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, 2000.
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 August 7, 2000, the number of outstanding shares of the issuer's common stock
was 33,056,876.
SYNTROLEUM CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements.
Unaudited Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Unaudited Consolidated Statements of Operations for the three month and six month
periods ended June 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . 2
Unaudited Consolidated Statements of Stockholders' Equity for the six
month period ended June 30, 2000. . . . . . . . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Cash Flows for the six month
periods ended June 30, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . 4
Notes to Unaudited Consolidated Financial Statements. . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . 17
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements as
well as historical facts. These forward-looking statements include statements
relating to our gas-to-liquids technology known as the Syntroleum Process and
related technologies, gas-to-liquids plants based on the Syntroleum Process,
anticipated costs to design, construct and operate these plants, the timing of
commencement and completion of the design and construction of these plants,
obtaining required financing for these plants, anticipated costs to make
products from these plants, the economic construction and operation of gas to
liquids plants, the value and markets for plant products, testing,
certification, characteristics and use of plant products, the continued
development of the Syntroleum Process (alone or with partners), anticipated
capital expenditures, use of proceeds from our recent public offering,
anticipated revenues, the sale of and costs associated with our real estate
inventory and any other statements regarding future growth, cash needs,
operations, business plans and financial results. When used in this document,
the words "anticipate," "believe," "estimate," "expect," "intend," "may,"
"plan," "project," "should" and similar expressions are intended to be among the
statements that identify forward-looking statements. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
these kinds of statements involve risks and uncertainties. Actual results may
not be consistent with these forward-looking statements. Important factors that
could cause actual results to differ from these forward-looking statements
include the risks that the cost of designing, constructing and operating
commercial-scale gas to liquids plants will exceed current estimates,
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, 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, 1999.
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 share and per share data)
JUNE 30, DECEMBER 31,
2000 1999
------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,241 $ 20,316
Short-term investments 3,411 3,565
Accounts and notes receivable 146 1,193
Other current assets 259 365
--------- ---------
Total current assets 17,057 25,439
REAL ESTATE HELD FOR SALE 23 2,665
REAL ESTATE UNDER DEVELOPMENT 3, 040 3,349
INVESTMENTS 1,160 1,104
PROPERTY AND EQUIPMENT, net 10,303 6,442
NOTES RECEIVABLE 2,381 297
OTHER ASSETS, net 799 295
--------- ---------
$ 34,763 $ 39,591
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,933 $ 2,188
Accrued liabilities 325 453
--------- ---------
Total current liabilities 4,258 2,641
OTHER NONCURRENT LIABILITIES 64 94
MINORITY INTERESTS 917 1,024
DEFERRED REVENUE 12,000 11,000
--------- ---------
Total liabilities 17,239 14,759
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
no shares issued - -
Common stock, $0.01 par value, 150,000,000 shares authorized,
35,040,814 and 34,668,748 shares issued in 2000 and 1999,
respectively, including shares in treasury 350 347
Additional paid-in capital 71,009 68,935
Notes receivable from sale of common stock (599) (699)
Accumulated deficit (53,159) (43,674)
--------- ---------
17,601 24,909
Less-treasury stock, 7,674,905 shares in
2000 and 1999, respectively (77) (77)
--------- ---------
Total stockholders' equity 17,524 24,832
--------- ---------
$ 34,763 $ 39,591
========= =========
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 share and per share data)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
Joint development revenue $ 258 $ 548 $ 542 $ 1,151
Real estate sales 496 520 4,035 520
Licensing 2,000 - 2,000 -
Other 22 162 75 324
------------ ------------ ------------ ------------
Total revenues 2,776 1,230 6,652 1,995
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of real estate sales 153 404 3,231 404
Real estate operating expense 27 233 189 390
Pilot plant, engineering and research and
Development 4,116 2,943 7,269 4,596
General and administrative 3,429 2,468 6,465 4,619
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (4,949) (4,818) (10,502) (8,014)
