SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission File No:
March 31, 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
St. Augustine, Florida 32086
(Address of principal executive offices)
(904) 808-0503
(Issuer's telephone number, including area code)
-----------------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of March 31, 2000, 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.
Transactional Small Business Disclosure Format
Yes |_| No |X|
1
<PAGE>
Contents
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
Part I - Financial Information
Consolidated Balance Sheets of Conversion Technologies International, Inc. and
Subsidiaries as of March 31, 2000 and June 30, 1999 ............................... 3
Consolidated Statements of Operations of Conversion Technologies International, Inc.
and Subsidiaries for the three and nine month periods ended March 31, 2000 and 1999 4
Consolidated Statement of Stockholders' Deficiency of Conversion Technologies
International, Inc. and Subsidiaries for the nine month period ended March 31, 2000 5
Consolidated Statements of Cash Flows of Conversion Technologies International, Inc.
and Subsidiaries for the nine month periods ended March 31, 2000 and 1999 ........ 6
Notes to Consolidated Financial Statements .......................................... 7
Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Quantative and Qualitative Disclosure about Market Risk ............................. 19
Part II - Other Information ............................................................ 19
</TABLE>
2
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Cash and cash equivalents ................................... $ 13,036 $ 60,954
Accounts receivable, less allowance for doubtful accounts of
$68,146 at March 31, 2000 and June 30, 1999 ............. 201,466 104,350
Inventories ................................................. 269,476 283,029
Prepaid expenses and other current assets ................... 105,117 156,701
----------- -----------
Total current assets ........................................ 589,095 605,034
Property, plant and equipment:
Land .................................................... 75,000 75,000
Building and improvements ............................... 675,000 675,000
Machinery and equipment ................................. 815,624 1,022,053
Construction in progress ................................ 23,671 --
----------- -----------
1,589,295 1,772,053
Less accumulated depreciation ........................... (391,482) (269,841)
----------- -----------
1,197,813 1,502,212
Other assets, less accumulated amortization of $73,754 and
$123,346 at March 31, 2000 and June 30, 1999 respectively 79,982 106,398
----------- -----------
$ 1,866,890 $ 2,213,644
=========== ===========
Liabilities and stockholders' deficiency
Notes payable ............................................... $ -- $ 121,915
Accounts payable ............................................ 1,341,136 1,495,153
Reserve for disposal ........................................ 273,000 301,000
Accrued expenses ............................................ 1,073,965 994,559
Investment tax credit payable ............................... 235,000 235,000
Current portion of capital lease obligations ................ 10,495 14,688
Current portion of long-term debt ........................... 1,334,555 2,514,496
----------- -----------
Total current liabilities ................................... 4,268,151 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 March 31, 2000 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 March 31, 2000 ...................... 4,820 --
Common Stock, $.00025 par value, authorized 200,000,000
shares, issued and outstanding 7,615,045 and 6,947,045
shares at March 31, 2000 and June 30, 1999 respectively . 1,904 1,737
Additional paid-in capital .............................. 35,671,987 33,353,485
Unearned stock compensation ............................. (39,434) (57,246)
Accumulated deficit ..................................... (38,041,050) (38,289,774)
----------- -----------
Total stockholders' deficiency .............................. (2,401,261) (4,991,252)
----------- -----------
$ 1,866,890 $ 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 Nine months ended
March 31, March 31,
2000 1999 2000 1999
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Revenue $ 393,298 280,790 912,720 749,411
Cost of goods sold 272,750 341,502 812,492 964,770
----------- ----------- ----------- -----------
Gross Profit (Loss) on sales 120,548 (60,712) 100,228 (215,359)
Selling, general and administrative 212,800 415,465 697,520 1,114,522
----------- ----------- ----------- -----------
Loss from operations (92,252) (476,177) (597,292) (1,329,881)
Gain on disposal of equipment 163,769 -- 163,769 --
Interest and other income 28,638 382 60,203 9,170
Interest expense 31,067 129,221 183,252 364,194
----------- ----------- ----------- -----------
Income (Loss) before extraordinary item 69,088 (605,016) (556,572) (1,684,905)
Extraordinary item - gain on debt
retirement -- -- 805,296 --
----------- ----------- ----------- -----------
Net income (loss) 69,088 (605,016) 248,724 (1,684,905)
