertible Preferred Stock, convertible into 10,248,600 shares of
Common Stock, 4,819,634 shares of Series B Convertible Preferred Stock,
convertible into 96,392,680 shares of Common Stock, Redeemable Class A Warrants
exercisable for 9,808,666 shares of Common Stock and Redeemable Class B Warrants
exercisable for 7,617,287 shares of Common Stock.
Transactional Small Business Disclosure Format
Yes |_| No |X|
1
<PAGE>
Contents
Page
No.
---
Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of December 31, 1999
and June 30, 1999 .................................................. 3
Consolidated Statements of Operations of Conversion
Technologies International, Inc. and Subsidiaries for the
three and six month periods ended December 31, 1999 and 1998 ....... 4
Consolidated Statement of Stockholders' Deficiency of
Conversion Technologies International, Inc. and Subsidiaries
for the six month period ended December 31, 1999 ................... 5
Consolidated Statements of Cash Flows of Conversion
Technologies International, Inc. and Subsidiaries for the six
month periods ended December 31, 1999 and 1998 ..................... 6
Notes to Consolidated Financial Statements ........................... 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................... 14
Part II - Other Information ................................................ 18
2
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
-------------------------------
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 39,780 $ 60,954
Note receivable 50,000 --
Accounts receivable, less allowance for doubtful accounts of $68,146
at December 31, 1999 and June 30, 1999 111,843 104,350
Inventories 213,205 283,029
Prepaid expenses and other current assets 116,436 156,701
-------------------------------
Total current assets 531,264 605,034
Property, plant and equipment:
Land 75,000 75,000
Building and improvements 675,000 675,000
Machinery and equipment 1,022,053 1,022,053
-------------------------------
1,772,053 1,772,053
Less accumulated depreciation (339,821) (269,841)
-------------------------------
1,432,232 1,502,212
Other assets, less accumulated amortization of $69,928
and $123,346 at December 31, 1999 and June 30, 1999 respectively 83,808 106,398
-------------------------------
$ 2,047,304 $ 2,213,644
===============================
Liabilities and stockholders' deficiency
Notes payable $ 171,217 $ 121,915
Accounts payable 1,488,707 1,495,153
Reserve for disposal 273,000 301,000
Accrued expenses 894,069 994,559
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 10,495 14,688
Current portion of long-term debt 1,293,517 2,514,496
-------------------------------
Total current liabilities 4,366,005 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 512,430
and 545,830 shares at December 31, 1999 and June 30, 1999 respectively 512 546
Series B Convertible Preferred Stock, $.001 par value, authorized
6,000,000 shares, issued and outstanding 4,819,634 shares
at December 31, 1999 4,820 --
Common Stock, $.00025 par value, authorized 200,000,000 and
50,000,000 shares, issued and outstanding 7,615,045 and 6,947,045
shares at December 31, 1999 and June 30, 1999 respectively 1,904 1,737
Additional paid-in capital 35,829,572 33,353,485
Unearned stock compensation (45,371) (57,246)
Accumulated deficit (38,110,138) (38,289,774)
-------------------------------
Total stockholders' deficiency (2,318,701) (4,991,252)
-------------------------------
$ 2,047,304 $ 2,213,644
===============================
</TABLE>
See Accompanying Notes.
3
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
Product sales $ 252,846 $ 231,383 $ 515,865 $ 453,104
Recycling fees -- -- -- 15,517
-----------------------------------------------------------------------
252,846 231,383 515,865 468,621
Cost of goods sold 285,534 60,043 582,065 568,925
-----------------------------------------------------------------------
Gross loss on sales (32,688) 171,340 (66,200) (100,304)
Selling, general and administrative 236,303 314,226 443,319 753,400
-----------------------------------------------------------------------
Loss from operations (268,991) (142,886) (509,519) (853,704)
Interest expense, net 23,750 120,903 116,141 226,185
-----------------------------------------------------------------------
Loss before extraordinary item (292,741) (263,789) (625,660) (1,079,889)
Extraordinary item - gain on debt
retirement 25,920 -- 805,296 --
-----------------------------------------------------------------------
Net income (loss) (266,821) (263,789) 179,636 (1,079,889)
Preferred stock dividends (127,133) (251,419) (238,815) (852,345)
-----------------------------------------------------------------------
Net income (loss) applicable to
Common Stock $ (393,954) $ (515,208) $ (59,179) $(1,932,234)
=======================================================================
Basic Earnings Per Common Share:
Loss before extraordinary item $ (0.06) $ (0.11) $ (0.13) $ (0.40)
Extraordinary item -- -- 0.12 --
-----------------------------------------------------------------------
Net income (loss) applicable to
Common Stock $ (0.06) $ (0.11) $ (0.01) $ (0.40)
Weighted average number of
common shares outstanding 6,849,486 4,862,486 6,637,899 4,861,413
=======================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' Deficiency
Six Months Ended December 31, 1999
<TABLE>
<CAPTION>
Series A Preferred Stock Series B Preferred Stock Common Stock
--------------------------------------------------------------------------------------
Number Number Number
of Shares Amount of Shares Amount of Shares Amount
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 545,830 $ 546 6,947,045 $ 1,737
Series A Preferred Stock
converted into Common Stock (33,400) (34) 668,000 167