INVESTMENT AND INTEREST INCOME 359 729 546 1,115
OTHER INCOME 340 2 387 2
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY
INTERESTS (4,250) (4,087) (9,569) (6,897)
MINORITY INTERESTS 118 28 84 34
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (4,132) $ (4,059) $ (9,485) $ (6,863)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE -
Basic and diluted $ (0.15) $ (0.15) $ (0.35) $ (0.26)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 27,359,299 26,900,052 27,279,071 26,900,052
============ ============ ============ ============
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 NOTES
-------------- ADDITIONAL RECEIVABLE TOTAL
NUMBER PAID-IN FROM SALE OF ACCUMULATED TREASURY STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL COMMON STOCK DEFICIT STOCK EQUITY
---------------------------------------------------------------------
BALANCE, December 31, 1999 34,669 $347 $68,935 $(699) $(43,674) $(77) $24,832
STOCK OPTIONS EXERCISED 378 3 2,206 - - - 2,209
NOTE REPAYMENT (6) - (132) 100 - - (32)
NET INCOME (LOSS) - - - - (9,485) - (9,485)
------- ---- -------- ------ --------- ----- --------
BALANCE, June 30, 2000 35,041 $350 $71,009 $(599) $(53,159) $(77) $17,524
======= ==== ======== ====== ========= ===== ========
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,
-------------------
2000 1999
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(9,485) $(6,863)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations:
Minority interest in income (loss) of subsidiary (74) (34)
Distribution of minority interest (33) -
Depreciation and amortization 486 259
Equity in earnings of affiliates (56) (110)
Changes in real estate held for sale and under development 2,951 (1,223)
Changes in assets and liabilities--
Accounts and notes receivable 1,047 7
Other assets (2,497) 260
Accounts payable 1,745 (295)
Accrued liabilities and other (158) (69)
Deferred Revenue 1,000 -
Net cash provided by (used in) operating activities (5,074) (8,068)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,332) (564)
Sale (purchase) of short-term investments 154 (17)
-------- --------
Net cash provided by (used in) investing activities (4,178) (581)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Settlement of merger contingency - 5,997
Proceeds from exercise of stock options 2,177 -
-------- --------
Net cash provided by financing activities 2,177 5,997
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (7,075) (2,652)
CASH AND CASH EQUIVALENTS, beginning of period 20,316 34,981
-------- --------
CASH AND CASH EQUIVALENTS, end of period $13,241 $32,329
======== ========
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, 2000
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. Synthetic liquid hydrocarbons produced by the Syntroleum Process
can be further processed into high quality liquid fuels such as diesel,
kerosene, gasoline, naphtha and fuel for fuel cells, or high quality specialty
products such as synthetic lubricants, process oils, high melting point waxes,
liquid normal paraffins, drilling fluids and chemical feedstocks.
The Company's current focus is to further demonstrate the commercial
viability of its proprietary technology. The Company has sold license
agreements to seven oil companies and the Commonwealth of Australia and
participated in the operation of a pilot plant located at ARCO's refinery in
Cherry Point, Washington. The Company is developing a commercial-scale
specialty products plant to be located in Western Australia known as the
Sweetwater plant.
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/A for the year ended December 31, 1999
filed with the SEC under the Securities Exchange Act of 1934, as amended, on
April 25, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles 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. RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements
to conform with the 2000 presentation. These reclassifications did not impact
net income (loss).
3. 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 2,416,300 shares
of common stock at an average exercise price of $8.17 were not included in the
computation of diluted earnings per share for the six months ended June 30, 2000
because inclusion of these options would be anti-dilutive. Options to purchase
2,709,304 shares of common stock at an average exercise price of $7.29 were not
included in the computation of diluted earnings per share for the six months
ended June 30, 1999 because inclusion of these options would be anti-dilutive.
The Company completed the sale of 5,250,000 shares of common stock on July
6, 2000 pursuant to a public offering and completed the sale of an additional
400,000 shares pursuant to the underwriter's exercise of a portion of the
over-allotment option on July 17, 2000. Had the sale of these shares been
completed at June 30, 2000, the number of shares outstanding would have been
33,015,909.
