UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______.
COMMISSION FILE NO. 0-21911
SYNTROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-1565725
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1350 South Boulder, Suite 1100
Tulsa, Oklahoma 74119-3295
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 592-7900
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 .
--- ---
At November 2, 2001, the number of outstanding shares of the issuer's
common stock was 33,282,707.
SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements.
Unaudited Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000................................................................. 1
Unaudited Consolidated Statements of Operations for the three month and nine month
periods ended September 30, 2001 and 2000........................................ 2
Unaudited Consolidated Statements of Stockholders' Equity for the nine
month period ended September 30, 2001............................................. 3
Unaudited Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 2001 and 2000......................................... 4
Notes to Unaudited Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 18
Item 2. Changes in Securities and Use of Proceeds...................................... 18
Item 3. Defaults Upon Senior Securities................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders............................ 19
Item 5. Other Information.............................................................. 19
Item 6. Exhibits and Reports on Form 8-K............................................... 19
SIGNATURES.............................................................................. 20
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements as
well as historical facts. These forward-looking statements include statements
relating to our gas-to-liquids technology known as the Syntroleum Process and
related technologies, gas-to-liquids plants based on the Syntroleum Process
including the proposed Sweetwater plant, anticipated costs to design, construct
and operate these plants, anticipated costs to make products from these plants,
the timing of commencement and completion of the design and construction of
these plants, obtaining required financing for these plants, the economic
construction and operation of gas-to-liquids plants, the value and markets for
plant products, testing, certification, characteristics and use of plant
products, the continued development of the Syntroleum Process (alone or with
partners), anticipated capital expenditures, use of proceeds from our recent
public offering, anticipated revenues, the sale of and costs associated with our
real estate inventory and any other statements regarding future growth, cash
needs, operations, business plans and financial results. When used in this
document, the words "anticipate," "believe," "estimate," "expect," "intend,"
"may," "plan," "project," "should", and similar expressions are intended to be
among the statements that identify forward-looking statements. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, these kinds of statements involve risks and uncertainties. Actual
results may not be consistent with these forward-looking statements. Important
factors that could cause actual results to differ from these forward-looking
statements include the risks that the cost of designing, constructing and
operating commercial-scale gas-to-liquids plants will exceed current estimates,
the schedule for construction of commercial-scale GTL plants will extend beyond
current estimated schedules, financing for design and construction of
commercial-scale GTL plants and our other activities may not be available,
commercial-scale gas-to-liquids plants will not achieve the same results as
those demonstrated on a laboratory or pilot basis, gas-to-liquids plants may
experience technological and mechanical problems, improvements to the Syntroleum
Process currently under development may not be successful, markets for gas-to-
liquids plant products may not develop, plant economics may be adversely
impacted by operating conditions, including energy prices, construction risks
and risks associated with investments and operations in foreign countries, our
ability to implement corporate strategies, competition, intellectual property
risks, our ability to obtain financing and other risks described in this
Quarterly Report on Form 10-Q and Syntroleum's Annual Report on Form 10-K for
the year ended December 31, 2000.
As used in this Quarterly Report on Form 10-Q, the terms "we," "our" or
"us" mean Syntroleum Corporation, a Delaware corporation, and its predecessors
and subsidiaries, unless the context indicates otherwise.
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 31,
2001 2000
---------------------- ----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 54,833 $ 83,150
Short-term investments................................................. 360 3,347
Accounts and notes receivable.......................................... 480 572
Other current assets................................................... 303 407
---------------------- ----------------------
Total current assets.............................................. 55,976 87,476
REAL ESTATE UNDER DEVELOPMENT............................................... 2,824 3,340
INVESTMENTS................................................................. 1,075 959
RESTRICTED CASH............................................................. 16,199 13,744
PROPERTY AND EQUIPMENT, net................................................. 32,854 31,274
NOTES RECEIVABLE............................................................ 2,333 2,362
OTHER ASSETS, net........................................................... 1,230 723
---------------------- ----------------------
$112,491 $139,878
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................................... $ 3,366 $ 5,178
Accrued liabilities.................................................... 581 576
---------------------- ----------------------
Total current liabilities......................................... 3,947 5,754
LONG-TERM DEBT.............................................................. 1,125 731
OTHER NONCURRENT LIABILITIES................................................ 27 29
DEFERRED REVENUE............................................................ 33,838 35,680
MINORITY INTERESTS.......................................................... 2,787 2,936
---------------------- ----------------------
Total liabilities................................................. 41,724 45,130
---------------------- ----------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000 shares authorized,
no shares issued..................................................... - -
Common stock, $0.01 par value, 150,000 shares authorized,
40,957 and 40,812 shares issued in 2001 and 2000,
respectively, including shares in treasury........................... 410 408
Additional paid-in capital............................................. 163,726 163,858
Notes receivable from sale of common stock............................. (599) (599)
Notes receivable from officers secured by common stock................. (1,595) -
---------------------- ----------------------
Accumulated deficit.................................................... (91,098) (68,842)
---------------------- ----------------------
70,844 94,825
Less-treasury stock, 7,675.......................................... (77) (77)
---------------------- ----------------------
Total stockholders' equity........................................ 70,767 94,748
---------------------- ----------------------
$112,491 $139,878
====================== ======================
The accompanying notes are an integral part of these unaudited consolidated
balance sheets.
1
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Three Months Ended For the Nine Months
September 30, Ended September 30,
----------------------------------- ---------------------------------------
2001 2000 2001 2000
---------------- -------------- ---------------- ------------------
REVENUES:
Joint development revenue................... $ 123 $ 428 $ 872 $ 970
Real estate sales........................... 2,926 319 4,285 4,353
Licensing................................... - - - 2,000
Other....................................... - 1 1 76
---------------- -------------- ---------------- ------------------
Total revenues............................ 3,049 748 5,158 7,399
---------------- -------------- ---------------- ------------------
COST AND EXPENSES:
Cost of real estate sales................... 676 159 1,332 3,390
Real estate operating expense............... 18 11 71 200
Pilot plant, engineering and research and
development............................... 5,725 5,114 15,795 12,383
General and administrative.................. 4,446 2,585 13,264 9,049
---------------- -------------- ---------------- ------------------
INCOME (LOSS) FROM OPERATIONS................. (7,816) (7,121) (25,304) (17,623)
INVESTMENT AND INTEREST INCOME................ 832 1,687 3,504 2,621
FOREIGN EXCHANGE GAIN (LOSS).................. (26) 835 273 835
---------------- -------------- ---------------- ------------------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES.................. (7,010) (4,599) (21,527) (14,167)
MINORITY INTERESTS............................ (100) 11 (272) 94
INCOME TAXES.................................. (18) (2,468) (457) (2,468)
---------------- -------------- ---------------- ------------------
NET INCOME (LOSS)............................. $(7,128) $(7,056) $(22,256) $(16,541)
================ ============== ================ ==================
NET INCOME (LOSS) PER SHARE -
Basic and diluted........................... $(.21) $(.22) $(0.67) $(0.57)
================ ============== ================ ==================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................. 33,235 32,685 33,184 29,094
================ ============== ================ ==================
The accompanying notes are an integral part of these unaudited consolidated
statements.
