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 June 30, 2002.
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 July 22, 2002, the number of outstanding shares of the issuer's common
stock was 32,760,357.
SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements.
Unaudited Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 .......................................................... 1
Unaudited Consolidated Statements of Operations for the six and three-month
periods ended June 30, 2002 and 2001 ....................................... 2
Unaudited Consolidated Statements of Stockholders' Equity for the six-month
period ended June 30, 2002 ................................................. 3
Unaudited Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 2002 and 2001 ....................................... 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 .................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................................ 15
Item 2. Changes in Securities and Use of Proceeds .................................... 15
Item 3. Defaults Upon Senior Securities .............................................. 16
Item 4. Submission of Matters to a Vote of Security Holders .......................... 16
Item 5. Other Information ............................................................ 16
Item 6. Exhibits and Reports on Form 8-K ............................................. 16
SIGNATURES ............................................................................ 17
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 and our other
activities, the economic construction and operation of gas-to-liquids plants,
anticipated expense amount if the Sweetwater project is discontinued or
suspended, plans and expectations relating to our Talara Project, 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 2000
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, 2001.
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)
June 30, December 31,
2002 2001
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 30,305 $ 44,737
Accounts and notes receivable ........................................ 3,801 1,795
Other current assets ................................................. 417 661
--------- ---------
Total current assets ............................................ 34,523 47,193
REAL ESTATE UNDER DEVELOPMENT ............................................. 2,073 3,028
INVESTMENTS ............................................................... 729 1,072
RESTRICTED CASH ........................................................... 18,075 16,506
PROPERTY AND EQUIPMENT, net ............................................... 33,877 34,049
NOTES RECEIVABLE .......................................................... 2,204 2,322
OTHER ASSETS, net ......................................................... 901 1,342
--------- ---------
$ 92,382 $ 105,512
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 3,914 $ 3,993
Accrued liabilities .................................................. 984 435
--------- ---------
Total current liabilities ....................................... 4,898 4,428
LONG-TERM DEBT ............................................................ 1,370 1,190
OTHER NONCURRENT LIABILITIES .............................................. 23 26
DEFERRED REVENUE .......................................................... 35,884 34,351
MINORITY INTERESTS ........................................................ 2,456 2,786
--------- ---------
Total liabilities ............................................... 44,631 42,781
--------- ---------
COMMITMENTS
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,
40,435 and 40,958 shares issued in 2002 and 2001
respectively, including shares in treasury .................... 404 410
Additional paid-in capital ........................................... 161,544 163,734
Notes receivable from sale of common stock ........................... (100) (599)
Notes receivable from officers secured by common stock ............... (1,163) (1,595)
Accumulated deficit .................................................. (112,857) (99,142)
--------- ---------
47,828 62,808
Less-treasury stock, 7,675 shares ................................. (77) (77)
--------- ---------
Total stockholders' equity ....................................... 47,751 62,731
--------- ---------
$ 92,382 $ 105,512
========= =========
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 For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
REVENUES:
Joint development revenue ............... $ 3,790 $ 492 $ 4,430 $ 749
Real estate sales ....................... 436 222 880 1,359
Other ................................... - 1 - -
-------- -------- -------- --------
Total revenues ........................ 4,226 715 5,310 2,108
-------- -------- -------- --------
COST AND EXPENSES:
Cost of real estate sales ............... 292 8 624 656
Pilot plant, engineering and research and
development ........................... 6,416 5,521 10,589 10,070
General and administrative and other .... 4,636 4,824 8,361 8,871
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS ............. (7,118) (9,638) (14,264) (17,489)
INVESTMENT AND INTEREST INCOME ............ 425 1,199 860 2,672
OTHER INCOME (EXPENSE) .................... (148) - (148) -
FOREIGN EXCHANGE GAIN (LOSS) .............. (38) (143) (65) 299
-------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND INCOME TAXES .............. (6,879) (8,582) (13,617) (14,518)
MINORITY INTERESTS ........................ (35) (52) (68) (172)