4. NOTES RECEIVABLE
In February 2000, the Company closed the sale of its Reno parking garage to
Fitzgeralds Reno, Inc. The sale price of $3 million was paid by $750,000 in
cash at or before closing and the balance in the form of Fitzgeralds' promissory
note in the principal amount of $2,250,000. The note bears interest at the rate
of 10% and is payable in monthly installments of principal and interest based on
a 20 year amortization, with the entire unpaid balance due in 10 years. The
note is secured by the ground lease on which the garage is located as well as
the parking garage itself.
5
5. MINORITY INTERESTS
In January 2000, the Company received $2 million from Methanex Corporation
towards the cost of the engineering work being performed by a third party for
the Sweetwater plant. These funds were received pursuant to a letter of intent
with Methanex that provided for the contribution by Methanex of an additional
$43 million in exchange for an equity interest in the Sweetwater plant, subject
to the execution of definitive agreements and the satisfaction of certain
conditions. During the second quarter, Methanex informed the Company that it
was terminating further participation in the Sweetwater plant. The $2 million
contribution has been recorded as a reduction in engineering costs for the
Sweetwater plant during the second quarter of 2000.
The Company is in discussions with other potential equity partners in the
Sweetwater plant. In June 2000, the Company entered into a non-binding letter of
intent with a subsidiary of Enron Corp. with respect to its contemplated
contribution of $21 million in exchange for a 13% equity investment in the
Sweetwater plant. Under the letter of intent, Enron would receive a $1 million
credit toward its investment in the Sweetwater plant as a result of its prior
contribution toward the development of the project, resulting in net equity
funding to be received from Enron of $20 million. Enron would have the right to
receive cash flow distributions in excess of 13% if the plant does not meet
specified performance targets.
Upon Enron's funding of its net capital contribution, it would become
entitled to convert its interest in
the Sweetwater plant into a maximum of 1,640,625 shares of the Company's common
stock during a period beginning one year after the date on which the project
completes successful performance testing and ending on the tenth anniversary of
execution of definitive agreements relating to the transaction contemplated in
the letter of intent. In addition, upon Enron's funding of its net capital
contribution, it would receive a warrant to acquire no more than
1,640,625 additional shares of the Company's common stock at an exercise price
equal to $21.00 per share.
Consummation of the transaction contemplated by the letter of intent
requires the satisfaction of a number of substantial conditions, some of which
are not within the Company's control, including Enron management approvals,
satisfactory completion of certain due diligence by Enron, funding of
commitments with respect to other debt and equity financing and the negotiation
and execution of definitive agreements. As a result, the transactions
contemplated by the letter of intent may not be realized or may only be realized
under terms and conditions that differ materially from those contemplated by
the letter of intent.
6. LICENSING ACTIVITY
During the second quarter, the Company entered into a volume license
agreement with Ivanhoe Energy Inc. Under this agreement the Company received a
$3 million license fee deposit. Ivanhoe Energy is a Canadian oil and natural
gas exploration and development company.
Also during the second quarter, the Company recognized $2 million in
license revenue. This amount had previously been received by the Company as
payment for an option granted to a licensee to acquire the right to use the
Syntroleum Process in certain additional geographic areas not included in the
original licensed territory. Revenue received upon the grant of this option was
deferred until the earlier of the licensee exercising the option or the
expiration of the option. The option lapsed in April 2000, resulting in the
recognition of the related revenue.
7. PUBLIC OFFERING
In July 2000, the Company completed the sale of 5,650,000 shares of common
stock (including 400,000 shares of common stock pursuant to the exercise of a
portion of the underwriter's over-allotment option) pursuant to a public
offering at a price to the public of $17.50 per share. The Company received net
proceeds of approximately $92 million after the underwriting discount and
offering expenses.
6
The Company intends to use a substantial portion of the net proceeds from
the offering to fund a portion of the Sweetwater plant's construction costs.