Stock compensation
Issuance of Series B Preferred
Stock, net of issuance costs 4,819,634 $ 4,820
Preferred Stock dividends
Net Income
--------------------------------------------------------------------------------------
Balance at December 31, 1999 512,430 $ 512 4,819,634 $ 4,820 7,615,045 $ 1,904
======================================================================================
<CAPTION>
Additional Unearned Total
Paid-In Stock Accumulated Stockholders'
Capital Compensation Deficit Deficiency
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1999 $ 33,353,485 $ (57,246) $(38,289,774) $ (4,991,252)
Series A Preferred Stock
converted into Common Stock (133) --
Stock compensation 11,875 11,875
Issuance of Series B Preferred
Stock, net of issuance costs 2,715,035 2,719,855
Preferred Stock dividends (238,815) (238,815)
Net Income 179,636 179,636
----------------------------------------------------------------
Balance at December 31, 1999 $ 35,829,572 $ (45,371) $(38,110,138) $ (2,318,701)
================================================================
</TABLE>
See accompanying notes
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
December 31,
1999 1998
-----------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 179,636 $(1,079,889)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation expense 69,980 70,246
Amortization expense 10,038 12,767
Amortization of discount on notes payable -- 64,800
Extraordinary item (805,296) --
Stock compensation expense 11,875 31,565
Changes is operating assets and liabilities:
(Increase) decrease in accounts receivable (7,493) 51,386
Decrease in inventories 69,824 2,255
(Increase) in prepaid expenses and other current assets (132,124) (29,542)
(Increase) in other noncurrent assets (8,755) --
Increase in accounts payable, reserve for disposal
and other accrued expenses 38,113 73,742
-----------------------------------
Net cash used in operating activities (574,202) (802,670)
Investing activities
Issuance of notes receivable (100,000) --
Repayment of notes receivable 50,000 --
Capital expenditures -- (51,885)
-----------------------------------
Net cash used in investing activities (50,000) (51,885)
Financing activities
Issuance of notes payable 116,347 802,778
Payment of notes payable (32,045) (7,391)
Principal payments on long-term debt (600,000) (9,758)
Principal payments under capital lease obligations (4,193) (13,505)
Issuance of Series B Preferred Stock, net of offering costs 1,122,919 --
-----------------------------------
Net cash provided by financing activities 603,028 772,124
-----------------------------------
(Decrease) in cash and cash equivalents (21,174) (82,431)
Cash and cash equivalents at beginning of period 60,954 168,483
-----------------------------------
Cash and cash equivalents at end of period $ 39,780 $ 86,052
===================================
Supplemental disclosure of cash flow information
Interest paid $ 36,324 $ 38,343
===================================
Supplemental disclosure of non cash transactions
Preferred stock converted into common stock 490,487 32,131
Amortization of discount on Series A Preferred Stock -- 852,345
Dividends accrued on Series A Preferred Stock 238,815 --
Long-term debt and accrued interest converted
into Series B Preferred Stock 1,766,778 --
</TABLE>
See accompanying notes
6
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods presented have been
included. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes for the fiscal year
ended June 30, 1999 included in the Company's annual report on Form 10-KSB.
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. The Company has had limited
revenue and has incurred significant losses which has resulted in a working
capital deficiency and a stockholders' deficiency. The Company does not
currently possess sufficient funds to conduct its business and satisfy its
liabilities. The Company has significant past due payables and is in default in
payment of principal and interest on substantially all of its indebtedness for
borrowed money and as a result all of the Company's debt has been classified as
a current liability at December 31, 1999.
On September 24 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 cancellation of $1,767,000 of debt
including accrued interest. From the cash proceeds, $600,000 was paid to Empire
State Development Corporation ("ESDC") in full satisfactions of loans with
principal balances of $1,220,980. This conversion and pay-off of debt totaling
$2,987,980 of the Company's total debt of $4,164,496 will significantly reduce
interest expense which was approximately $477,000 for the year ended June 30,
1999. In September 1999, the Company leased a portion of its Dunkirk plant and
is exploring various alternatives for the use of the remaining portion of the
plant to generate additional revenues. Also in September 1999 the Company
entered into a distribution agreement with a major building products supplier
for the sale and distribution of decorative particles for the pool industry
which could significantly increase that business.
Although management believes that as a result of the above Private Placement and
if all of the foregoing courses of action are achieved, it would allow the
Company to continue as a going concern for the next year, there are no
assurances that management will be successful in implementing all of these plans
and eliminating the substantial doubt as to its ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the
7
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
(Unaudited)
realization of assets and liquidation of liabilities that might be necessary
should the Company be unable to continue as a going concern.
2. Inventories
Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.