INCOME TAXES .............................. (17) (422) (30) (438)
-------- -------- -------- --------
NET INCOME (LOSS) ......................... $ (6,931) $ (9,056) $(13,715) $(15,128)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE -
Basic and diluted ....................... $ (.21) $ (.27) $ (.42) $ (.46)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING ............................. 33,185 33,169 32,995 33,158
======== ======== ======== ========
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 Notes Accumulated Treasury Stockholders'
of Shares Amount Capital Receivable Deficit Stock Equity
------------ ----------- ----------- -------------- ------------- ----------- --------------
BALANCE, December 31, 2001 ............ 40,958 $ 410 $ 163,734 $ (2,194) $ (99,142) $ (77) $ 62,731
CONSULTANT OPTIONS GRANTED ....... - - (53) - - - (53)
NOTES RECEIVABLE FROM OFFICERS ... (523) (6) (2,137) 931 (1,212)
NET INCOME (LOSS) ................ - - - - (13,715) - (13,715)
------------ ----------- ----------- -------------- ------------- ----------- --------------
BALANCE, June 30, 2002 ................ 40,435 $ 404 $ 161,544 $ (1,263) $ (112,857) $ (77) $ 47,751
============ =========== =========== ============== ============= =========== ==============
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 Six months
Ended June 30,
------------------------
2002 2001
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $(13,715) $(15,128)
Adjustments to reconcile net income (loss)
to net cash used in operations:
Minority interest in subsidiaries ....................................... (330) (235)
Depreciation and amortization ........................................... 421 475
Foreign currency exchange ............................................... 1,655 (1,441)
Non-cash compensation expense ........................................... (53) (173)
Equity in affiliates .................................................... 343 (40)
Changes in real estate held for sale and under development .............. 955 415
Changes in assets and liabilities--
Accounts and notes receivable ................................... (2,237) (172)
Other assets .................................................... 660 (356)
Accounts payable ................................................ (97) (2,090)
Accrued liabilities and other ................................... 546 (17)
-------- --------
Net cash used in operating activities .......................... (11,852) (18,762)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................................... (224) (246)
Change in restricted cash ............................................... 40 (3,944)
Changes in investments and distributions from investment funds .......... - (271)
-------- --------
Net cash used in investing activities .......................... (184) (4,461)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and option exercises ................. - (139)
Proceeds from issuance of long-term debt ................................ 57 463
Notes receivable from officers secured by common stock .................. (863) -
-------- --------
Net cash provided by (used in) financing activities ............ (806) 324
-------- --------
FOREIGN EXCHANGE EFFECT ON CASH ............................................ (1,590) 1,142
-------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ........................................................... (14,432) (21,757)
CASH AND CASH EQUIVALENTS, beginning of period ............................. 44,737 83,150
-------- --------
CASH AND CASH EQUIVALENTS, end of period ................................... $ 30,305 $ 61,393
======== ========
The accompanying notes are an integral part of these unaudited
consolidated statements.
4
SYNTROLEUM CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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 (gas-to-liquids or "GTL") 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 commercialize the Syntroleum Process
through licensing and constructing commercial plants. 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 design and operation of a demonstration plant located at
ARCO's Cherry Point refinery in Washington. This plant has been relocated to the
Tulsa Port of Catoosa and will be used as part of the Company's DOE ultra-clean
fuels Project.
Construction of Company owned GTL plants will require significant
capital 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 may 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.
If adequate funds are not available, the Company may be required to
delay or to eliminate expenditures for these capital projects, as well as its
research and development and other activities or seek to enter into a business
combination 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, 2001
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 of common
stock outstanding during the reporting periods. Options to purchase 3,703,755
shares of common stock at an
5
average exercise price of $10.12 were not included in the computation of diluted
earnings per share for the six months ended June 30, 2002 because inclusion of
these options would be anti-dilutive. Options to purchase 3,295,644 shares of
common stock at an average exercise price of $11.28 were not included in the
computation of diluted earnings per share for the six months ended June 30, 2001
because inclusion of these options would be anti-dilutive.
3. New Accounting Pronouncements
In July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations", which 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.