The Company intends to use any remaining net proceeds to fund costs associated
with pilot plant facilities, the development and construction of additional GTL
plants, research and development activities, the acquisition of complementary
technologies, working capital needs and other general corporate purposes.
8. 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/A for
the year ended December 31, 1999 as filed with the SEC, and are incorporated
herein by reference as follows:
NOTE DESCRIPTION
- ---- -----------
1. Summary of Significant Accounting Policies
2. Investments
3. Property and Equipment
4. Notes Receivable from Sale of Common Stock
5. Accrued Liabilities
6. Income Taxes
7. Supplemental Cash Flow Information
8. Commitments
9. Fair Value of Financial Instruments
10. Cash Equivalents and Short-Term Investments
11. Stock Options
12. Significant Customers
13. Stockholder Rights Plan
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/A for the year ended
December 31, 1999 (including our audited financial statements and the
accompanying notes).
OUR BUSINESS
We are a leading developer, owner and licensor of a proprietary catalytic
process for converting natural gas to synthetic liquid hydrocarbons, generally
known as gas-to-liquids, or GTL, technology. We sell licenses to use our GTL
technology, the Syntroleum Process, for the production of fuels, and we plan to
develop and own GTL plants based on the Syntroleum Process that produce refined
specialty products and fuels. We believe that the costs to produce many products
from natural gas using the Syntroleum Process, including diesel fuel, gasoline
and lubricants, can be competitive with the costs to produce comparable quality
products from crude oil using conventional refining processes. 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
alternative technologies) and the use of our proprietary catalysts, which
enhance the conversion efficiency of the catalytic reaction. These advantages
reduce the capital and operating costs of GTL plants based on the Syntroleum
Process, while also permitting smaller unit sizes, including mobile plants that
could be placed on skids, barges and ocean-going vessels. Based on our
demonstrated research, we believe that the Syntroleum Process can be
economically applied in GTL plants with throughput levels from as low as 2,000
to over 100,000 barrels a day. As a result of the advantages of our technology
and the large worldwide resource base of stranded natural gas, we believe that a
significant market opportunity exists for the use of the Syntroleum Process by
our company and our licensees to develop cost-effective GTL plants.
7
The Syntroleum Process produces synthetic liquid hydrocarbons, also known
as synthetic crude oil, which can be further processed into higher margin
products through conventional refining processes. These products include:
- Premium, ultra-clean liquid fuels, such as 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 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. While we have not yet built a commercial-scale GTL plant
based on the Syntroleum Process, we are currently developing a 10,000 barrel per
day specialty product GTL plant based on the Syntroleum Process known as the
Sweetwater plant to be constructed in Western Australia. We are also evaluating
the potential development of additional GTL plants, including facilities that
will produce synthetic liquid fuels.
BUSINESS STRATEGY
Our objectives are to rapidly establish the Syntroleum Process as an
industry standard and maximize our market share relative to alternative GTL
technologies. Our business strategy to achieve these objectives involves the
following key elements:
- - continue broadly licensing our technology for the production of synthetic
crude oil and fuels,
- - use our technology to build and own plants designed to make specialty
products and fuels,
- - develop alternative markets for the synthetic products of GTL plants based
on the Syntroleum Process like ultra-clean fuels and fuels for fuel cell
applications, and
- - continue our research and development program alone and with strategic
partners to lower costs and expand the potential applications for our
technology.
OPERATING REVENUES
General. During the periods discussed below, our revenues were primarily
generated from the following:
- - sales of real estate holdings owned by SLH Corporation prior to the merger
of Syntroleum Corporation and SLH Corporation,
- - reimbursement for research and development activities associated with
the Syntroleum Process, and
- - other sources, including rent generated by real estate holdings owned
by SLH prior to the merger.
Because our real estate portfolio has been substantially sold, we expect
to receive lower levels of revenues from these sources in following 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 GTL plants in which we own an equity interest,
and
8
- - revenues from research and development activities carried out with
industry partners.