2
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock
--------------------- Additional Total
Number Paid-in Accumulated Treasury Stockholders'
of Shares Amount Capital Notes Receivable Deficit Stock Equity
----------- -------- --------- ---------------- ----------- ---------- ---------------
BALANCE, December 31, 2000.......... 40,812 $408 $163,858 $ (599) $(68,842) $(77) $ 94,748
STOCK OPTIONS EXERCISED........ 146 2 19 - - - 21
CONSULTANT OPTIONS GRANTED..... - - (151) - - - (151)
NOTES RECEIVABLE FROM OFFICERS. - - - (1,595) - (1,595)
NET INCOME (LOSS).............. - - - - (22,256) - (22,256)
----------- -------- --------- ---------------- ----------- ---------- ---------------
BALANCE, September 30, 2001......... 40,958 $410 $163,726 $(2,194) $(91,098) $(77) $ 70,767
=========== ======== ========= ================ =========== ========== ===============
The accompanying notes are an integral part of these unaudited consolidated
statements.
3
SYNTROLEUM CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine Months
Ended September 30,
---------------------------------------
2001 2000
------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................... $(22,256) $(16,541)
Adjustments to reconcile net income (loss)
to net cash used in operations:
Minority interest in subsidiaries................................. (149) (118)
Depreciation and amortization..................................... 741 728
Foreign currency exchange......................................... (1,939) (1,863)
Non-cash compensation expense..................................... (151) 306
Equity in affiliates.............................................. (116) (85)
Changes in real estate held for sale and under development........ 516 2,644
Changes in assets and liabilities--
Accounts and notes receivable............................. 121 (1,294)
Other assets.............................................. (472) (34)
Accounts payable.......................................... (1,832) 6,701
Accrued liabilities and other............................. 3 (49)
Deferred revenue.......................................... - 18,520
------------------ ---------------
Net cash (used in) provided by operating activities.... (25,534) 8,915
------------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................ (2,252) (13,896)
Increase in restricted cash....................................... (4,099) 250
Changes in investments and distributions from investment funds.... 2,987 (14,123)
------------------ ---------------
Net cash used in investing activities................... (3,364) (27,769)
------------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and option exercises........... 21 94,517
Proceeds from issuance of long-term debt.......................... 489 698
Issuance of note receivable to officers........................... (1,595) -
------------------ ---------------
Net cash (used in) provided by financing activities...... (1,085) 95,215
------------------ ---------------
FOREIGN EXCHANGE EFFECT ON CASH...................................... 1,666 1,028
------------------ ---------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................................... (28,317) 77,389
CASH AND CASH EQUIVALENTS, beginning of period....................... 83,150 20,316
------------------ ---------------
CASH AND CASH EQUIVALENTS, end of period............................. $ 54,833 $ 97,705
================== ===============
The accompanying notes are an integral part of these unaudited consolidated
statements.
4
SYNTROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
1. Basis of Reporting
The primary operations of Syntroleum Corporation (together with its
predecessors and subsidiaries, the "Company" or "Syntroleum") to date have
consisted of the research and development of a proprietary process (the
"Syntroleum Process") designed to convert natural gas into synthetic liquid
hydrocarbons and activities related to commercialization of the Syntroleum
process. Synthetic liquid hydrocarbons produced by the Syntroleum Process can
be further processed into high quality liquid fuels such as diesel, kerosene and
naphtha, high quality specialty products such as synthetic lubricants, synthetic
drilling fluid, waxes, liquid normal paraffins and certain chemical feedstocks.
The Company's current focus is to further demonstrate the commercial viability
of the Syntroleum Process. The Company has sold license agreements to seven oil
companies and the Commonwealth of Australia. In addition to operating its own
pilot plant in Tulsa, Oklahoma, the Company participated in the operation of a
demonstration plant located at ARCO's refinery in Cherry Point, Washington.
The construction of GTL plants will require significant capital expenditures.
The Company's other efforts to commercialize the Syntroleum Process will also
involve significant expenditures. The Company has an effective registration
statement for the proposed offering from time to time of shares of our common
stock, preferred stock, debt securities, depositary shares or warrants for
an aggregate initial offering price of $250,000,000. The Company intends to
obtain additional funding through joint ventures, partnerships, license
agreements and other strategic alliances, as well as various other financing
arrangements. The Company may also seek debt or additional equity financing in
the capital markets. In the event such capital resources are not available to
the Company, its GTL plant development and other activities may be curtailed.
The Company is developing a commercial-scale specialty products plant to be
located in Western Australia known as the Sweetwater plant. Definitive
agreements with equity and debt participants in the Sweetwater project and the
Company's other capital projects are expected to include conditions to funding,
many of which could be outside of its control. If adequate funds are not
available, the Company may be required to delay or to eliminate expenditures for
the Sweetwater project and its other capital projects, as well as its research
and development and other activities or seek to enter into a business
continuation transaction with another company. The Company could also be forced
to license to third parties the rights to commercialize additional products or
technologies that it would otherwise seek to develop itself. If the Company
obtains additional funds by issuing equity securities, dilution to stockholders
may occur. In addition, preferred stock could be issued in the future without
stockholder approval and the terms of the preferred stock could include
dividend, liquidation, conversion, voting and other rights that are more
favorable than the rights of the holders of the Company's common stock. The
Company can give no assurance that any of the transactions outlined above will
be available to it when needed or on terms acceptable or favorable to the
Company.
The consolidated financial statements included in this report have been
prepared by Syntroleum without audit pursuant to the rules and regulation of the
Securities and Exchange Commission ("SEC"). Accordingly, these statements
reflect all adjustments (consisting of normal recurring entries), which are, in
the opinion of management, necessary for a fair statement of the financial
results for the interim periods presented. These financial statements should be
read together with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2000
filed with the SEC under the Securities Exchange Act of 1934.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. Earnings Per Share
The Company applies the provisions of SFAS No. 128, "Earnings Per Share."
Basic and diluted earnings (losses) per common share were computed by dividing
net income (loss) by the weighted average number of shares
5
of common stock outstanding during the reporting periods. Options to purchase
3,220,225 shares of common stock at an average exercise price of $11.40 were not
included in the computation of diluted earnings per share for the nine months
ended September 30, 2001 because inclusion of these options would be anti-
dilutive. Options to purchase 2,369,932 shares of common stock at an average
exercise price of $8.20 were not included in the computation of diluted earnings
per share for the nine months ended September 30, 2000 because inclusion of
these options would be anti-dilutive.
3. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ''Accounting for Derivative Instruments and Hedging Activities.'' SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting
treatment. The Company does not purchase futures contracts nor does it hold
derivative investments. The Company adopted SFAS No. 133 beginning January 1,
2001. The adoption of SFAS No.133 did not have a material effect on the
Company's financial statements.
