UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
(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 __.
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At July 22, 2002, the number of outstanding shares of the issuer's
common stock was 32,760,357.
Syntroleum Corporation is filing this Amendment No. 2 to our Quarterly
Report on Form 10-Q filed with the Securities and Exchange Commission on August
14, 2002 to amend Item 2- Management's Discussion and Analysis of Financial
Condition and Results of Operations. This Item 2 amendment corrects the
expiration date of the engineering, procurement and construction (EPC) contract
with Tessag Industrie Anlagen GMBH, which was later reorganized into RWE
Solutions AG (RWE) and updates our expectation of a write down of capital costs
for our Sweetwater plant. We previously reported that this date was October 31,
2002, however, we recently determined that the correct expiration date is August
30, 2002. This date has been corrected under "Liquidity and Capital
Resources-Sweetwater Plant".
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
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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.
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
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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 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.
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
4
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 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
5
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 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.
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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.
7
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.
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 expired on August 30, 2002. As a
result, we expect to have a write down in the third quarter, currently estimated
in the amount of $25 to $30 million, which covers the capital costs for plant
design and other costs related to the plant. The estimate of the amount of the
write down involves uncertainties, and the actual amount may differ
substantially from this estimate. The write down 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. While the project could ultimately be suspended, we are
continuing to explore alternatives, including using the Sweetwater design to
develop other projects.
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
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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 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.
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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: October 7, 2002 By: /s/ Kenneth L. Agee
-------------------------------------------
Kenneth L. Agee
Chairman and Chief Executive Officer
Date: October 7, 2002 By: /s/ Kenneth R. Roberts
-------------------------------------------
Kenneth R. Roberts
Chief Financial Officer (Principal Financial
Officer)
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CERTIFICATION
I, Kenneth L. Agee, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Syntroleum
Corporation, a Delaware corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods represented
in this quarterly report.
Date: October 7, 2002
By: /s/ Kenneth L. Agee
------------------------------------
Kenneth L. Agee
Chairman and Chief Executive Officer
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CERTIFICATION
I, Kenneth R. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Syntroleum
Corporation, a Delaware corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly represent in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods represented
in this quarterly report.
Date: October 7, 2002
By: /s/ Kenneth R. Roberts
------------------------------------------
Kenneth R. Roberts
Vice President and Chief Financial Officer
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