Until the commencement of commercial operation of GTL plants in which we
own an interest, we expect that cash flow relating to the Syntroleum Process
will consist primarily of license fee deposits, site license fees and revenues
associated with joint development activities. We will not receive any cash flow
from GTL plants in which we own an equity interest until the first of these
plants is constructed. 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. Our results of operations and cash flows are
expected 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.
License Revenues. The revenue earned from licensing the Syntroleum
Process is expected to be generated through four types of contracts: master
License agreements, volume license agreements, regional license agreements and
Site license agreements. Master, volume and regional license agreements provide
the licensee with the right to enter into site license agreements for individual
GTL plants. A master license agreement grants broad geographic and volume
rights, while volume license agreements limit the total production capacity of
all GTL plants constructed under the agreement to specified amounts, and
regional license agreements limit the geographical rights of the licensee.
Master, volume and regional license agreements require an up-front cash deposit
that may offset or partially offset license fees for future plants payable under
site licenses. We have acquired technology, commitment of funds for joint
development activities, services or other consideration in lieu of the initial
cash deposit in cases where we believed the technologies or commitments had a
greater value.
Our site license agreements require fees to be paid in increments when
milestones during the plant design and construction process are achieved. The
amount of the license fee under our existing master and volume license
agreements is determined pursuant to a formula based on the present value of the
product of: (1) the yearly maximum design capacity of the plant, (2) an assumed
life of the plant and (3) our per barrel rate, which currently is approximately
$.50 per barrel of daily capacity, regardless of plant capacity. Our licensee
fees may change from time to time based on the size of the plant, improvements
that reduce plant capital cost and competitive market conditions. Our existing
master and volume license agreements allow for the adjustment of fees for new
site licenses under certain circumstances. Our accounting policy is to defer all
up-front deposits under master, volume and regional license agreements and
license fees under site license agreements and recognize 50% of the deposits and
fees as revenue in the period in which the engineering process design package
for a plant licensed under the agreement is delivered and recognize the other
50% of the deposits and fees when the plant has passed the performance tests.
The amount of license revenue we earn will be dependent on the construction of
plants by licensees, as well as the number of licenses we sell in the future.
Catalyst Revenues. We expect to earn revenue from the sale of our
proprietary catalysts to our licensees. Our license agreements require our
catalyst to be used in the initial fill for the licensee to receive our process
guarantee. After the initial fill, the licensee may use other catalyst vendors
if appropriate catalysts are available. The price for catalysts purchased from
us pursuant to license agreements is equal to our cost plus a specified margin.
We will receive revenue from catalyst sales if and when our licensees purchase
catalysts. We expect that catalysts will need to be replaced every three to five
years.
GTL Plant Revenues. We intend to develop several GTL plants and to retain
significant equity interests in these plants. These plants will enable us to
gain experience with the commercial operation of the Syntroleum Process and, if
successful, are expected to provide ongoing revenues. The anticipated products
of these plants (i.e., fuels, synthetic lube base oils, process oils, waxes,
synthetic drilling fluid and liquid normal paraffins) have historically been
sold at premium prices and are expected to result in relatively high margins for
these plants. We anticipate forming several joint ventures with energy industry
and financial partners in order to finance and operate these plants. We
anticipate that our GTL plants will include partners who have low-cost gas
reserves in strategic locations and/or have distribution networks in place for
the specialty products to be made in each plant.
Joint Development Revenues. We continually conduct research and development
activities in order to reduce the capital and operating costs of GTL plants
based on the Syntroleum Process. We conduct our research and development
activities primarily through two initiatives: (1) independent development
utilizing our own resources and (2) formal joint development arrangements with
our licensee partners and others. Through these joint development agreements, we
may receive revenue as reimbursement for specified portions of our research and
development expenses. Under some of these agreements, the joint development
partner may receive credits against future license fees for monies expended on
joint research and development.