In July 2001, the FASB issued Statement No. 141, Business Combinations,
Statement No. 142, Goodwill and Other Intangible Assets, and Statement No. 143,
Accounting for Asset Retirement Obligations. Statement No. 141 requires all
business combinations initiated after June 30, 2001, to be accounted for using
the purchase method of accounting. Under Statement No. 142, goodwill is no
longer subject to amortization over its estimated useful life. Rather, goodwill
will be subject to at least an annual assessment for impairment by applying a
fair-value-based test. Additionally, an acquired intangible asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intent
to do so. Under these statements there will be more recognized intangible
assets, such as unpatented technology and database content, being separated from
goodwill. Those assets will be amortized over their useful lives, other than
assets that have an indefinite life. Statement No. 142 is required to be applied
starting with fiscal years beginning after December 15, 2001. The Company does
not believe the adoption of Statement No. 142 will have a material impact on the
financial conditions and results of operations.
Statement No. 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Statement No. 143 is effective for fiscal years beginning after June 15, 2002.
The Company is currently assessing the impact of Statement No. 143 on its
financial condition and results of operations.
In August, 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement No. 144 supercedes the
previously issued Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of and addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Statement No. 144 is effective for fiscal years beginning after December 15,
2001. The Company is currently assessing the impact of Statement No. 144 on its
financial condition and results of operations.
4. Long-Term Debt
During the first nine months of 2001, a wholly-owned subsidiary of the
Company received a third advance of loan proceeds in the amount of AUD $8
million (approximately U.S. $4 million) under the Company's loan agreement with
the Commonwealth of Australia. These funds were placed in escrow and are being
held in Australian currency. Both the restricted funds and the long-term debt
have been adjusted to reflect the exchange rates in effect as of the balance
sheet date at the end of the third quarter. This loan is an unsecured, non-
amortizing, interest-free, 25-year loan to the Company. The long-term amount
reflects cash loan proceeds received in escrow from both the 2000 and 2001
distributions, discounted over the remaining term of the loan using an imputed
interest
6
rate of nine percent. The difference between the cash proceeds received and the
discounted long-term debt has been recorded as a reduction in the cost of the
related property, plant and equipment. The long-term debt amount reflected for
these proceeds will, excluding the effect of currency exchange rate
fluctuations, increase over time as the remaining term of the loan declines.
5. Real Estate
During the third quarter, the Company sold its partnership interest in the
Powder Basin Partnership which owns a shopping center in Gillette, Wyoming for a
gain of approximately $1.9 million dollars. The investment had a negative
carrying value of $104,000. This sale also released approximately $3.4 million
in short-term investments which secured 49.9% of a letter of credit issued to
secure obligations of the partnership.
6. Officer Notes
During the third quarter, the Company loaned $300,000 to Kenneth J. Agee,
the Company's Chairman and Chief Executive Officer, and $1,295,217 to Mark A.
Agee, the Company's President and Chief Operating Officer. The proceeds of
these loans were used by the Agees to either reduce or repay margin account
loans to the Agees from third parties and thereby avoid the sale by either of
the Agees of shares of the Company's common stock to satisfy margin calls as a
result of the recent decline in the market price of the Company's common stock.
Each of the loans to the Agees is full recourse, matures in one year, bears
interest at the rate of six percent, and is secured by the pledge to the Company
by each of the Agees of shares of the Company's common stock which they own and
which have a value (based on the Company's stock price) equal to or greater than
two times the outstanding principal and accrued interest of their respective
loans.
7. Footnotes Incorporated by Reference
Certain footnotes are applicable to the financial statements, but would be
substantially unchanged from the footnotes presented in the audited financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 as filed with the SEC, and are incorporated herein by
reference as follows:
Note Description
- -------------------------------- --------------------------------------------------------
1. Summary of Significant Accounting Policies
2. Investments
3. Restricted Cash
4. Property and Equipment
5. Notes Receivable from Sale of Common Stock
6. Notes Receivable
7. Long-Term Debt
8. Minority Interests
9. Licensing Activity
10. Public Offering
11. Income Taxes
12. Supplemental Cash Flow Information
13. Commitments
14. Fair Value of Financial Instruments
15. Cash Equivalents and Short-Term Investments
16. Stock Options
17. Significant Customers
18. Stockholder Rights Plan
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
You should read the following information together with the information
presented elsewhere in this Quarterly Report on Form 10-Q and with the
information presented in our Annual Report on Form 10-K for the year ended
December 31, 2000 (including our audited financial statements and the
accompanying notes).
Our Business
We are a leading developer and licensor of a proprietary catalytic process for
converting natural gas to synthetic liquid hydrocarbons, generally known as gas-
to-liquids, or GTL, technology. We sell licenses to use our GTL technology,
known as the Syntroleum Process, for the production of fuels, and we plan to
develop and own GTL plants based on the Syntroleum Process that produce refined
specialty products and fuels. We believe that the Syntroleum Process will be an
attractive solution in many cases for companies with natural gas reserves that
are not economic to produce using traditional technology.
The Syntroleum Process produces synthetic liquid hydrocarbons, also known as
synthetic crude oil, that are substantially free of contaminants normally found
in products made from crude oil and that can be further processed into higher
margin products through conventional refining processes. These products include:
. premium, ultra-clean liquid fuels, such as synthetic diesel, kerosene,
gasoline, naphtha, and fuel for fuel cells; and
. specialty products, such as synthetic lubricants, process oils, high
melting point waxes, liquid normal paraffins, drilling fluids, and
chemical feedstocks.
We believe that the costs to produce ultra-clean fuels and specialty
products from natural gas using the Syntroleum Process can be competitive with
the costs to produce comparable quality products from crude oil using
conventional refining processes. We also believe that these ultra-clean fuels
meet or exceed new and proposed environmental requirements.
The key advantages of our technology over traditional GTL technologies are
the use of air in the conversion process (in contrast to the requirement for
pure oxygen in other technologies) and the use of our proprietary catalysts,
which enhance the conversion efficiency of the catalytic reaction. We believe
these advantages will reduce the capital and operating costs of GTL plants based
on the Syntroleum Process, while also permitting smaller unit sizes, including
mobile plants that could be placed on skids, barges and ocean-going vessels.
Based on our demonstrated research, we believe that the Syntroleum Process can
be economically applied in GTL plants with throughput levels from as low as
2,000 to over 100,000 barrels a day. The advantages of our technology combined
with the large worldwide resource base of stranded natural gas provide what we
believe is a significant market opportunity for the use of the Syntroleum
Process by our company and our licensees to develop cost-effective GTL plants.
We have successfully demonstrated many elements and variations of the
Syntroleum Process in pilot plant operations and laboratory tests, including our
joint participation in a 70 barrel per day GTL demonstration plant with one of
our licensees, ARCO (a subsidiary of BP), at ARCO's Cherry Point refinery in
Washington. We are currently developing a project with the United States
Department of Energy and Marathon Oil Company to move the Cherry Point
demonstration plant to Tulsa, Oklahoma where it will be the basis of a new 70
barrel per day stand alone synthetic fuels production demonstration facility.
While we have not yet built a commercial-scale GTL plant based on the
Syntroleum Process, we are currently developing an 11,500 barrel per day
specialty product GTL plant based on the Syntroleum Process known as the
Sweetwater plant to be constructed in Western Australia. We have entered into an
option contract to lease the plant site, a natural gas supply contract, a firm,
lump sum engineering, procurement and construction contract, an operation and
maintenance contract, a contract for use of nearby port facilities, a contract
for the supply of water to the plant, a contract for pipeline transportation of
natural gas to the plant and pipeline transportation of products produced at the
plant to the port facilities, and other contracts for this plant. In addition,
we have retained financial
8
advisors who are attempting to obtain the necessary debt and equity financing
for this plant.