Inventories consisted of the following:
December 31, 1999 June 30, 1999
----------------- -------------
Raw materials $ 22,467 $ 35,562
Work-in-process 18,093 20,707
Finished goods 172,645 226,760
-------- --------
$213,205 $283,029
======== ========
3. Revenue Recognition
With respect to revenue from product sales, including products created from
processed waste materials, revenue is recognized only upon shipment to
customers. For the three months ended December 31, 1999 ("1999"), 71.5% of the
Company's revenue was derived from two major customers. Revenue generated from
each of these customers amounted to $128,961 and $51,817, which represents
51.0%, and 20.5% of total revenue, respectively.
For the three months ended December 31, 1998 ("1998"), 57.0% of the Company's
revenue was derived from two major customers. Revenue generated from each of
these customers amounted to $70,450 and $61,355, which represents 30.5% and
26.5% of total revenue, respectively.
For the six months ended 1999, 80.3% of the Company's revenue was derived from
three major customers. Revenue generated from each of these customers amounted
to $242,573, $116,713 and $55,061, which represents 47.0%, 22.6% and 10.7% of
total revenue respectively.
For the six months ended 1998, 58.0% of the Company's revenue was derived from
three major customers. Revenue generated from each of these customers amounted
to $118,257, $79,257 and $74,332, which represents 25.2%, 16.9% and 15.9% of
total revenue, respectively.
8
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
(Unaudited)
4. Reserve for Disposal
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), a wholly owned
subsidiary of the Company, began accepting waste materials (primarily CRT glass)
in early 1994. Upon accepting the waste materials, Dunkirk established a reserve
for the probable disposal and cleanup costs for the unprocessed waste materials
on hand in the event that the conversion processes being developed were not
successful. To date, the Company has disposed of 2,357 tons of waste materials
which it had not been able to process, of which 1,220 tons were disposed of
during the year ended June 30, 1999. The amount of unprocessed waste materials
on hand was 843 tons at June 30, 1999 and at December 31, 1999. From July 1,
1998 to December 31, 1998, the Company decreased the reserve by approximately
$214,000 from $515,000 to $301,000 . From July 1, 1999 to December 31, 1999, the
Company decreased the reserve by approximately $28,000 from $301,000 to
$273,000. The decreases in the reserve, which resulted from the cleanup costs of
waste material storage areas, have been credited against operations. The Company
intends to adjust the reserve for disposal if and when it can further reduce the
quantities of unprocessed waste materials on hand.
5. Net Income (Loss) Per Common Share
Basic net income (loss) per common share is based on the net income (loss)
attributable to common stockholders for the period, divided by the weighted
average number of common shares outstanding during the period (excluding 740,559
common shares that were deposited into escrow in connection with the Company's
initial public offering). Potential common shares have not been included since
their effect would be antidilutive. Common shares that could be potentially
dilutive include 37,345,358 stock options, 29,376,661 warrants, 10,248,600
shares underlying the Series A Preferred Stock, and 96,392,680 shares underlying
the Series B Preferred Stock.
6. Extraordinary Item
On September 24, 1999 from the cash proceeds of the Private Placement (see Note
7), the Company paid $600,000 to ESDC in full satisfaction of the Dunkirk-Term
loan with the New York State Job Development Authority with a $1,183,110
principal balance and the Dunkirk-New York Job Development Authority (Al Tech)
subordinated note with a principal balance of $37,870. The Company also wrote
off approximately $24,000 of deferred financing costs and $150,000 of accrued
interest relating to such debt. In addition, $165,500 was paid to the Company's
former legal counsels in full settlement of an accrued liabilities of $229,110
for past due professional services. These forgivenesses resulted in a net pretax
gain to the Company of approximately $805,000, which is reported as an
Extraordinary Item.
To the extent that Dunkirk is deemed to be insolvent immediately prior to such
forgiveness by an amount which equals or exceeds the amount of debt forgiveness,
the Company will not recognize
9
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
(Unaudited)
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, 1999, the Company has approximately $24 million of net operating
loss carryforwards, which expire, between 2006 and 2019. The Tax Reform Act of
1986 enacted a complex set of rules (Section 382) limiting the potential
utilization of net operating loss carryforwards in periods following a corporate
"ownership change". In general, an ownership change is deemed to occur if the
percentage of stock of a loss corporation owned (actually, constructively and,
in some cases, deemed) by one or more "5% stockholders" has increased by more
that 50 percentage points over the lowest percentage of such stock owned during
a three year testing period. Although a comprehensive evaluation has not yet
been performed, it is likely that due to prior shifts in ownership (the Dunkirk
merger, the completion of the IPO and the Series A Preferred Stock offering) and
current shifts in ownership (the Series B Preferred Stock offering), the
Company's ability to utilize its net operating loss carryforwards could be
severely limited.