9
Real Estate Sales Revenues. As of June 30, 2000, our real estate
inventory consisted of undeveloped land in Houston, Texas (300 acres of
undeveloped land and 49 lots comprising the "Houston Project"), and in Corinth,
Texas (nine acres). 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, 2000 of approximately $ 3.1 million.
All of our real estate inventory is held for sale except the Houston Project,
which is being developed for commercial and residential use and ultimate sale.
The timing of real estate sales will create variances in period-to-period
earnings recognition. We do not intend to acquire additional real estate
holdings for development and/or sale outside our core business interests,
and real estate sales revenues should decrease as the current real estate
inventory is liquidated.
In February 2000, we closed the sale of our Reno parking garage to
Fitzgeralds Reno, Inc. The sale price of $3 million was paid by $750,000 in
cash at or before closing and the balance in the form of Fitzgeralds' promissory
note in the principal amount of $2,250,000. The note bears interest at the rate
of 10% and is payable in monthly installments of principal and interest based on
a 20 year amortization, with the entire unpaid balance due in 10 years. The
note is secured by the ground lease on which the garage is located as well as
the parking garage itself.
Operating Expenses
Our operating expenses historically have consisted primarily of pilot
plant, engineering and research and development expenses and general and
administrative expenses, which include costs associated with general corporate
overhead, compensation expense, legal and accounting expense and expenses
associated with other related administrative functions. Our policy is to expense
pilot plant, engineering and research and development costs as incurred. All of
these research and development expenses are associated with our development of
the Syntroleum Process. We have also recognized depreciation and amortization
expense primarily related to office and computer equipment. Our operating
expenses have also included costs of real estate sold and real estate operating
expense. Our general and administrative expenses have increased substantially,
and we have expanded our research and development, engineering and commercial
staffing levels. These expenses are expected to continue to increase. We also
expect to continue to incur pilot plant, engineering and research and
development expenses as we continue to develop and improve our GTL technology.
We expect to incur significant expenses in connection with the start-up of
our GTL plants. For example, we expect that our expenses will increase at the
time of commencement of construction of GTL plants in which we own an interest.
Upon the commencement of commercial operation of GTL plants in which we own an
equity interest, we will incur cost of sales expenses relating primarily to the
cost of natural gas feedstocks for our specialty plants and operating expenses
relating to these plants, 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. Engineering costs are capitalized once an
engineering contract leading to a firm lump sum price has been signed.
RESULTS OF OPERATIONS
OVERVIEW
During the first six months of 2000, we continued our efforts to
commercialize our GTL technology on several fronts. We completed our joint
participation with ARCO in a 70 barrel per day demonstration GTL plant located
at ARCO's Cherry Point refinery in the State of Washington. The plant began
operating in July 1999 and operated successfully until it was shut down at the
completion of testing shortly after June 30, 2000. ARCO funded the construction
and operation of this plant under our joint development agreement. Plant
operations exceeded our expectations and successfully demonstrated a number of
key aspects of our proprietary autothermal reformer and moving bed reactor
designs and related catalyst performance. The data and experience generated
from our participation in plant operations will be useful in our efforts to
apply these reactor designs on a commercial basis both for fuels and specialty
product plants. We are currently conducting engineering studies with others
for commercial-scale plants using these reactor designs.
10
We continued our activities to confirm catalyst performance and reactor
designs for our proposed Sweetwater project. These activities included
operation of new pilot scale Fischer-Tropsch reactors at our pilot plant in
Tulsa, Oklahoma. Operation of these reactors will allow us to complete a
battery of confirmation tests and continue detailed engineering of our
proposed Sweetwater plant during the year 2000.