We are also evaluating the potential development of additional GTL plants,
including facilities that will produce synthetic fuels. Potential projects we
currently have under study include a proposed 10,000 barrel per day GTL plant to
be located at the Cabo Negro industrial park near Punta Arenes, Chile, and one
or more mobile marine GTL production facilities in Nigeria. We cannot assure
you that any of these proposed GTL projects will be completed.
Business Strategy
Our objectives are to rapidly establish the Syntroleum Process as an
industry standard and maximize our market share relative to alternative GTL
technologies. Our business strategy to achieve these objectives involves the
following key elements:
. continue to broadly license our technology for the production of
synthetic fuels,
. use our technology to build and own plants designed to make synthetic
specialty products and fuels,
. develop alternative markets for the synthetic fuels and specialty
products of GTL plants based on the Syntroleum Process like ultra-clean
fuels and fuels for fuel cell applications; and
. continue our research and development program alone and with strategic
partners to lower costs and expand the potential applications for our
technology.
Operating Revenues
General. During the periods discussed below, our revenues were primarily
generated from the following:
. sales of real estate holdings owned by SLH Corporation prior to the
merger of Syntroleum Corporation and SLH Corporation,
. reimbursement for research and development activities associated with
the Syntroleum Process; and
. other sources, including rent generated by real estate holdings owned by
SLH prior to the merger.
Because substantially all of our real estate portfolio has been sold, we
expect to receive lower levels of revenues from these sources in future periods.
In the future, we expect to receive revenue relating to the Syntroleum
Process from four principal sources:
. licensing,
. catalyst sales,
. sales of products from, or fees for the use of the Syntroleum Process
in, GTL plants in which we own an equity interest; and
. revenues from research and development activities carried out with
industry partners.
Until the commencement of commercial operation of GTL plants in which we
own an interest, we expect that cash flow relating to the Syntroleum Process
will consist primarily of license fee deposits, site license fees and revenues
associated with joint development activities. We will not receive any cash flow
from GTL plants in which we own an equity interest until the first of these
plants is constructed and producing products for sale. Our future operating
revenues will depend on the successful commercial construction and operation of
GTL plants based on the Syntroleum Process, the success of competing GTL
technologies and other competing uses for natural gas. We expect our results of
operations and cash flows to be affected by changing natural gas, crude oil,
fuel and specialty
9
product prices. If the price of these products increases (decreases), there
could be a corresponding increase (decrease) in operating revenues.0
Operating Expenses
Our operating expenses historically have consisted primarily of pilot
plant, engineering and research and development expenses and general and
administrative expenses, which include costs associated with general corporate
overhead, compensation expense, legal and accounting expense and expenses
associated with other related administrative functions.
Our policy is to expense pilot plant, engineering and research and
development costs as incurred. All of these research and development expenses
are associated with our development and commercialization of the Syntroleum
Process. Research and development expenses include costs to operate both our
laboratory and technology center, salaries and wages associated with these
operations, research and development services performed by universities,
consultants and third parties and additional supplies and equipment needs for
these facilities.
We have also recognized depreciation and amortization expense primarily
related to office and computer equipment and patents. Our operating expenses
have also included costs of real estate sold and real estate operating expense.
Our general and administrative expenses have increased substantially as we have
expanded our research and development, engineering and commercial activities,
including staffing levels. We also expect to continue to incur pilot plant,
engineering and research and development expenses as we continue to develop,
improve, and commercialize our GTL technology.
We expect to incur significant expenses in connection with the start-up
of GTL plants in which we own an interest. For example, we expect that our
expenses will increase at the time of commencement of construction of the
Sweetwater plant. Upon the commencement of commercial operation of the
Sweetwater plant, we will incur cost of sales expenses relating primarily to the
cost of natural gas feedstock for this plant and operating expenses relating to
this plant, including labor, supplies and maintenance. Due to the substantial
capital expenditures associated with the construction of GTL plants, we expect
to incur significant depreciation and amortization expense in the future. Our
policy is to expense costs associated with the development of GTL plants until
financial close unless they have future economic value for future projects.
Engineering costs are capitalized once an engineering contract leading to a firm
lump sum price has been signed.
Results Of Operations
Overview
During the third quarter of 2001, we continued our efforts to advance
numerous aspects of the Sweetwater project, including completion of agreements,
which are discussed in more detail below under "Liquidity and Capital Resources
- - Sweetwater Plant."
Our primary research and development projects during the first nine
months of 2001 related to the GTL technology we plan to use in the Sweetwater
plant, including confirmation of catalyst performance and reactor designs. Of
the $15.8 million expenses for pilot plant, engineering and research and
development during the first nine months of 2001, approximately $3.3 million
directly related to the Sweetwater plant and $1.4 million related to our new
pilot scale refining unit at our Technology Center in Tulsa, Oklahoma.
Operation of this unit allowed us to complete a battery of confirmation tests
and detailed engineering of our proposed Sweetwater plant relating to product
properties and yields. In addition, an aggregate of $8.2 million of expenses
incurred during the first nine months of 2001 related to salaries and wages,
outside contract services, lab equipment and improvements and pilot plant and
laboratory operating expenses, which primarily supported work on technology we
plan to use in the Sweetwater plant. Another significant research and
development project during the first nine months of 2001 related to technology
associated with our moving bed reactor design, for which we incurred $2.0
million of directly related expense during the first nine months of 2001.
10
Also during the first nine months of 2001, we entered into a letter of
intent with Petroleum Geo-Services ASA (PGS) to form a joint venture to develop,
market and operate mobile, marine-based production facilities that use the
Syntroleum Process. If the transaction is completed, the joint venture is
expected to be a separate operating company offering contract GTL services to
gas producers to convert natural gas from offshore fields into synthetic
hydrocarbon products. Under the letter of intent, the planned joint venture
will have its initial operations in Aberdeen, Scotland and will be the exclusive
means by which we and PGS offer mobile, marine-based contract GTL services to
third parties. Formation of the joint venture is subject to negotiation and
execution of definitive agreements by the parties. We cannot assure you that
the joint venture will be formed or commence actual business operations.
During the third quarter, the U.S. Department of Energy (DOE) concluded an
agreement with Integrated Concepts & Research Corporation (ICRC) to provide
funding to a team of companies for the GTL Ultra-Clean Fuels Production and
Demonstration Project for which preliminary approval was announced by us in
October 2000. We expect to be the prime subcontractor for this project. Under
the terms of the agreement, the DOE will fund $16 million of the $36 million
award, and the other project participants will provide the remaining $20
million. We are currently in discussions with Marathon Oil Company regarding
its participation in this project. Under the program, Syntroleum's Cherry Point
GTL facility will be relocated from ARCO's Cherry Point Refinery in Washington
State to a site near Tulsa, Oklahoma, where it will become the basis for
construction of a new GTL facility expected to produce up to approximately 70
barrels per day of Syntroleum ultra-clean diesel fuel and synthetic naphtha.