Preferred stock dividends (157,585) (193,299) (396,400) (1,045,644)
----------- ----------- ----------- -----------
Net (loss) applicable to
Common Stock $ (88,497) $ (798,315) $ (147,676) $(2,730,549)
=========== =========== =========== ===========
Basic Earnings Per Common Share:
Loss before extraordinary item $ (0.01) $ (0.16) $ (0.14) $ (0.59)
Extraordinary item -- -- 0.12 0.03
----------- ----------- ----------- -----------
Net income (loss) applicable to
Common Stock $ (0.01) $ (0.16) $ (0.02) $ (0.56)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 6,874,491 4,862,486 6,706,903 4,861,765
</TABLE>
See accompanying notes
4
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statement of Stockholders' Deficiency
Nine Months Ended March 31, 2000
(Unaudited)
<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 1,875,000 $ 1,875
Conversion of debt to
Series B Preferred Stock 2,944,634 $ 2,945
Preferred Stock dividends
Net Income
-------------------------------------------------------------------------------------
Balance at March 31, 2000 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 17,812 17,812
Issuance of Series B Preferred
Stock, net of issuance costs 951,202 953,077
Conversion of debt to
Series B Preferred Stock 1,763,833 1,766,778
Preferred Stock dividends (396,400) (396,400)
Net Income 248,724 248,724
-------------------------------------------------------------
Balance at March 31, 2000 $ 35,671,987 $ (39,434) $(38,041,050) $ (2,401,261)
============================================================
</TABLE>
See accompanying notes
5
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
March 31,
2000 1999
---------------------------
<S> <C> <C>
Operating activities
Net (loss) income $ 248,724 $(1,684,905)
Adjustments to reconcile net (loss) income to net cash
(used in) operating activities:
Depreciation expense 104,970 108,377
Amortization expense 10,872 19,151
Amortization of discount on notes payable -- 97,200
Gain on disposal of equipment (163,769) --
Extraordinary item - gain on debt retirement (805,296) --
Stock compensation expense 17,812 44,254
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (97,116) 43,753
Decrease in inventories 13,553 3,311
(Increase) decrease in prepaid expenses and other current assets 51,584 (71,204)
Decrease (increase) in other assets (8,456) 850
Decrease in reserve for disposal (28,000)
Increase (decrease) in accounts payable, reserve for
disposal and other accrued expenses (59,002) 493,026
----------- -----------
Net cash used in operating activities (714,124) (946,187)
Investing activities
Capital expenditures (23,829) (91,513)
Proceeds from disposal of equipment 387,027 --
----------- -----------
Net cash provided by (used in) investing activities 363,198 (91,513)
Financing activities
Issuance of notes payable -- 1,027,778
Payment of notes payable (121,915) (16,048)
Proceeds from issuance of long-term debt 76,039 --
Principal payments on long-term debt (600,000) (9,758)
Principal payments under capital lease obligations (4,193) (19,592)
Issuance of Series B Preferred Stock net of offering costs 953,077 --
----------- -----------
Net cash provided by financing activities 303,008 982,380
----------- -----------
Decrease in cash and cash equivalents (47,918) (55,320)
Cash and cash equivalents at beginning of period 60,954 168,483
----------- -----------
Cash and cash equivalents at end of period $ 13,036 $ 113,163
=========== ===========
Supplemental disclosure of cash flow information
Interest paid $ 31,067 $ 55,500
=========== ===========
Non cash investing and financing activities
Long-term debt converted to Series B Preferred Stock 1,766,778 --
Decrease in additional paid in capital due to Series A Preferred Stock
converted into Common Stock 133 3,670
Dividends accrued on Series A Preferred Stock 396,400 --
</TABLE>
6
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2000
(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
results of operations for the nine and three months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
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 March 31, 2000.
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 conversion and 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 which resulted in a gain on debt
retirement (See Note 6). 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. The Company conducted an equipment auction in January 2000
at Dunkirk. 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.
Although management believes that as a result of the above Private Placement and
sale of equipment 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
March 31, 2000
(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 consist of the following:
March 31, 2000 June 30, 1999
-------------- -------------
(Unaudited)
Raw materials $ 70,858 $ 35,562
Work-in-process 22,035 20,707
Finished goods 176,583 226,760
-------- --------
$269,476 $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 March 31, 2000 ("2000"), 82.4% of the
Company's revenue was derived from three major customers. Revenue generated from
each of these customers which represents 42.5%, 24.9% and 15.0% of total
revenue, respectively.