7. Capital Stock
On September 24 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 $1,115,000 in cash and cancellation of debt and accrued
interest in the amount of $1,766,778 as consideration for the sale of the Series
B Preferred. Of the debt converted, $1,652,778 was from two significant
stockholders of the Company (the "Funds") who converted all of the debt and
accrued interest owed to them under the Senior Secured Line of Credit Agreement
(as amended, the "Credit Agreement"), the interim financing of February 22, 1999
and the July 7, 1999
10
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
(Unaudited)
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 vested one-third upon grant, one-third on the first
anniversary of the date of grant and one-third on the second anniversary of the
date of grant and expire on the tenth anniversary of the date of grant.
On September 24, 1999, the Company's Certificate of Incorporation was amended to
increase the number of shares of Common Stock it is authorized to issue from 50
million to 200 million.
8. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. FAS 133, as amended by FAS 137, is effective for
periods beginning after June 15, 2000. Historically, the Company has not entered
into derivative contracts. Accordingly, FAS 133 is not expected to affect the
Company's financial statements.
9. Industry Segments
The Company's operations are classified into two business segments; decorative
particles and performance aggregates ("particles") and industrial abrasives and
recycling cathode ray tube glass ("abrasives and CRT").
The particle segment manufacturers, processes and markets decorative particles
that visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring and performance aggregates which can be used as
structural and textural enhancers, fillers and additives, and to strengthen and
add consistency to materials such as cements, plasters, grouts, roofing and
flooring, and glass and ceramic materials.
11
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
(Unaudited)
The abrasives and CRT segment manufacturers, processes and markets industrial
abrasives which can be used for surface cleaning and preparation applications
such as in cleaning steel structures, railcars, aircraft parts, and equipment.
During the six month periods ended December 31, the Company has continued to
shift its focus away from industrial abrasives in favor of decorative particles
and performance aggregates due to the increased costs of production for
industrial abrasives relative to their market sales price. The Company was also
engaged in recycling CRT glass produced in the manufacture of televisions for
resale to television manufacturers and others. In March 1998 the Company agreed
to subcontract its recycling operations which has resulted in a decrease in CRT
revenue in the 1998 period and no revenue in the 1999 period.
The following table shows revenues and operating income (loss) and other
financial information by segment as of and for the periods ended December 31,
1999 and 1998:
Three Months Ended Six Months ended
December 31 December 31
1999 1998 1999 1998
--------------------- ---------------------
Revenue
Particles $ 237,226 $ 175,430 $ 489,835 $ 291,985
Abrasives and CRT 15,620 55,953 26,030 176,636
--------- --------- --------- ---------
$ 252,846 $ 231,383 $ 515,865 $ 468,621
========= ========= ========= =========
Operating Income (Loss)
Particles $ (72,196) $ (94,036) $(129,746) $(426,678)
Abrasives and CRT (23,537) 179,523 (60,620) 165,050
Corporate Expenses (173,258) (228,373) (319,153) (592,076)
--------- --------- --------- ---------
$(268,991) $(142,886) $(509,519) $(853,704)
========= ========= ========= =========
Depreciation and Amortization
Particle $ 32,761 $ 33,316 $ 65,522 $ 65,921
Abrasives and CRT 2,991 5,550 8,370 11,100
Corporate Expenses 3,064 2,962 $ 6,127 $ 5,993
--------- --------- --------- ---------
$ 38,816 $ 41,828 $ 80,019 $ 83,014
========= ========= ========= =========
12
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
(Unaudited)
Interest and Other Income
Particles $ 116 $ -- $ 256 $ --
Abrasives and CRT 24,750 -- 28,600 5,121
Corporate Expenses 2,064 527 2,429 3,667
---------- ---------- ---------- ----------
$ 26,930 $ 527 $ 31,285 $ 8,788
========== ========== ========== ==========
Interest Expense
Particles $ -- $ -- $ 22 $ --
Abrasives and CRT 46,300 50,671 99,311 103,102
Corporate 4,380 70,759 48,093 131,871
---------- ---------- ---------- ----------
$ 50,680 $ 121,430 $ 147,426 $ 234,973
========== ========== ========== ==========
Extraordinary Item - Gain
on Debt Retirement
Particles $ -- $ -- $ -- $ --
Abrasives and CRT -- -- 747,172 --
Corporate 25,920 -- 58,124 --
---------- ---------- ---------- ----------
$ 25,920 $ -- $ 805,296 $ --
========== ========== ========== ==========
Identifiable Assets
Particles $ 760,862 $ 884,515
Abrasives and CRT 1,174,537 1,650,618
Corporate 111,905 93,910
---------- ----------
$2,047,304 $2,629,043
========== ==========
Capital Expenditures
Particles $ -- $ 40,791
Abrasives and CRT $ -- 4,269
Corporate $ -- $ 6,825
----------
$ -- $ 51,885
==========
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months ended December 31, 1999 Compared to Three Months Ended December 31,
1998.