Construction for the project is currently expected to begin in late 2001, with
fuel production expected to commence in early 2003. The fuels from this facility
are expected to be tested by other project participants in advanced power train
and emission control technologies and are also expected to be tested in bus
fleets by the Washington Metropolitan Area Transit Authority and the U.S.
National Park Service at Denali National Park in Alaska. Completion of the
project is subject to continued congressional appropriation of project funds. In
addition, construction of this project will be subject to the risks of delay
inherent in any large construction project.
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Joint Development Revenue. Revenues from our joint research and
development and pilot plant operations were $123,000 in the third quarter of
2001, down $305,000 from the third quarter of 2000 when they were $428,000. The
decrease was primarily due to the completion in the third quarter of 2001 of
feasibility studies and preliminary engineering for several licensees related to
potential future GTL projects and preliminary engineering for our proposed
project with the DOE.
Real Estate Sales Revenue. Revenues from the sale of real estate were
$2,926,000 in the third quarter of 2001, up $2,607,000 from the third quarter of
2000 when they were $319,000. The increase resulted from the sale of 49 lots
from our Houston real estate partnership and the sale of our interest in the
Powder Basis Partnership which owns a shopping center in Gillette, Wyoming
during the third quarter of 2001, compared to the sale of 15 lots from our
Houston real estate partnership during the third quarter of 2000. This sale
generated $1.9 million in real estate revenues and furthered our progress in
liquidating our remaining real estate assets. Real estate sales revenues should
continue to decrease in the future as our remaining real estate inventory is
sold.
Licensing Revenue. We had no revenues from license activities in the third
quarter of either 2001 or 2000.
Other Revenue. We had no other revenues in the third quarter of 2001, down
$1,000 from the third quarter of 2000. This decrease was due to a continued
decrease in miscellaneous revenues from our real estate operations as we
continue to dispose of our remaining real estate inventory.
Cost of Real Estate Sold and Real Estate Operating Expense. The cost of real
estate sold was $676,000 in the third quarter of 2001, up $517,000 from $159,000
in the third quarter of 2000. This increase resulted from the higher costs
associated with the sale of 49 lots from our Houston real estate partnership and
the sale of our interest in the Powder Basin Partnership which owns a shopping
center in Gillette, Wyoming during the third quarter of 2001 compared to the
costs associated with the sale of 15 lots from our Houston real estate
partnership during the third quarter of 2000. Real estate operating expenses
were $18,000 during the third quarter of 2001, up $7,000 from the third quarter
of 2000 when these expenses were $11,000.
11
Pilot Plant, Engineering and R&D Expense. Expenses from pilot plant,
engineering and research and development activities were $5,725,000 in the third
quarter of 2001, up $611,000 from the third quarter of 2000 when these expenses
were $5,114,000. The increase was primarily the result of the continued
expansion of and improvements to our Tulsa, Oklahoma pilot plant facility, the
construction of a product upgrading pilot plant at our technology center, higher
research and development spending and higher consulting expenses associated with
the design and engineering of the Sweetwater plant.
General and Administrative Expense. General and administrative expenses
were $4,446,000 in the third quarter of 2001, up $1,861,000 from the third
quarter of 2000 when these expenses were $2,585,000. The increase is
attributable primarily to increased spending on outside consultants, increased
staffing levels and increased legal fees related to the Sweetwater Project.
Investment, Interest and Other Income. Investment, interest and other
income was $706,000 in the third quarter of 2001, down $1,827,000 from the third
quarter of 2000 when this income was $2,533,000. The decrease was primarily
attributable to decreased interest income from lower cash balances, lower
interest rates and a foreign currency loss of $26,000 compared to a foreign
currency gain of $835,000 in the third quarter of 2000.
Provision for Income Taxes. Income tax expense was $18,000 in the third
quarter of 2001, down from $2,468,000 in the first quarter of 2000. Tax expense
during both periods represents the Australian withholding tax imposed on
interest we earned on funds held in Australian bank accounts and on the third
advance of loan proceeds under our loan agreement with the Commonwealth of
Australia. We expect to incur similar withholding tax expense with respect to
any future interest payments to us from these Australian bank accounts and any
future advances of loan proceeds. We incurred a loss in both the third quarter
of 2001 and the third quarter of 2000 and did not recognize an income tax
benefit for these losses.
Net Income (Loss). In the third quarter of 2001, we experienced a loss of
$7,128,000. The loss was $72,000 higher than in the third quarter of 2000 when
we experienced a loss of $7,056,000. The increase in the loss is a result of
the factors described above.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Joint Development Revenue. Revenues from our joint research and
development and pilot plant operations were $872,000 in the first nine months of
2001, down $98,000 from the first nine months of 2000 when they were $970,000.
The decrease was primarily due to the completion of feasibility studies and
preliminary engineering for several licensees related to potential future GTL
projects and preliminary engineering for our proposed project with the DOE.
Real Estate Sales Revenue. Revenues from the sale of real estate were
$4,285,000 in the first nine months of 2001, down $68,000 from the first nine
months of 2000 when they were $4,353,000. The decrease resulted from the sale
of 116 lots from our Houston real estate partnership and the sale of our
interest in the Powder Basin Partnership during the first nine months of 2001
compared to the sale of our Reno parking garage and the sale of 66 lots from our
Houston real estate partnership during the first nine months of 2000. Real
estate sales revenues should continue to decrease in the future as our remaining
real estate inventory is sold.
Licensing Revenue. We had no revenues from license activities in the first
nine months of 2001 compared to $2,000,000 in the first nine months of 2000.
This decrease was a result of our recognition during the first nine months of
2000 of $2 million in previously deferred license revenue as a result of the
expiration of an option held by a licensee to expand the licensee's licensed
territory.
Other Revenue. Other revenues were $1,000 in the first nine months of
2001, compared to $76,000 for the first nine months of 2000. The decrease
resulted from the absence of parking and retail rentals from our parking garage
in Reno, Nevada, which we sold in February 2000.
12
Cost of Real Estate Sold and Real Estate Operating Expense. The cost of real
estate sold was $1,332,000 in the first nine months of 2001, down $2,058,000
from $3,390,000 in the first nine months of 2000. This decrease resulted from
the lesser costs associated with our sale of 116 lots from our Houston real
estate partnership and the sale of our interest in the Powder Basin Partnership
during the first nine months of 2001 compared to costs associated with the sale
of our Reno parking garage and 66 lots from our Houston real estate partnership
during the first nine months of 2000. Real estate operating expenses were
$71,000 in the first nine months of 2001 down $129,000 from the first nine
months of 2000 when they were $200,000. This decrease was the result of the
sale of the Reno parking garage in February 2000.
Pilot Plant, Engineering and R&D Expense. Expenses from pilot plant,
engineering and research and development activities were $15,795,000 in the
first nine months of 2001, up $3,412,000 from the first nine months of 2000 when
these expenses were $12,383,000. The increase was primarily the result of the
continued expansion of and improvements to our Tulsa, Oklahoma pilot plant
facility, the construction of a product upgrading pilot plant at our technology
center, higher research and development spending and higher consulting expense
associated with the design and engineering of the Sweetwater plant.