4. Notes Receivable from Officers
During 2001, the Company loaned Kenneth Agee, the Company's Chairman
and Chief Executive Officer, $300,000 under a loan agreement which allowed up to
$1,100,000 in loan advances and which matured on June 25, 2001. In May and June
of 2002, the Company made additional advances of $683,000 to Mr. Agee. The
proceeds of these advances were used by Mr. Agee to reduce third party margin
account loans and thereby avoid the sale by Mr. Agee of shares of the Company's
common stock to satisfy margin calls as a result of a decline in the market
price of the Company's common stock. The loan to Mr. Agee was full recourse,
matured in one year, bore interest at the rate of six percent, and was secured
by the pledge of shares of the Company's common stock that he owned and which
had a value (based on the Company's stock price) equal to or greater than two
times the outstanding principal and accrued interest of his loan. On June 25,
2002, the promissory note was renewed for an additional year with an interest
rate of 3.75%. The renewal of the promissory note increased the amount available
to be borrowed to $1,460,000. Subsequent to this renewal an additional $458,000
was loaned to Mr. Agee to pay off all remaining third party margin account
loans. The current outstanding balance as of July 3, 2002 is $1,441,000 plus
accrued interest.
Prior to 2001, the Company had entered into a note agreement with Mark
Agee, the Company's President and Chief Operating Officer, in the amount of
$595,000, for the purchase of the Company's common stock. This note bore
interest at the rate of 6.10%, matured in May 2004, and was secured by the
pledge of the Company's common stock. During 2001, the Company loaned an
additional $1,295,000 to Mr. Agee. The proceeds of this loan were used by Mr.
Agee to either reduce or repay third party margin account loans and thereby
avoid the sale by him of shares of the Company's common stock to satisfy margin
calls as a result of a decline in the market price of the Company's common
stock. The loan with Mr. Agee was full recourse, matured in one year, bore
interest at the rate of 6%, and was secured by the pledge to the Company by Mr.
Agee of shares of the Company's common stock, which he owned and which had a
value (based on the Company's stock price) equal to or greater than two times
the outstanding principal and accrued interest of the respective loans.
In June 2002, Mr. Agee notified the Company that he could not deliver
additional shares as collateral as required by his note agreements. Therefore,
the Company declared default and exercised its right to take ownership of the
existing collateral under the documents relating to loans from the Company to
Mr. Agee. The Company received and retired 522,350 shares of the Company's
common stock, based on the Company's common stock price on June 7, 2002 of
$4.10, for full repayment of the outstanding notes and accrued interest of
$2,142,000. The remaining shares that had been held as collateral by the Company
were returned to Mr. Agee.
5. Marathon Participation and Loan Agreement
In May of 2002, the Company signed a Participation Agreement with
Marathon Oil Company in connection with the ultra clean fuels production and
demonstration project managed by the U.S. Department of Energy. This agreement
provides for the formation of an executive committee, comprised of a majority of
Company representatives, to govern the project and that Marathon will reimburse
the Company for up to $5 million in project costs and will provide up to $3
million in Marathon personnel contributions. The $5 million in Marathon cash
contributions will be recorded as joint development revenue. Marathon is
entitled to credit these contributions against future license fees in specified
circumstances. Marathon also agreed to provide project funding pursuant to
advances under a $19 million secured promissory note between the Company and
Marathon Oil. The promissory note will bear interest at a rate of eight percent
per year. The Company has the right to prepay the note up to May 31, 2003.
Should the Company obtain capital for the project from a third party, these
capital contributions are
6
required to be applied towards the outstanding principal and interest of the
note. Under this agreement, Marathon's only other form of repayment is its right
to convert the investment into a combination of credits against future license
fees or into the Company's stock at no less than $6 per share. The promissory
note is secured by a mortgage in the assets of the project. The purpose of this
mortgage is to allow Marathon to complete the project in the event of a default
by the Company. Events of default under the promissory note include failure by
the Company to comply with the terms of the promissory note, events of
bankruptcy of the Company, a material adverse effect on the Company, a change of
control of the Company and the Company's current assets minus current
liabilities falling below $10 million (excluding amounts due under the
promissory note and liabilities associated with prepaid license fees). Upon an
event of default, Marathon may exercise its rights under the mortgage securing
the promissory note and appoint a majority of the executive committee that
governs the project. The promissory note matures on June 30, 2004.