Consolidated revenues for 1999 were approximately $253,000 consisting of
decorative particles and performance aggregates sales of approximately $235,000
and ALUMAGLASS sales of approximately $18,000. For the same three-month period
of 1998, the Company's consolidated revenues were approximately $231,000
consisting of decorative particles and performance aggregates sales of
approximately $173,000, ALUMAGLASS sales of approximately $42,000 and CRT glass
recycling fees of approximately $16,000. The increase of $62,000 in sales of
decorative particles and performance aggregates is as a result of the continuing
growth in that business which the Company is focusing upon. The decrease of
$24,000 in sales of ALUMAGLASS is as a result of ceasing operations at the
Dunkirk plant in the second quarter of fiscal 1999 and the CRT sales stopped as
a result of the Company subcontracting those operations to a third party.
The increase in cost of goods sold of approximately $226,000 to $286,000 in 1999
from $60,000.
As a result of the above increase in revenues of $22,000 and increase in cost of
goods sold of $226,000, the Company's gross margin decreased by $204,000 to a
loss of $33,000 for 1999 compared to a gain of $171,000 for 1998. The increased
sales and costs of production for decorative particles and performance
aggregates resulted in an increase in gross margin of $7,000 while the shutdown
of operations and credit to operations at the Dunkirk plant resulted in a net
decrease in gross margin of $211,000.
Selling, general and administrative expenses decreased by $78,000 to
approximately $236,000 for 1999 as compared to approximately $314,000 for the
same 1998 period. This decrease was primarily the result of a $41,000 decrease
in Corporate salaries, payroll taxes and fringe benefits, a $26,000 decrease in
professional fees paid to consultants, legal and accounting, a $17,000 decrease
in compensation expenses relating to capital stock and a $4,000 decrease in
expenses for the Corporate office including rent, telephone and office supplies.
Net interest expense decreased by $97,000 to approximately $24,000 for 1999 from
approximately $121,000 for 1998. The decrease was primarily attributable to the
cancellation of debt in exchange for the Series B Preferred Stock and
satisfaction of loans in September 1999 for the total reduction of debt of
approximately $2,988,000.
The Company recorded an extraordinary item (see Note 6) for the gain on debt
retirement of $26,000 in 1999 as a result of a gain for the accounts payable
forgiveness granted to the Company by its former legal counsel.
14
<PAGE>
Six Months ended December 31, 1999 Compared to Six Months ended December 31,
1998.
Consolidated revenues for 1999 were approximately $516,000 consisting of
decorative particles and performance aggregates sales of approximately $487,000
and ALUMAGLASS sales of approximately $29,000. For the same six month period of
1998, the Company's consolidated revenues were approximately $469,000 consisting
of decorative particles and performance aggregates sales of $288,000, ALUMAGLASS
sales of approximately $106,000 and CRT glass recycling fees of approximately
$74,000. The increase of $199,000 in sales of decorative particles and
performance aggregates is as a result of the continuing growth in that business
which the Company is focusing upon. The decrease of $77,000 in sales of
ALUMAGLASS is as a result of ceasing operations at the Dunkirk plant in the
second quarter of fiscal 1999 and the CRT sales stopped as a result of the
Company subcontracting those operations to a third party.
The increase in cost of goods sold of approximately $13,000 to $582,000 in 1999
from $569,000 in 1998 is as a result of an increase of $214,000 from a credit to
operations at the Dunkirk plant in 1998 for the decrease in the reserve for
disposal costs for the unprocessed waste materials on hand, a decrease of
$131,000 relating to costs at the Dunkirk plant which was not in operation in
1999 and was operating in 1998, and a decrease of $70,000 for the costs of
decorative particles and performance aggregates business which incurred many
expenses in 1998 as it started normal production. These expenses have been
reduced or eliminated in 1999.
As a result of the above increase in revenues of $47,000 and increase in cost of
goods sold of $13,000, the Company's gross margin improved by $34,000 to a loss
of $66,000 for 1999 compared to a loss of $100,000 for 1998. The increased sales
and reduced costs of production for decorative particles and performance
aggregates resulted in an improved gross margin of $269,000 while the shutdown
of operations and credit to operations at the Dunkirk plant resulted in a
reduced gross margin of $235,000.
Selling general and administrative expenses decreased by $310,000 to
approximately $443,000 for 1999 as compared to approximately $753,000 for the
same 1998 period. This decrease was primarily the result of a $151,000 decrease
in Corporate salaries, payroll taxes and fringe benefits, a $72,000 decrease in
professional fees paid to consultants, legal and accounting, a $35,000 decrease
in travel expenses for the Corporate office, a $20,000 decrease in compensation
expenses relating to capital stock and a $32,000 decrease in expenses for the
Corporate office including rent, telephone and office supplies
Net interest expense decreased by $110,000 to approximately $116,000 for 1999
from approximately $226,000 for 1998. The decrease was primarily attributable to
the cancellation of debt in exchange for the Series B Preferred Stock and the
satisfaction of loans in September 1999 for the total reduction of debt of
approximately $2,988,000
The Company recorded an extraordinary item (see Note 6) 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-off to the ESDC and a gain of $58,000 for the
accounts payable forgiveness granted to the Company by it former legal counsels.