General and Administrative Expense. General and administrative expenses
were $13,264,000 in the first nine months of 2001, up $4,215,000 from the first
nine months of 2000 when these expenses were $9,049,000. The increase is
primarily attributable to increased spending on outside consultants, increased
staffing levels and higher legal expenses related to the Sweetwater Project.
Investment, Interest and Other Income. Investment, interest and other
income was $3,505,000 in the first nine months of 2001, up $45,000 from the
first nine months of 2000 when this income was $3,550,000. The increase was
primarily attributable to increased interest income from higher cash balances
resulting from our July 2000 common stock offering, partially offset by lower
foreign currency exchange gains relating to the Sweetwater project.
Provision for Income Taxes. Income tax expense was $457,000 in the first
nine months of 2001, down from $2,468,000 in the first nine months of 2000. Tax
expense during both periods represents the Australian withholding tax imposed on
interest we earned on funds held in Australian bank accounts and on loan
proceeds advanced under our loan agreement with the Commonwealth of Australia.
We expect to incur similar withholding tax expense with respect to any future
interest payments to us from these Australian bank accounts and any future
advances of loan proceeds. We incurred a loss in both the first nine months of
2001 and the first nine months of 2000 and did not recognize an income tax
benefit for these losses.
Net Income (Loss). In the first nine months of 2001, we experienced a loss
of $22,256,000. The loss was $5,715,000 higher than in the first quarter of
2000 when we experienced a loss of $16,541,000. The increase in the loss is a
result of the factors described above.
Liquidity and Capital Resources
General
As of September 30, 2001, we had $55,193,000 in cash and short-term
investments and $3,947,000 in current liabilities. Our long-term debt as of
September 30, 2001 was $1,125,000. This debt matures 25 years from the date on
which loan proceeds are advanced under our credit facility with the Commonwealth
of Australia. The long-term debt amount reflects cash loan proceeds received in
escrow (AUD$20 million which is approximately U.S.$10 million) discounted over
the remaining term of the loan using an imputed interest rate of nine percent.
The difference between the cash received and the discounted long-term debt
amount of $1,125,000 has been recorded as a reduction in the costs of the
related Sweetwater plant. The long-term debt amount reflected for these
proceeds will, excluding the effect of currency exchange rate fluctuations,
increase over time as the remaining term of the loan declines. As of September
30, 2001, we had $2,813,000 in accounts and notes receivable outstanding, and
short-term investments of approximately $360,000. During the third quarter, we
sold our interest in the Powder Basis Partnership which owns a shopping center
in Gillette, Wyoming, and we were released from our guaranty of partnership
debt. The related security for our guaranty was likewise released. We also had
$16,199,000 in restricted
13
investments as of September 30, 2001 that were held in escrow representing
proceeds received from the Commonwealth of Australia under our loan and license
agreements with the Commonwealth.
Cash flows used in operations were $25,534,000 in the first nine months of
2001 compared to cash inflows of $8,915,000 during the first nine months of
2000. This increase in cash flows used in operations was primarily the result
of increased staffing, consulting and costs associated with the development of
our Sweetwater plant in Western Australia during 2001 and the inflow of
$18,520,000 of deferred revenue in 2000.
Cash flows used in investment activities were $3,364,000 in the first nine
months of 2001 compared to $27,769,000 in the first nine months of 2000. The
decrease resulted primarily from decreased capitalized costs for our Sweetwater
plant during 2001 and the receipt of deferred revenue during 2000.
Cash flows used in financing activities were $1,085,000 in the first nine
months of 2001 compared to cash inflows of $95,215,000 in the first nine months
of 2000. The difference is primarily due to the completion in the first nine
months of 2000 of the sale of 5,650,000 shares of common stock pursuant to a
public offering in which we received net proceeds of approximately $92,000,000
after the underwriting discount and offering expenses and the receipt of
$698,000 in long-term debt under the Commonwealth of Australia loan agreement
during 2000.
We have expended and will continue to expend a substantial amount of funds to
continue the research and development of our technologies, to market the
Syntroleum Process and to design and construct GTL plants. We intend to finance
the Sweetwater plant primarily through non-recourse debt financing at the
project level, as well as equity financing, and plan to obtain additional funds
for our other GTL plant projects primarily through a combination of equity and
debt project financing. We also intend to obtain additional funds through
collaborative or other arrangements with strategic partners and others and debt
and equity financing in the capital markets. We have an effective registration
statement for the proposed offering from time to time of shares of our common
stock, preferred stock, debt securities, depositary shares or warrants for an
aggregate initial offering price of $250,000,000. We also intend to obtain
additional funding through joint ventures, partnerships, license agreements and
other strategic alliances, as well as various other financing arrangements.
Definitive agreements with equity and debt participants in the Sweetwater
project and our other capital projects are expected to include conditions to
funding, many of which could be outside of our control. If adequate funds are
not available, we may be required to delay or to eliminate expenditures for the
Sweetwater project and our other capital projects, as well as our research and
development and other activities or seek to enter into a business continuation
transaction with another company. We could also be forced to license to third
parties the rights to commercialize additional products or technologies that we
would otherwise seek to develop ourselves. If we obtain additional funds by
issuing equity securities, dilution to stockholders may occur. In addition,
preferred stock could be issued in the future without stockholder approval and
the terms of our preferred stock could include dividend, liquidation,
conversion, voting and other rights that are more favorable than the rights of
the holders of our common stock. We can give no assurance that any of the
transactions outlined above will be available to us when needed or on terms
acceptable or favorable to us.
Assuming the commercial success of the plants based on the Syntroleum
Process, we expect that license fees, catalyst sales and sales of specialty
products from GTL plants in which we own an interest will be a source of funds
for operations. However, we may not receive any of these revenues, and these
revenues may not be sufficient for capital expenditures or operations and may
not be received within the expected time frame. If we are unable to generate
funds from operations, our need to obtain funds through financing activities
will be increased.
Additionally, we estimate that construction and disposal costs to complete
our Houston real estate project currently under development will be
approximately $1 million, although the actual amount could be materially
different than this estimated amount.
We have sought and intend to continue to temporarily invest our assets,
pending their use, so as to avoid becoming subject to the registration
requirements of the Investment Company Act of 1940. These investments are likely
to result in lower yields on the funds invested than might be available in the
securities market generally. If we were required to register as an investment
company under the Investment Company Act, we would become subject to substantial
and costly regulation that would have a material adversely affect on us.
14
Sweetwater Plant
We are developing a nominal 11,500 barrel per day specialty product GTL plant
in Australia that we call the Sweetwater plant. We currently anticipate that
this plant will produce synthetic lube oil, normal paraffins, process oils and
light paraffins. The plant will use a fixed tube reactor design which produces a
high yield of the desired products with high wax content. The plant design has
lower scale-up risks than other reactor designs and will include additional
refining equipment necessary to produce the targeted specialty products. We plan
to construct this plant through a joint venture with other parties who we expect
will furnish a portion of the needed equity financing. After receiving a
financial commitment from the Commonwealth of Australia, we selected a site for
the plant about four kilometers from the North West Shelf liquid natural gas
facility on the Burrup Peninsula of Western Australia. We have applied for and
received most of the necessary permits for the plant.