6. Separation Agreements
In June 2002, the Company entered into a separation agreement with Mark
Agee. Under this agreement, Mr. Agee resigned his position as the Company's
President and Chief Operating Officer and as a Director of the Company. The
agreement calls for two years of severance at Mr. Agee's current salary of
$230,000 and payment of Mr. Agee's health benefits until July 2003. These
benefits were expensed in the Company's statement of operations for the three
and six month periods ended June 30, 2002. The agreement also provides for the
vesting of all stock options held by Mr. Agee and for the term of the options to
continue notwithstanding his termination of employment. Under the agreement, Mr.
Agee agrees to provide consulting services to the Company for two years at no
additional cost to the Company.
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, 2001 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 Related to Common Stock
6. Notes Receivable
7. Long-Term Debt
8. Minority Interests
9. Licensing Activity
10. Public Offering
11. Income Taxes
12. Commitments
13. Fair Value of Financial Instruments
14. Cash Equivalents and Short-Term Investments
15. Stock Options
16. Significant Customers
17. 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, 2001 (including our audited financial statements and the
accompanying notes).
Overview
We are incurring costs with respect to developing and commercializing
the Syntroleum Process and do not anticipate recognizing any significant
revenues from licensing our technology or from production from either a fuel or
specialty plant in the near future. As a result, we expect to continue to
operate at a loss unless and until sufficient revenues are recognized from
licensing activities or gas-to-liquids plants.
Our Business
We are a developer and licensor of a proprietary process for converting
natural gas to synthetic liquid hydrocarbons, a process 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
fuels and specialty products. We anticipate 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 conventional products made from crude oil. These synthetic
liquid hydrocarbons 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 conventional processes. We
also believe that these ultra-clean fuels meet or exceed new and proposed
environmental requirements.
We believe 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 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 less than 10,000 to over 100,000 barrels per 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 and have moved the Cherry Point
demonstration plant to Tulsa, Oklahoma where it is the basis of a new 70 barrel
per day stand alone synthetic fuels production demonstration facility.
8
Operating Revenues
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 GTL plants in which
we own an equity interest,
. revenues from research and development activities carried out with
industry partners, and
. our interest in oil and gas producing properties.
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. 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 crude oil, fuel and specialty product prices.
If the price of these products increases (decreases), there could be a
corresponding increase (decrease) in operating revenues.
Operating Expenses
Our operating expenses historically have consisted primarily of pilot
plant, engineering, including third party 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 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.
As a result of the completion of a substantial portion of the
engineering and process/product testing associated with our Sweetwater project
and in an effort to conserve working capital, we plan to decrease our operating
expenses compared to prior years while continuing to fund our most critical
research and development and project development activities.
If we are successful in developing a GTL plant in which we own an
interest, we expect to incur significant
9
expenses in connection with the start-up of the plant. Upon the commencement of
commercial operations of a 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 the 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
has been signed.
Results Of Operations
Overview
Our primary research and development projects during the first six
months of 2002 related to the GTL technology for use in licensee GTL plants,
including confirmation of catalyst performance and reactor designs. Of the $10.6
million expenses for pilot plant, engineering and research and development
during the first six months of 2002, approximately $2.7 million directly related
to the expansion of our existing pilot plant facilities in Tulsa, Oklahoma with
a new pilot-scale reactor based on Syntroleum's advanced moving bed technology.
We plan that this unit will enable the Company to provide quality control for
commercial catalyst manufacturing and project-specific engineering support. We
plan that this unit will be up and running by the end of the third quarter. We
also spent $2.4 million related to the DOE project and engineering related to
licensee support. In addition, an aggregate of $5.5 million of expenses incurred
during the first six months of 2002 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 fuels plants.
During January of 2002, we announced that Congress had appropriated
$3.5 million for a proposed Flexible JP-8 (single battlefield fuel) Pilot Plant
program under the Department of Defense Appropriation Bill, 2002. We expect to
negotiate a contract with the DOD to participate in the program, which will
provide for the design of a marine-based fuel-production plant, as well as
testing of synthetically-made (gas-to-liquids) JP-8 fuel in military diesel and
turbine engine applications. We cannot assure you that we will be successful in
negotiating a contract with DOD to participate in this program.