15
<PAGE>
Liquidity and Capital Resources
The Company's business is capital intensive. The Company has funded its
operations principally from private debt and equity financing and the proceeds
of its IPO. Presently, the Company has limited revenue, has suffered recurring
losses from operations and has a net capital deficiency. The Company has a need
for financing. Management has implemented operational changes and has
restructured certain debt; however, management cannot predict the success of
these operational changes. These conditions, among others, raise substantial
doubt about the Company's ability to continue as a going concern. These issues
also create an uncertainty as to the recoverability of recorded assets and
satisfaction of liabilities. At December 31, 1999, the Company had approximately
$1,294,000 in principal amount of indebtedness (excluding amounts borrowed under
notes payable and capital lease obligations) and net working capital deficiency
of approximately $3,835,000. As of December 31, 1999, the Company had cash and
cash equivalents of approximately $40,000.
Net cash used in operating activities for the six months ended December 31, 1999
was $574,202. Net income for the period used cash of $533,767, net of non-cash
charges for depreciation and amortization, the gain on debt retirement reported
as an extraordinary item and stock compensation expense. In addition, cash was
used for the net change of $40,435 in our operating assets and liabilities,
consisting primarily of an increase in prepaid expenses and other current assets
and a decrease in accounts payable, reserve for disposal and other accrued
expenses.
Net cash used in investing activities for the six months ended December 31, 1999
was $50,000 for the issuance of a note receivable net of repayment. Net cash
provided by financing activities for the period was $603,028. Of this amount,
$1,125,000 was received from the cash sales of Series B Preferred and $116,347
was received from the issuance of notes payable. This cash provided was offset
by the $600,000 payment on long-term debt and $36,238 in payments on notes
payable and capital lease obligations.
On May 8, 1998, the Company entered into the Credit Agreement with the Funds
which provided for a line of credit for up to $1,200,000 principal amount of
loans pursuant to which the Company had fully borrowed as of January 13, 1999.
The line of credit was secured by the receivables and inventory of the Company
and its subsidiaries. Amounts borrowed under the line of credit accrued interest
at an annual rate of 12%. In connection with the line of credit (including an
amendment increasing the amount available thereunder by $90,000 (discussed
below), the Company issued to the Funds warrants to purchase an aggregate of
385,075 shares of Common Stock at an exercise price equal to $0.67 per share
(after giving effect to antidilution adjustment as of December 8, 1998), subject
to vesting as the borrowings occurred. As of December 15, 1998, the line of
credit was amended to increase the amount available thereunder by $90,000. On
February 22, 1999, the Funds provided the Aries Interim Financing to the Company
in the amount of up to $150,000 (which the Company has borrowed). Also on July
7, 1999, the Funds provided additional financing to the Company in the amount of
$20,000.
During the period commencing September 1998 and terminating in February 1999,
Eckardt C. Beck, the Acting President and Chief Executive Officer of the
Company, provided loans to the Company or did not receive accrued compensation,
aggregating $190,000. The loans accrue interest at the rate of 12% per year and
became due on September 1, 1999.
In September and December of 1999, the Company raised $1,125,000 in cash and
$1,766,778 in the form of cancellation of debt 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
16
<PAGE>
the Series B Preferred are entitled to receive dividends payable in cash or in
shares of Series B Preferred stock at the option of the Company at the rate of
10% per annum.
The Company accepted cash and the cancellation of debt as consideration for the
sale of the Series B Preferred. Of the total proceeds $1,125,000 was in cash and
$1,766,778 was in the form of cancellation of debt and accrued interest. Of the
debt converted, $1,652,778 was from the Funds who converted all of the principal
and accrued interest owed to them under the Credit Agreement, the Aries Interim
Financing and the July 7, 1999 borrowing. Also the Acting President and Chief
Executive Officer converted $114,000 of the principal and accrued interest owed
to him under the promissory note dated February 23, 1999.
From the cash proceeds of the Private Placement, $600,000 was paid to ESDC in
full satisfaction of the Dunkirk-Term loan with New York State Job Development
Authority with a $1,183,110 principal balance and the Dunkirk-New York Job
Development Authority (Al Tech) subordinated note with a principal balance of
$37,870. In addition, $160,000 was paid to the Company's former legal counsel in
full settlement of an accrued liability of $197,689 for past due professional
services.
As of December 31, 1999, the Company had approximately $1,294,000 in principal
amount of indebtedness (excluding amounts borrowed under notes payable and
capital lease obligations), consisting of (i) approximately $590,000 aggregate
outstanding principal amount under various mortgage and secured equipment loans
and (ii) approximately $704,000 aggregate outstanding principal amount under
subordinated indebtedness from certain of the Company's CRT glass customers who
provided financial assistance to the Company during its start-up phase. The
Company's indebtedness is secured by liens on its fixed assets. The Company's
indebtedness has been used to finance its facility, equipment and related
capital expenditures. Certain of the agreements related to such indebtedness
contain customary covenants and default provisions. At December 31, 1999, the
Company was in violation of certain loan covenants and was in default in payment
of principal and interest, related to the above $1,294,000 in debt, and as a
result all of the debt has been classified as a current liability at December
31, 1999.