We currently expect the capital costs of the Sweetwater plant to be funded
primarily by non-recourse senior and subordinated debt at the project level, as
well as equity financing from third parties, together with our own equity
contribution. We are seeking third party equity participation in the project
and we have retained financial advisors who are working to obtain both debt and
equity financing to fund final design, construction, and start-up of the plant.
We are currently in discussions with several potential equity participants in
the project. However, we cannot assure you that we will obtain the necessary
financing for this project.
The State of Western Australia has announced its intention to assist the
Sweetwater project with an AUD $30 million (approximately U.S. $15 million)
common use infrastructure package, including construction of a desalination
plant to which the Sweetwater plant will supply steam and from which the plant
will receive cooling water. In addition, we have entered into a gas purchase
agreement with the North West Shelf Gas Partners, whose members include
affiliates of BHP Petroleum, BP, Chevron, Mitsui, Mitsubishi, Royal Dutch Shell
and Woodside Energy Ltd. Subject to certain conditions, North West Shelf Gas
Partners have agreed to supply the Sweetwater plant with the natural gas
required to operate the plant at full capacity for 20 years. The agreement
provides fixed purchase prices for the gas, subject to fixed periodic escalation
provisions.
In August 2000, we entered into a license agreement with the Commonwealth of
Australia to license the Syntroleum Process as part of a program designed to
unlock the value of Australia's energy reserves and improve the quality of the
environment. Under the license agreement, the Commonwealth made an AUD $30
million (approximately U.S. $15 million) deposit, of which AUD $15 million
(approximately U.S. $7 million) is currently held in escrow pending satisfaction
of conditions relating to the construction of the Sweetwater plant. AUD $20
million (approximately U.S. $10 million) of the license fee may be credited
against future site license fees otherwise payable under the Commonwealth
license. At the same time, we entered into a loan agreement with the
Commonwealth under which the Commonwealth will make a non-amortizing, interest-
free loan to us in the amount of AUD $40 million (approximately U.S. $20
million) with a 25-year maturity to support the further development and
commercialization of GTL technologies in Australia and under which we have
agreed to conduct a feasibility study on constructing a large-scale GTL fuels
plant in Australia. Loan proceeds are to be made available to us in three
successive advances. Pending satisfaction of conditions relating to the
financing, construction and completion of the Sweetwater plant, loan proceeds
will be held in escrow. Should the conditions not be fully satisfied by August
2004, any license and loan proceeds remaining in escrow will be returned to the
Commonwealth. To date, we have received three advances of loan proceeds under
our loan with the Commonwealth, which are currently being held in escrow.
In June 2000, we entered into a non-binding letter of intent with a subsidiary
of Enron with respect to its contemplated contribution of $21 million in
exchange for a 13% equity investment in the Sweetwater plant. Under the letter
of intent, Enron would receive a $1 million credit toward its investment in the
Sweetwater plant as a result of its prior contribution toward the development of
the project, resulting in net equity funding to be received from Enron of $20
million. Our letter of intent with Enron has expired and Enron has recently
informed us that it no longer plans to participate in the Sweetwater project.
In April 2001, we entered into an agreement with Clough-PGS Joint Venture to
provide operating and maintenance services for the Sweetwater plant during the
construction and provisional acceptance phases and for the following 10
operating years. Clough-PGS is a joint venture between Clough Engineering Ltd.,
an Australian
15
company that is part of Clough Ltd., and PGS Production Pty. Ltd., an Australian
subsidiary of Petroleum Geo-Services ASA. The agreement provides for total
payments to Clough-PGS of approximately AUD$350 million (approximately U.S. $173
million) over the ten year operations phase of the agreement. In addition, we
will pay Clough-PGS on a monthly basis for services provided to us during the
construction and provisional acceptance phases of the Sweetwater plant, as well
as reimburse Clough-PGS for additional services not otherwise within the scope
of the contracted services. The agreement also provides additional financial
incentives for Clough-PGS to maximize plant revenues and financial penalties for
plant underperformance.
We also entered into multiple agreements with the Dampier Port Authority in
April 2001. These 30-year agreements provide us with access to the Dampier port
facilities and services for shipping products produced at the Sweetwater plant.
The port facilities agreement provides us with priority loading of vessels
carrying products from the plant. Under that agreement, the port will construct
additional facilities that will enable accommodation of increased traffic at the
port. The related lease agreement provides us with a small parcel of land
adjacent to the wharf that will be used for loading equipment, pumps and storage
tanks. The related easement agreement provides us with right of way access on
Dampier Port Authority land for laying and operating product pipelines from the
plant to the wharf.
In August of 2001, we entered into an engineering , procurement and
construction (EPC) contract with Tessag Industrie Anlagen GmbH (as a result of a
recent name change, now known as RWE Industrie-Losugen GmbH), a subsidiary of
RWE AG. The EPC contract covers engineering, procurement, construction, pre-
commissioning, commissioning and testing of the Sweetwater plant, plus personnel
training for a lump sum price of $599.5 million. The plant's operating capacity
has increased from the original 10,000 to 11,500 nominal barrels-per-day as a
result of pilot plant tests demonstrating higher conversion rates than those
included in the original design as well as standard engineering design margins
which had not been considered previously. The price is an increase from
Tessag's February 2001 quote of $506 million, primarily as a result of an
increase of $35 million for Tessag's contingency and margin, which now totals
more than $100 million, higher costs associated with additional product
upgrading facilities, expanded operating parameters for the autothermal
reformers (ATRs) and Fischer-Tropsch (F-T) reactors, higher labor costs due to
wage-rate inflation in the Western Australia region and changes in foreign
currency exchange rates. The final price may also vary up or down with exchange
rates until financial close on the project, when the price will be fixed in U.S.
dollars. Tessag's final price does not include interest during construction and
other owner's costs, which include proprietary catalysts to be supplied by
Syntroleum. Our current estimate of these costs, excluding interest during
construction, is $90 million. Financing for and construction of the plant will
be subject to the risks inherent in any large construction project.
In addition to the EPC contract, we have recently completed several other
agreements important to the Sweetwater plant.
. In September 2001, we signed an option with the State of Western Australia,
which grants us the irrevocable right to lease the approximately 160 acre
site for the Sweetwater plant. The lease option is for a term of two years
and execution of the final lease agreement is subject to completion of
project financing and notice to Tessag to proceed with construction of the
plant under the engineering, procurement and construction contract
discussed above.
. In October 2001, we signed a 20 year agreement with the Water Corporation
of Western Australia for the supply of water to the Sweetwater plant. Under
the terms of the agreement, Water Corporation will, subject to construction
of a new water desalination plant and satisfaction of various other
conditions, supply over 1.4 million gallons of water per day for use in
process cooling. In return, we will provide Water Corporation steam and
electricity produced by the plant, along with a modest operating fee.
. In October 2001, we concluded a contract with a major Australian natural
gas pipeline company for transportation of natural gas from the Northwest
Shelf LNG facility to the Sweetwater plant site and transportation of
products produced at the plant site to the Dampier public wharf, where they
will be loaded to tankers. This agreement is for a term of 20 years at a
fixed price, with extension options. Under the terms of the agreement, a
natural gas pipeline to the plant site will be constructed and
approximately six
16
product pipelines will be constructed from the plant site to the wharf.