We continued to work on our DOE project during the first six months of
2002. This project was announced during 2001 and during the third quarter of
2001 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 are the prime
subcontractor for this project. Under the terms of the agreement, the DOE will
fund $16 million of the project, and the other project participants will provide
the remaining balance. In May 2002, the Company signed a Participation Agreement
with Marathon Oil Company in connection with the ultra clean fuels production
and demonstration project. This agreement provides for the formation of an
executive committee, comprised of a majority of Company representatives, to
govern the project and that Marathon will reimburse the Company for up to $5
million in project costs and $3 million in Marathon personnel contributions. The
$5 million in Marathon cash contributions will be recorded as joint development
revenue. Marathon is entitled to credit these contributions against future
license fees in specified circumstances. Marathon also agreed to provide project
funding pursuant to advances under a $19 million secured promissory note between
the Company and Marathon Oil. The promissory note will bear interest at a rate
of eight percent per year. The Company has the right to prepay the note up to
May 31, 2003. Should the Company obtain capital for the project from a third
party, these capital contributions are required to be applied towards the
outstanding principal and interest of the note. Under this agreement, Marathon's
only other form of repayment is its right to convert the investment into a
combination of credits against future license fees or into the Company's stock
at no less than $6 per share. The promissory note is secured by a mortgage in
the assets of the project. The purpose of this mortgage is to allow Marathon to
complete the project in the event of a default by the Company. Events of default
under the promissory note include failure by the Company to comply with the
terms of the promissory note, events of bankruptcy of the Company, a material
adverse effect on the Company, a change of control of the Company and the
Company's current assets minus current liabilities falling below $10 million
(excluding amounts due under the promissory note and liabilities associated with
prepaid license fees). Upon an event of default, Marathon may exercise its
rights under the mortgage securing the promissory note and appoint a majority
of the executive committee that governs the project. The promissory note matures
on June 30, 2004. Under the program, Syntroleum's Cherry Point GTL facility has
been disassembled and relocated from ARCO's Cherry Point Refinery in Washington
State to a site near Tulsa, Oklahoma. It is expected to become the basis for
construction of a new GTL facility to produce up to approximately 70 barrels per
day of Syntroleum ultra-clean diesel fuel and synthetic naphtha. Procurement and
construction for the project is currently underway, with fuel deliveries
expected to commence in early third quarter 2003. The fuels from this facility
are expected to be tested by other project participants in advanced power train
and emission
10
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 as well as our ability
to attract the remaining necessary funds not provided by the DOE. In addition,
construction of this project will be subject to the risks of delay inherent in
any large construction project.
During the second quarter of 2002 we continued our work on our Northern
Peru Project. This project was announced during the fourth quarter of 2001 with
plans to develop an integrated NGL/GTL (natural gas liquids/gas-to-liquids)
project in the Talara Basin of Northwest Peru. Initially, this project is
expected to consist of construction of a nominal 2,000 barrel per day NGL plant
to upgrade and replace an existing plant. Completion of this project is subject
to satisfaction of several conditions including negotiation and execution of
definitive gas purchase agreements, engineering, procurement and construction
agreements and other agreements, site acquisition and financing. We cannot
assure you that this project will commence actual operations. We have located an
existing NGL plant, which we plan to recondition and move to Talara once all of
the contracts are in place. We are in current negotiations with the local power
company in Talara and we are working on definitive agreements. Our plan is to
recondition the NGL plant and ship it to the Talara Basin once all contracts are
in place. In connection with this proposed project, we signed a license contract
with the government of Peru under which we have acquired exploration and
production rights to the offshore Peruvian oil and gas block designated as Z-1.
The Company is continuing preparation to develop the Z-1 block, Syntroleum's
data room for the Z-1 block has been opened in Houston and the Company is now in
discussions with potential partners to begin further exploitation of oil and
gas. Previous concession holders drilled six exploration wells in the 1,155
square mile block, five of which discovered oil, gas and condensate. We believe
that Syntroleum's GTL technology can be the key to producing this block
successfully by providing means for monetizing the gas that would otherwise have
to be re-injected. The Company believes that full-scale development of the Z-1
block, which could include production of oil, gas, gas condensate and GTL
liquids, could produce significant cash flow to the Company when fully
developed. This project will be subject to the risks of delay inherent in any
large construction or development project.
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Joint Development Revenue. Revenues from our joint research and
development and pilot plant operations were $3,790,000 in the second quarter of
2002, up $3,298,000 from the second quarter of 2001 when they were $492,000. The
increase was primarily due to increased reimbursement for engineering relating
to our project with the DOE.