For the three months ended March 31, 1999 ("1999"), 77.0% of the Company's
revenue was derived from three major customers. Revenue generated from each of
these customers which represent 42.2%, 24.5% and 10.3% of total revenue,
respectively.
For the nine months ended 2000, 91.4% of the Company's revenue was derived from
three major customers. Revenue generated from each of these customers which
represents 39.3%, 38.1% and 14.0% of total revenue, respectively.
For the nine months ended 1999, 51.3% of the Company's revenue was derived from
two major customers. Revenue generated from each of these customers which
represents 26.4% and 24.9% of total revenue, respectively.
8
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2000
(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 less than 700 tons at March 31, 2000.
From July 1, 1999 to March 31,2000, the Company decreased the reserve by $28,000
from $301,000 to $273,000. The decrease 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. These shares are subject to cancellation if certain
earning levels or market price of the Company's stock does not achieve certain
levels by June 30, 2000). 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 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
March 31, 2000
(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 $1,125,000 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.
10
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
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.
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 Pronouncement
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 manufactures, processes and markets decorative particles
that visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring and performance aggregates which can be used as
structural and textural enhancers, fillers and additives, and to strengthen and
add consistency to materials such as cements, plasters, grouts, roofing and
flooring, and glass and ceramic materials.
The abrasives and CRT segment 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 aircraft
equipment. The Company has continued to shift its focus away from the industrial
abrasives in favor of decorative particles and performance aggregates and has
sold all of the equipment used to manufacture industrial abrasives at its
Dunkirk plant (See Note 1). In addition, the Company has
12
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
converted the Dunkirk facility into rental property. The Company has leased
33,000 square feet of the space under a short term lease and is seeking to lease
the remaining space of approximately 170, 000 square feet.
The following table shows revenues and operating (loss) and other financial
information by segment as of and for the periods ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
2000 1999 2000 1999
----------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue
Particles $ 384,176 $ 256,210 $ 886,690 $ 548,195
Abrasives and CRT 9,122 24,580 26,030 201,216
----------- ----------- ----------- -----------
$ 393,298 $ 280,790 $ 912,720 $ 749,411
=========== =========== =========== ===========
Operating (Loss)
Particles $ 33,262 $ (122,805) $ (131,000) $ (509,947)
Abrasives & CRT -- (42,281) (14,776) 91,694
Corporate (125,514) (311,091) (451,516) (911,628
----------- ----------- ----------- -----------
$ (92,252) $ (476,177) $ (597,292) $(1,329,881)
=========== =========== =========== ===========
Depreciation and Amortization
Particle $ 32,761 $ 41,558 $ 106,652 $ 102,509
Abrasives & CRT -- 1,850 -- 8,370
Corporate 3,063 2,997 9,190 16,649
----------- ----------- ----------- -----------
$ 35,824 $ 46,405 $ 115,842 $ 127,528
=========== =========== =========== ===========
</TABLE>
12
<PAGE>
Conversion Technologies International, Inc.
And Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
2000 1999 2000 1999
----------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest and Other Income
Particles $ 262 $ -- $ 518 $ --
Abrasives and CRT 24,830 -- 53,710 5,121
Corporate 3,546 382 5,975 4,049
---------- ---------- ---------- ----------
$ 28,638 $ 382 $ 60,203 $ 9,170
========== ========== ========== ==========
Interest Expense
Particles $ 450 $ 385 $ 4,929 $ 385
Abrasives and CRT 29,210 42,016 128,521 145,118
Corporate 1,407 86,820 49,802 218,691
---------- ---------- ---------- ----------
$ 31,067 $ 129,221 $ 183,252 $ 364,194
========== ========== ========== ==========
Extraordinary Item - Gain on Debt Retirement
Particles $ -- $ -- $ -- $ --
Abrasives and CRT -- -- 747,172 --
Corporate -- -- 58,124 --
---------- ---------- ---------- ----------
$ -- $ -- $ 805,296 $ --
========== ========== ========== ==========
Identifiable Assets
Particles $ 990,361 $ 884,515
Abrasives and CRT 764,303 1,650,618
Corporate 112,226 93,910
---------- ----------
$1,866,890 $2,629,043
========== ==========
Capital Expenditures
Particles $ 23,829 $ 80,419
Abrasives and CRT $ -- 4,269
Corporate $ -- $ 6,825
---------- ----------
$ 23,829 $ 91,513
========== ==========
</TABLE>
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This Form 10-QSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include risks and uncertainties, including, but not
limited to: (i) the risk that the Company's marketing efforts with respect to
its abrasives, decorative particles and other products will not result in
increased sales and the Company will continue to experience substantial losses
from operations, (ii) the risk that the Company will require additional
financing prior to achieving positive cash flow from operations and that it may
not be able to obtain such financing on terms acceptable to the Company or at
all, (iii) the risk that the redemption of the IDA Bonds or removal of
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.