Real Estate and Other Asset Sales
As of September 30, 2001, our real estate inventory consisted of land in
Houston, Texas comprised of 255 acres of undeveloped land and 78 lots known as
the "Houston real estate partnership." This real estate inventory was owned by
SLH Corporation prior to the merger of Syntroleum Corporation and SLH
Corporation and reflects the remaining assets of a real estate development
business that was conducted by SLH's former parent corporation. Our total real
estate inventory had an aggregate carrying value at September 30, 2001 of
approximately $3 million. The Houston real estate partnership is being developed
for commercial and residential use and ultimate sale.
Our other assets at September 30, 2001 included an investment in a
privately owned developer of proprietary bone substitute technology, which had a
carrying value of approximately $506,000; an investment in a privately held
venture capital limited partnership, which had a carrying value of $476,000; and
an equity investment in a recently renovated hotel in Tulsa, Oklahoma. During
the third quarter, we sold our 49.9% interest in the Powder Basin Partnership
which owns a shopping center in Gillette, Wyoming for a gain of approximately
$1.9 million. Our investment had a negative carrying value of $104,000.
We plan to liquidate our real estate assets and other investments in an
orderly manner to maximize their value. The timing of these sales will create
variances in period-to-period earnings recognition. We do not intend to acquire
additional real estate holdings for development or sale outside our core
business interests, and revenue from real estate sales should decrease as the
current real estate inventory is liquidated.
Currency Risk
We expect to conduct a portion of our business in currencies other than the
United States dollar. We may attempt to minimize our currency exchange risk by
seeking international contracts payable in local currency or we may choose to
convert our currency position into United States dollars. Our engineering,
procurement and construction contract for the Sweetwater plant is denominated
primarily in Australian dollars and Euros but, upon the closing of the debt and
equity financing for the plant, the contract will be converted to and
denominated in United States dollars at then prevailing exchange rates. Until
then, we expect the contract to subject us to risks associated with exchange
rate fluctuations. In addition, we expect to seek contractual purchase price
adjustments based on an exchange rate formula related to United States dollars.
In the future, we may also have significant investments in countries other than
the United States. The functional currency of these foreign operations may be
the local currency and, accordingly, financial statement assets and liabilities
may be translated at prevailing exchange rates and may result in gains or losses
in current income. Currently, all of our subsidiaries use the United States
dollar for their functional currency. Monetary assets and liabilities are
translated into United States dollars at the rate of exchange in effect at the
balance sheet date. Transaction gains and losses that arise from exchange rate
fluctuations applicable to transactions denominated in a currency other than the
United States dollar are included in the results of operations as incurred.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting
treatment. We do not currently purchase futures contracts nor do we hold
derivative investments. We adopted SFAS No. 133 beginning January 1, 2001.
Adoption of SFAS No.133 did not have a material effect on our financial
statements.
In July, 2001, the FASB issued Statement No. 141, Business Combinations,
Statement No. 142, Goodwill
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and Other Intangible Assets, and Statement No. 143, Accounting for Asset
Retirement Obligations. Statement No. 141 requires all business combinations
initiated after June 30, 2001, to be accounted for using the purchase method of
accounting. Under Statement No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill will be subject to
at least an annual assessment for impairment by applying a fair-value-based
test. Additionally, an acquired intangible asset should be separately recognized
if the benefit of the intangible asset is obtained through contractual or other
legal rights, or if the intangible asset can be sold, transferred, licensed,
rented, or exchanged, regardless of the acquirer's intent to do so. Under these
statements there will be more recognized intangible assets, such as unpatented
technology and database content, being separated from goodwill. Those assets
will be amortized over their useful lives, other than assets that have an
indefinite life. Statement No. 142 is required to be applied starting with
fiscal years beginning after December 15, 2001. The Company does not believe the
adoption of Statement No. 142 will have a material impact on the financial
conditions and results of operations.
Statement No. 143 requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred and a
corresponding increase in the carrying amount of the related long-lived asset.
Statement No. 143 is effective for fiscal years beginning after June 15, 2002.
The Company is currently assessing the impact of Statement No. 143 on its
financial condition and results of operations.
In August, 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Statement No. 144 supercedes the
previously issued Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of and addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Statement No. 144 is effective for fiscal years beginning after December 15,
2001. The Company is currently assessing the impact of Statement No. 144 on its
financial condition and results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We had $55,193,000 in cash equivalents and short-term investments in the form
of money market instruments as of September 30, 2001. We also hold restricted
funds in the form of the funds currently held in our Australian escrow accounts.
These funds earn interest at an annual rate of approximately four percent and
are marked to market at the end of each reporting period. These accounts can
have fluctuating balances relating to the foreign currency exchange rate between
the United States and Australian Dollar.
Foreign exchange risk currently relates to our two escrow accounts held in
Australian dollars in the total amount of U.S. $16,199,000 at September 30,
2001, and to long-term debt held in Australian dollars in the amount of
U.S.$1,125,000 at September 30, 2001. This long-term debt matures 25 years from
the date of each advance and has been discounted using an imputed interest rate
of nine percent. We also have deferred revenue that is denominated in
Australian dollars. This deferred revenue was U.S.$14,838,000 at September 30,
2001. These restricted funds, long-term debt and associated discount and
deferred revenue are converted to United States dollars for financial reporting
purposes at the end of every reporting period. To the extent that conversion
results in gains or losses, such gains or losses will be reflected in our
statements of operations.
We have not purchased futures contracts nor have we purchased any
derivative financial instruments.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
Our Registration Statement on Form S-3 (Registration No. 333-32968), as
amended (the "Registration Statement"), in connection with the registration of
shares of our common stock with an aggregate offering price of up
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to $120,000,000 was declared effective by the Securities and Exchange Commission
on April 25, 2000. As described in a prospectus supplement dated June 29, 2000,
an offering commenced on June 29, 2000 pursuant to the Registration Statement,
and resulted in (i) the sale by us of 5,250,000 shares of common stock on July
6, 2000 and (ii) the sale by us of 400,000 shares of common stock on July 19,
2000 pursuant to the exercise of the underwriters' over-allotment option.
The net proceeds to use from the offering were approximately $92 million.
To date, we have used approximately $37 million in such net proceeds for the
development of our Sweetwater project. The remaining net proceeds from the
offering are currently invested in short-term cash and cash equivalents. None
of such payments were direct or indirect payments to our directors or officers
or their associates, to persons owning ten percent or more of any class of our
equity securities or to our affiliates.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarter ending September 30, 2001.
Exhibits. Not applicable.
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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.
SYNTROLEUM CORPORATION, a Delaware
corporation (Registrant)
Date: November 13, 2001 By: /s/ Mark A. Agee
--------------------------------------------
Mark A. Agee
President and Chief Operating Officer
Date: November 13, 2001 By: /s/ Randall M. Thompson
--------------------------------------------
Randall M. Thompson
Chief Financial Officer (Principal Financial
Officer)
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