Real Estate Sales Revenue. Revenues from the sale of real estate were
$436,000 in the second quarter of 2002, up $214,000 from the second quarter of
2001 when they were $222,000. The increase resulted from a larger number of lot
sales from our Houston real estate partnership during 2002 as compared to 2001.
Real estate sales revenues should, in general, decrease in the future as our
remaining real estate inventory is sold.
Cost of Real Estate. The cost of real estate sold was $292,000 in the
second quarter of 2002, up $284,000 from $8,000 in the second quarter of 2001.
This increase resulted from a larger number of lot sales from our Houston real
estate partnership during 2002 as compared to 2001.
Pilot Plant, Engineering and R&D Expense. Expenses from pilot plant,
engineering and research and development activities were $6,416,000 in the
second quarter of 2002, up $895,000 from the second quarter of 2001 when these
expenses were $5,521,000. The increase was primarily the result of the
construction of our advanced reactor at our pilot plant facility and the
continued engineering work on our DOE project.
General and Administrative Expense. General and administrative expenses
were $4,587,000 in the second quarter of 2002, down $210,000 from the second
quarter of 2001 when these expenses were $4,797,000. The decrease is
attributable primarily to decreased spending on outside consultants and
decreased legal fees related to the Sweetwater Project, offset by expenses
related to Mark Agee's separation agreement.
Investment, Interest and Other Income. Investment, interest and other
income was $204,000 in the second quarter of 2002, down $800,000 from the second
quarter of 2001 when this income was $1,004,000. The decrease was primarily
attributable to decreased interest income from lower cash balances and lower
interest rates.
Provision for Income Taxes. Income tax expense was $17,000 in the second
quarter of 2002, down from $422,000 in the second quarter of 2001. 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 second
advance of loan proceeds under our loan agreement with the Commonwealth of
Australia. We expect to incur similar withholding tax expense
11
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 second quarter of 2002 and the second quarter of 2001 and did not recognize
an income tax benefit for these losses.
Net Income (Loss). In the second quarter of 2002, we experienced a loss
of $6,931,000. The loss was $2,125,000 lower than in the second quarter of 2001
when we experienced a loss of $9,056,000. The decrease in the loss is a result
of the factors described above.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Joint Development Revenue. Revenues from our joint research and
development and pilot plant operations were $4,430,000 in the first six months
of 2002, up $3,681,000 from the first six months of 2001 when they were
$749,000. The increase was primarily due to increased reimbursement for
engineering relating to our proposed project with the DOE.
Real Estate Sales Revenue. Revenues from the sale of real estate were
$880,000 in the first six months of 2002, down $479,000 from the first six
months of 2001 when they were $1,359,000. The decrease resulted from fewer lot
sales from our Houston real estate partnership during 2002 as compared to 2001.
Real estate sales revenues should continue to decrease in the future as our
remaining real estate inventory is sold.
Cost of Real Estate. The cost of real estate sold was $624,000 in the
first six months of 2002, down $32,000 from $656,000 in the first six months of
2001. This decrease resulted from the fewer lot sales from our Houston real
estate partnership during 2002 as compared to 2001.
Pilot Plant, Engineering and R&D Expense. Expenses from pilot plant,
engineering and research and development activities were $10,589,000 in the
first six months of 2002, up $519,000 from the first six months of 2001 when
these expenses were $10,070,000. The increase was primarily the result of the
construction costs related to our advanced reactor and our DOE project offset by
lower expenses associated with the design and engineering of the Sweetwater
plant.
General and Administrative Expense. General and administrative expenses
were $8,326,000 in the first six months of 2002, down $493,000 from the first
six months of 2001 when these expenses were $8,819,000. The decrease is
attributable primarily to decreased spending on outside consultants and
decreased legal fees related to the Sweetwater Project, offset by expenses
related to Mark Agee's separation agreement.
Investment, Interest and Other Income. Investment, interest and other
income was $579,000 in the first six months of 2002, down $2,220,000 from the
first six months of 2001 when this income was $2,799,000. The decrease was
primarily attributable to decreased interest income from lower cash balances,
lower interest rates and a foreign currency loss of $65,000 in 2002 compared to
a foreign currency gain of $299,000 in the first six months of 2001.