Results of Operations
Three Months ended March 31, 2000 Compared to Three Months Ended March 31, 1999.
Consolidated revenues for 2000 were approximately $393,000 consisting of
decorative particles and performance aggregates sales of approximately$ 384,000
and sales of ALUMAGLASS remaining inventory for approximately $9,000. For the
same three-month period of 1999, the Company's consolidated revenues were
approximately $281,000 consisting of decorative particles and performance
aggregates sales of approximately $256,000 and ALUMAGLASS sales of approximately
$25,000. The increase of $137,000 in sales of decorative particles and
performance aggregates result from continuing growth in that business which the
Company is focusing upon. The decrease of $16,000 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 stopping as a result of the Company subcontracting
those operations to a third party.
The decrease in cost of goods sold of approximately $69,000 from $342,000 in
1999 to $273,000 in 2000 is due to implementing cost improvements especially by
the efficient use of pigments and better purchasing techniques for quartz.
As a result of the above increase in revenues of $112,000 and decrease in cost
of goods sold of $69,000, the Company's gross margin increased by $181,000 to a
gross profit of $121,000 for 2000 compared to a gross loss of $60,000 for 1999.
The increased sales and decreased costs of production for decorative particles
and performance aggregates is mainly due to the Company's concentration of
placing its product in an aggressive distribution position and realizing
effective cost reductions.
Selling, general and administrative expenses decreased by $202,000 to
approximately $213,000 for 2000 as compared to approximately $415,000 for the
same 1999 period. This decrease was primarily the result of a $147,000 decrease
in legal fees and a $14,000 decrease in salary, payroll taxes and fringe
benefits due to a reduction in staffing.
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The Company realized a gain of approximately $164,000 from an equipment auction
conducted in January 2000 at Dunkirk.
Interest and other income increased by $28,000 from approximately $0 for 1999.
The increase was primarily brought about by space rental at Dunkirk for
approximately $25,000 and space rental at St. Augustine for approximately
$2,000.
Interest expense decreased by $98,000 to approximately $31,000 for 2000 from
approximately $129,000 for 1999. 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.
Preferred stock dividends decreased by approximately $36,000 from approximately
$194,000 for 1999 to approximately $158,000 for 2000 due to a decrease in
preferred stock resulting from Series A preferred stock being converted into
common stock.
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Nine Months ended March 31, 2000 Compared to Nine Months ended March 31, 1999.
Consolidated revenues for 2000 were approximately $913,000 consisting of
decorative particles and performance aggregates sales of approximately $887, 000
and ALUMAGLASS sales of approximately $26,000. For the same nine month period of
1999, the Company's consolidated revenues were approximately $749,000 consisting
of decorative particles and performance aggregates sales of $548,000, ALUMAGLASS
sales of approximately $185,000 and CRT glass recycling fees of approximately
$16,000 for combined total of approximately $201,000 for abrasives and CRT. The
increase of $339, 000 in sales of decorative particles and performance
aggregates is a result of the continuing growth in that business which the
Company is focusing upon. The decrease of $175,000 in sales of ALUMAGLASS is as
a result of ceasing operations at the Dunkirk plant in the second quarter of
fiscal 1999 and that CRT sales stopped as a result of the Company subcontracting
those operations to a third party.
The decrease in cost of goods sold of approximately $153,000 from $965,000 in
1999 to $812,000 in 2000 is a result of implementing cost improvements
especially by the efficient use of pigments and better purchasing techniques for
quartz.