The Company's capital lease payments were approximately $7,650 for the six
months ended December 31, 1999 and are estimated to be approximately $15,000 for
the fiscal year ending June 30, 2000, under current commitments. The Company has
no other material commitments for capital expenditures.
The Company received waste materials for processing into finished goods
inventory, which then can be sold to its customers. The Company has recorded a
reserve for disposal for the probable disposal and cleanup costs of waste
material it has received which cannot be processed through the Company's current
processing methods. The Company recorded a disposal reserve with respect to
materials it cannot process because it is probable it will incur these costs on
the ultimate disposition of the waste materials. The Company estimates that the
disposal costs for material received by the Company that the Company cannot
process, if and when incurred, will exceed the fees the Company was paid to
accept such materials.
The Company had 843 tons of unprocessed waste materials on hand as of December
31, 1999, and June 30, 1999. The Company's disposal reserve was $273,000 as of
December 31, 1999, compared to $301,000 at June 30, 1999. The decrease in the
reserve, which resulted from the cleanup costs of waste material storage areas,
has been credited against operations.
The Company has federal net operating loss carryforwards that amounted to
approximately $24 million at June 30, 1999, which expire between 2006 and 2019.
Pursuant to Section 382 of the
17
<PAGE>
Internal Revenue Code of 1986, as amended (the "Code"), utilization of net
operating loss carryforwards is limited if there has been a change in control
(ownership) of the Company. Although a comprehensive evaluation has not yet been
performed, it is likely that due to historical equity financing the Company's
ability to utilize its net operating loss carryforwards could be severely
limited.
Conversion Technologies International, Inc. (CTI) is fully Y2K compliant. We
have performed extensive tests on all our critical systems and to date we have
experienced no system errors or malfunctions. On December 10, 1999 CTI went into
a hard test by setting all system clocks to December 31, 1999. All systems
operated normally. The systems tested included all accounting software for
accounts payable, accounts receivable, general ledger, order entry, purchasing
and inventory control. The manufacturing systems are limited but they too have
been tested.
This Form 10-QSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include risks and uncertainties, including, but not
limited to: (i) the risk that the Company's marketing efforts with respect to
its abrasives, decorative particles and other products will not result in
increased sales and the the Company will continue to experience substantial
losses from operations, (ii) the risk that the Company will require additional
financing prior to achieving positive cash flow from operations and that it may
not be able to obtain such financing on terms acceptable to the Company or at
all, (iii) the risk that the redemption of the IDA Bonds or removal of
non-productive assets from service will result in taxable income to the Company
or otherwise create tax or tax-related obligations of the Company the result of
which could reduce the Company's net operating loss carry-forwards and/or,
depending on the amount of such taxable income, if any, result in the Company
being required to satisfy such obligations out of its available cash, at a time
which such obligations could exceed the Company's available cash, (iv) the risk
that the Company will experience interruptions in its manufacturing operations
which will delay shipments or result in lost business, (v) risks associated with
retaining and attracting key personnel, (vi) risks associated with being able to
obtain requisite supplies of raw materials for its products, (vii) risks
associated with its ability to protect its intellectual property and proprietary
rights, and (viii) risks associated with the failure to comply with applicable
environmental laws and regulations.
Part II - Other Information
Item 1. Legal Proceedings
The Company's previously reported potential litigation pertaining to Stephen
Archer and Gary Jellum remains the same.
For both MWW/Strategic Communications, Inc., and Buchanan Ingersoll Professional
Corporation, the Company has resolved the litigations and has reached
settlements.
The Company's position on the legal proceedings concerning The Hartford , as
previously reported, has not changed.
CLI Industries has filed a suit in St. Johns County Florida for recovery of
monetary damages of $15,286.64. for our product to us.
The Company is not involved in any other material legal proceedings.
18
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
On September 24 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 (the "Series B Preferred") for which the Company accepted $1,125,000 in
cash and the cancellation of $1,767,000 of debt and accrued interest. The Series
B Preferred was sold pursuant to an exemption from registration provided by
Section 4 (2) of the Securities Act of 1933, as amended (the "Securities Act")
and Regulation D promulgated thereunder. In connection with the sale of the
Series B Preferred, the Company did not conduct any general advertisement or
solicitation; each purchaser of the Series B Preferred represented that, among
other things, the purchaser was an "accredited investor" as that term is defined
in Regulation D and the purchaser was purchasing the shares of Series B
Preferred for investment and not with a view to distributions. Appropriate
legends were affixed to the certificates representing the Series B Preferred.
The Company has agreed to file, not later than 120 days following the final
closing of the Private Placement, a registration statement under the Securities
Act registering for resale the Common Stock issuable upon conversion of the
Series B Preferred.