Provision for Income Taxes. Income tax expense was $30,000 in the first
six months of 2002, down from $438,000 in the first six months of 2001. 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 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 first six months of
2002 and the first six months of 2001 and did not recognize an income tax
benefit for these losses.
Net Income (Loss). In the first quarter of 2002, we experienced a loss
of $13,715,000. The loss was $1,413,000 lower than in the first quarter of 2001
when we experienced a loss of $15,128,000. The decrease in the loss is a result
of the factors described above.
12
Liquidity and Capital Resources
General
As of June 30, 2002, we had $30,305,000 in cash and short-term
investments and $4,898,000 in current liabilities. Our long-term debt as of June
30, 2002 was $1,370,000. This debt matures in 2025 and reflects cash loan
proceeds received under our loan agreement with the Commonwealth of Australia.
These funds are held in escrow and are 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 has been recorded as a
reduction in the costs of the related Sweetwater project. 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. 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 loan
proceeds remaining in escrow may be returned to the Commonwealth. As of June 30,
2002, we had $3,801,000 in accounts and notes receivable outstanding. We also
had $18,075,000 in restricted investments as of June 30, 2002 that were held in
escrow representing proceeds received from the Commonwealth of Australia under
our loan and license agreements with the Commonwealth and a $300,000 letter of
credit guarantee for our Talara project.
Cash flows used in operations were $11,852,000 in the first six months
of 2002 compared to cash outflows of $18,762,000 during the first six months of
2001. This decrease in cash flows used in operations was primarily the result of
decreased disbursements relating to legal fees and research and development
costs associated with the development of our Sweetwater plant, the streamlining
of our research and development activities during 2002 offset by higher costs
associated with our DOE project.
Cash flows used in investment activities were $184,000 in the first six
months of 2002 compared to cash outflows of $4,461,000 in the first six months
of 2001. The decrease resulted primarily from decreased capitalized costs for
our Sweetwater plant during 2002.
Cash flows used in financing activities were $806,000 in the first
six months of 2002 compared to cash inflows of $324,000 in the first six months
of 2001. The difference is primarily due to the loan to Ken Agee in the amount
of $863,000 during the first six months of 2002.
We have expended and will continue to expend a substantial amount of
funds to continue the research and development of our GTL technologies, to
market the Syntroleum Process and to design and construct GTL plants. We are
attempting 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 (including debt which is convertible into our
common or preferred stock) and equity financing. 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 combination 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.
We have sought and intend to continue to temporarily invest our assets,
pending their use, so as to avoid
13
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.
Sweetwater Plant
Since early 2000, we have been developing a nominal 11,500 barrel per
day specialty product GTL plant, about four kilometers from the North West Shelf
liquid natural gas facility on the Burrup Peninsula of Western Australia, that
we call the Sweetwater plant. This site was selected after receiving a financial
commitment from the Commonwealth of Australia. The plant is designed to produce
synthetic lube oil, normal paraffins, process oils and light paraffins and to
use a fixed tube reactor design which produces a high yield of the desired
products with high wax content. This plant design has lower scale-up risks than
other reactor designs and includes additional refining equipment necessary to
produce the targeted specialty products.
We have been working on financing the Sweetwater plant using
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 have been seeking third party equity participation in the project and we have
attempted to obtain both debt and equity financing to fund final design,
construction, and start-up of the plant. We have been 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. Additionally,
we have been approached regarding the possibility of moving the plant to other
sites where stranded gas is located. In connection with proposals to move the
plant to other sites, we have discussed the availability of financial
sponsorship. During the third and fourth quarters of 2002, we will continue to
evaluate these alternatives. Our engineering, procurement and construction (EPC)
contract with Tessag Industrie Anlagen GmbH will expire on October 31, 2002. If
we do not make significant progress by this time, we plan to consider
discontinuing or suspending the project. Should we discontinue or suspend the
project, we would expense the Sweetwater assets that are currently on our
balance sheet, and this expense would be reflected in our statement of
operations. We estimate that this expense amount would approximate $25 to $30
million. All other costs related to the Sweetwater project have been expensed as
incurred.