As a result of the above increase in revenues of $339,000 and decrease in cost
of goods sold of $153,000, the Company's gross margin improved by $315,000 to a
profit of $100,000 for 2000 compared to a loss of $215,000 for 1999. The
increased sales and reduced costs of production for decorative particles and
performance aggregates is a result of focusing on operations in St. Augustine
and reducing the Company's efforts in Dunkirk along with ongoing cost
improvements
Selling general and administrative expenses decreased by $417,000 to
approximately $697,000 for 2000 as compared to approximately $1,114,000 for the
same 1999 period. This decrease was primarily the result of a $31,000 decrease
for Board of Directors Options; a $209,000 decrease in professional fees for
consultants, lawyers and accountants; a $14,000 decrease in employee options; a
$12,000 decrease for telephone expenses; and a $117,000 decrease for salaries ,
payroll taxes and fringe benefits due to a reduction in staffing.
Interest and other income increased by approximately $51,000. The increase was
primarily attributed to Dunkirk space rental of approximately $49,000 and St.
Augustine space rental of approximately $2,000.
The Company realized a gain of approximately $164,000 from an equipment auction
conducted in January 2000 at Dunkirk.
Interest expense decreased by $181,000 to approximately $183,000 for 2000 from
approximately $364,000 for 1999. 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 its former legal
counsels.
Preferred stock dividends decreased by approximately $649,000 from approximately
$1,045,000 for 1999 to approximately $396,000 for 2000 due to a decrease in
preferred stock resulting from Series A preferred stock being converted into
common stock.
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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 nine months ended March 31, 2000
was $714,124. Net income for the period used cash of $586,687, 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 $127,437 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 reserve for disposal
and a decrease in accounts payable and other accrued expenses.
Net cash used in investing activities for the nine months ended March 31, 2000
was $23,829 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 $303,008. Of this amount, $953,077 was received from the cash
sales of Series B Preferred net of offering costs and $76,039 was received from
the issuance of debt. This cash provided was offset by the $600,000 payment on
long-term debt and $126,108 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 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 totaling $130,000 to the Company. The loans accrue
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 March 31, 2000, Eckardt C. Beck has not received compensation and
expenses aggregating $160,000.
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 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. 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.
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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, $165,000 was paid to the Company's former legal counsels
in full settlement of accrued liabilities of $229,110 for past due professional
services
As of March 31, 2000, the Company had approximately $1,163,000 in principal
amount of indebtedness (excluding amounts borrowed under certain 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 $573,000 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 March
31,2000, the Company was in violation of certain loan covenants and was in
default in payment of principal and interest, related to the above $1,163,000 in
debt, and as a result all of the debt has been classified as a current liability
at March 31, 2000.
The Company's capital lease payments were approximately $4,000 for the nine
months ended March 31, 2000 and are estimated to be approximately $10,000 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 for sale to its customers. The Company has recorded a reserve for
disposal of $273,000 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 has federal net operating loss carryforwards that amounted to
approximately $24 million at June 30, 1999, which expire between 2006 and 2019.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), utilization of net operating loss carryforwards is limited if there has
been a change in control (ownership) of the Company. Although a comprehensive
evaluation has not yet been performed, it is likely that due to historical
equity financing the Company's ability to utilize its net operating loss
carryforwards could be severely limited.
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 issue and the Company believes
that such systems were already, or have been converted to be Year 2000
compliant. Conversion costs relating to the Year 2000 compliance have been
immaterial and have been expensed as incurred. The Company has requested
information regarding the computer systems of our primary customers, suppliers,
creditors and financial service organizations and found that they were
substantially Year 2000 Compliant. As of the date of this Report, the Company
has experienced no Year 2000 disruptions to its operations since the year 2000
began. There is no assurance, however, that such primary organizations are
actually Year 2000 compliant and that the Year 2000 issue will not adversely
affect the Company's financial position or results of operations. The Company
anticipates that its expenditures in addressing the Year 2000 issue will not
have a material adverse affect on our financial position or results of
operations.
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Quantative and Qualitative Disclosure about Market Risk
None.
Part II - Other Information
Item 1. Legal Proceedings
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 not involved in any other material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
None.
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 March 31, 2000, 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
None
Item 5. Other Information
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Item 6. Exhibits and Reports on Form 8-K
Exhibits
27 Financial Data Schedule.
Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
Dated: June 1, 2000 /s/ Eckardt C. Beck
-------------------
Eckardt C. Beck
Acting President and Chief
Executive Officer
(Principal Executive Officer)
Dated: June 1, 2000 /s/ Carl Rang
-------------
Carl Rang
Acting Chief Financial Officer and
Controller
(Principal Financial Officer)
21