Each share of Series B Preferred has a par value of $.001, a stated value of
$0.60 and is convertible into twenty shares of Common Stock at a conversion
price of $0.03 per share. The holders of the Series B Preferred are entitled to
the number of votes equal to the number of shares of Common Stock of the Company
into which such shares of Series B Preferred are convertible, and are entitled
to vote together with the holders of the Series A Convertible Preferred Stock
and the Common Stock.
The holders of the Series B Preferred are also entitled to certain voting rights
not shared by the holders of the Common Stock, so long as a majority of the
Series B Preferred sold in the Private Placement remains outstanding. The
affirmative vote of the holders of at least two-thirds of the Series B Preferred
will be required for (i) the issuance of securities senior to or on a parity
with the Series B Preferred with respect to dividends, voting or liquidation,
(ii) any alterations to the rights of the Series B Preferred, (iii) a
liquidation, dissolution or sale of substantially all of the assets of the
Company, (iv) the incurrence of over $100,000 of indebtedness (other than
borrowings under working capital lines of credit), and (v) the repurchase of any
of the securities of the Company. In addition, the holders of the Series B
Preferred are entitled to a liquidation preference in an amount per share equal
to $0.81 plus declared and/or accrued but unpaid dividends, if any. Finally, the
holders of the Series B Preferred are entitled to dividends, payable in cash or
in Series B Preferred, at an annual rate of 10% beginning in September 2000. The
Company must pay such dividend prior to any dividend declared on the Common
Stock. (For a detailed description of the terms of the Series B Preferred, see
the Certificate of Designation of Series B Convertible Preferred Stock, which
was filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1999.)
Item 3. Defaults Upon Senior Securities
The Company's indebtedness has been used to finance its facility, equipment and
related capital expenditures and is secured by liens on its fixed assets. The
agreements related to such indebtedness contain customary covenants and default
provisions. At December 31, 1999, the Company was in violation of certain loan
covenants and was in default in payment of principal and interest on its debt.
Item 4. Submission of Matters to a Vote of Security Holders
19
<PAGE>
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
11 Computation of per share earnings.
27 Financial Data Schedule.
Form 8-K
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
Dated: February 10, 2000 /s/ Eckardt C. Beck
------------------------
Eckardt C. Beck
Acting President and Chief
Executive Officer
` (Principal Executive Officer)
Dated: February 10, 2000 /s/ Carl Rang
------------------------
Carl Rang
Acting Chief Financial Officer
and Controller
(Principal Financial Officer)
21
Exhibit 11
Conversion Technologies International, Inc.
and Subsidiaries
Statement of Computation of Net Income (Loss) Per Share
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss before extraordinary item $ (292,741) $ (263,789) $ (625,660) $(1,079,889)
Preferred stock dividends (127,133) (251,419) (238,815) (852,345)
----------- ----------- ----------- -----------
Loss before extraordinary item
attributable to common stockholders $ (419,874) $ (515,208) $ (864,475) $(1,932,234)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 6,849,486 4,862,486 6,637,899 4,861,413
=========== =========== =========== ===========
Loss per common share before
extraordinary item $ (0.06) $ (0.11) $ (0.13) $ (0.40)
=========== =========== =========== ===========
Extraordinary item $ 25,920 $ -- $ 805,296 $ --
=========== =========== =========== ===========
Income per share from
extraordinary item $ -- $ -- $ 0.12 $ --
=========== =========== =========== ===========
Net income (loss) $ (266,821) $ (263,789) $ 179,636 $(1,079,889)
Preferred stock dividends (127,133) (251,419) (238,815) (852,345)
----------- ----------- ----------- -----------
Net income (loss) attributable
to common stockholders $ (393,954) $ (515,208) $ (59,179) $(1,932,234)
=========== =========== =========== ===========
Net income (loss) per
common share $ (0.06) $ (0.11) $ (0.01) $ (0.40)
=========== =========== =========== ===========
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Form 10-QSB
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 39,780
<SECURITIES> 0
<RECEIVABLES> 229,989
<ALLOWANCES> 68,146
<INVENTORY> 213,205
<CURRENT-ASSETS> 531,264
<PP&E> 1,772,053
<DEPRECIATION> 339,821
<TOTAL-ASSETS> 2,047,304
<CURRENT-LIABILITIES> 4,366,005
<BONDS> 0
0
5,332
<COMMON> 1,904
<OTHER-SE> (2,325,937)
<TOTAL-LIABILITY-AND-EQUITY> 2,047,304
<SALES> 515,865
<TOTAL-REVENUES> 515,865
<CGS> 582,065
<TOTAL-COSTS> 1,025,384
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,141
<INCOME-PRETAX> (625,660)
<INCOME-TAX> 0
<INCOME-CONTINUING> (625,660)
<DISCONTINUED> 0
<EXTRAORDINARY> 805,296
<CHANGES> 0
<NET-INCOME> 179,636
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