Real Estate and Other Asset Sales
As of June 30, 2002, our real estate inventory consisted of land in
Houston, Texas comprised of 255 acres of undeveloped land and 27 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 June 30, 2002 of
approximately $2 million. The Houston real estate partnership is being developed
for commercial and residential use and ultimate sale. During the first six
months of 2002 we received $1.4 million from municipal utility district bond
payments associated with cost recovery of site utilities associated with our
Houston real estate partnership. These cost recoveries were used to adjust the
book cost per lot.
Our other assets at June 30, 2002 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 $134,000; and an
equity investment in a recently renovated hotel in Tulsa, Oklahoma.
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
14
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 July 2001, the FASB issued, Statement No. 143, "Accounting for Asset
Retirement Obligations", which 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We had $30,305,000 in cash equivalents and short-term investments in
the form of money market instruments as of June 30, 2002. 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
3.5% 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. $18,075,000 at June 30, 2002,
and to long-term debt held in Australian dollars in the amount of U.S.$1,370,000
at June 30, 2002. This long-term debt matures in 2025 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.$16,884,000 at June 30, 2002. 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 do not have any purchased futures contracts or 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 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 $66 million in such net proceeds
for the development of our Sweetwater project, purchase of catalyst material and
operating expenses. 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.
15
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The 2002 annual meeting of the stockholders of the Company was held on
April 30, 2002. Set forth below are the results of the voting with respect to
each matter acted upon at the meeting.
Votes Broker
Votes Cast Votes Non-
----
Matter Cast For Against Withheld Abstentions Votes
------ -------- ------- -------- ----------- -----
Election of Directors:
Alvin R. Albe ........................ 26,508,270 174,888 - - -
Robert A. Day ........................ 25,304,431 1,378,727 - - -
J. Edward Sheridan ................... 26,623,399 59,759 - -
Ratification of the Appointment of
Arthur Andersen LLP as Independent
public accountants for the 2002 fiscal
year .................................... 25,858,875 787,463 36,820 -
Item 5. Other Information.
In June 2002, the Company entered into a separation agreement with Mark
Agee. Under this agreement, Mr. Agee resigned his position as the Company's
President and Chief Operating Officer and as a Director of the Company. The
agreement calls for two years of severance at Mr. Agee's current salary of
$230,000 and payment of Mr. Agee's health benefits until July 2003. These
benefits were expensed in the Company's statement of operations for the
three and six month periods ended June 30, 2002. The agreement also
provides for the vesting of all stock options held by Mr. Agee and for the
term of the options to continue notwithstanding his termination of
employment. Under the agreement, Mr. Agee agrees to provide consulting
services to the Company for two years at no additional cost to the Company.
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 June 30, 2002.
Exhibits
10.1 Participation Agreement between Syntroleum Corporation and Marathon Oil
Company dated May 8, 2002.
10.2 Secured Promissory Note between Syntroleum Corporation and Marathon Oil
Company dated May 8, 2002
10.3 Note Agreement dated June 7, 2002 between Syntroleum Corporation and
Mark A. Agee.
10.4 Separation Agreement dated June 12, 2002 between Syntroleum Corporation
and Mark A. Agee.
10.5 Renewal of Secured Promissory Note dated June 25, 2002 from Kenneth L.
Agee to Syntroleum Corporation.
16
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: August 13, 2002 By: /s/ Kenneth L. Agee
----------------------------------------
Kenneth L. Agee
Chairman and Chief Executive Officer
Date: August 13, 2002 By: /s/ Randall M. Thompson
----------------------------------------
Randall M. Thompson
Chief Financial Officer (Principal
Financial Officer)
17
INDEX TO EXHIBITS
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.6 Participation Agreement between Syntroleum Corporation and Marathon
Oil Company dated May 8, 2002.
10.7 Secured Promissory Note between Syntroleum Corporation and Marathon
Oil Company dated May 8, 2002
10.8 Note Agreement dated June 7, 2002 between Syntroleum Corporation and
Mark A. Agee.
10.9 Separation Agreement dated June 12, 2002 between Syntroleum
Corporation and Mark A. Agee.
10.10 Renewal of Secured Promissory Note dated June 25, 2002 from Kenneth L.
Agee to Syntroleum Corporation.
18