We also continued our efforts to advance numerous other aspects of the
Sweetwater project. In February 2000, we selected a site for the plant
approximately 4 kilometers from the North West Shelf liquid natural gas facility
on the Burrup Peninsula of Western Australia. Subsequent to the end of the
second quarter, we entered into a license agreement with the Commonwealth of
Australia to license the Syntroleum Process as part of a program designed to
unlock the value of Australia's energy reserves and improve the quality of the
environment. Under the license agreement, the Commonwealth made an AUD$30
million (approximately U.S.$19 million) deposit, of which AUD$15 million
(approximately U.S.$9 million) is to be held in escrow pending satisfaction of
certain conditions relating to the construction of the Sweetwater project. In
addition, we entered into a loan agreement with the Commonwealth under which the
Commonwealth will make an unsecured, non-amortizing, interest-free loan to us in
the amount of AUD$40 million (approximately U.S.$25 million) with a 25-year
maturity to support the further development and commercialization of GTL
technologies in Australia, and under which we have agreed to conduct a
feasibility study on constructing a large-scale GTL fuels plant in Australia.
Loan proceeds are to be made available to the Company in three successive
advances. Pending satisfaction of certain conditions relating to the financing,
construction and completion of the Sweetwater project, proceeds will be held in
escrow. Should the conditions not be fully satisfied by August 2004, any
license and loan proceeds remaining in escrow will be returned to the
Commonwealth.
During April of 2000 we entered into a non-exclusive volume license
agreement with Ivanhoe Energy Inc. granting Ivanhoe rights to use the Syntroleum
Process to convert natural gas into synthetic oil and transportation fuels.
Under this agreement, we receive a $3 million license fee deposit. Ivanhoe
Energy is a Canadian oil and natural gas exploration and development company.
Also during the second quarter, the Company recognized $2 million in
license revenue. This amount had previously been received by the Company as
payment for an option granted to a licensee to acquire the right to use the
Syntroleum Process in certain additional geographic areas not included in the
original licensed territory. Revenue received upon the grant of this option was
deferred until the earlier of the licensee exercising the option or the
expiration of the option. The option lapsed in April 2000, resulting in the
recognition of the related revenue.
Because 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 a
specialty plant in the near future, we expect to continue to operate at a loss
unless and until sufficient revenues are recognized from licensing activities,
GTL plants or real estate sales.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30,
1999
Joint Development Revenue. Revenues from our joint research and
development and pilot plant operations were $258,000 in the second quarter of
2000, down $290,000 from the second quarter of 1999 when they were $548,000.
The decrease was primarily due to the completion during 1999 of the funding
received under our joint development agreement with ARCO relating to the
construction of the pilot plant at ARCO's Cherry Point refinery in Washington.
We continued to receive funding for the operation of this pilot plant through
June 2000. Testing was completed and the plant was shut down in early July
2000.
Real Estate Sales Revenue. Revenues from the sale of real estate were
$496,000 in the second quarter of 2000, down $24,000 from the second quarter of
1999 when they were $520,000. The decrease was due to the sale of 26 lots from
our Houston Project during the second quarter of 2000 compared to our sale of
the Santa Rosa land in Kansas City in the second quarter of 1999. Real estate
sales revenues should decrease as the remaining real estate inventory is sold.
11
Licensing Revenue. Revenues from licensing were $2,000,000 in the second
quarter of 2000 compared to zero in the second quarter of 1999. This increase
was a result of our recognition of $2 million in license revenue which had
previously been deferred as a result of expiration of an option held by licensee
to expand the licensee's licensed territory.
Other Revenue. Other revenues were $22,000 in the second quarter of 2000,
down $140,000 from the second quarter of 1999 when they were $162,000. The
decrease resulted from the absence of parking and retail rentals from our
parking garage in Reno, Nevada, which we sold in February 2000.
Cost of Real Estate Sold and Real Estate Operating Expense. The cost of
real estate sold was $153,000 in the second quarter of 2000 down $251,000 from
$404,000 in the second quarter of 1999. The decrease resulted from the sale of
26 lots from our Houston Project in the second quarter of 2000 compared to the
sale of the Santa Rosa land in Kansas City in the second quarter of 1999. Real
estate expenses were $27,000 during the second quarter of 2000, down $206,000
from $233,000 in the second quarter of 1999. This decrease was due to the sale
of the Reno parking garage in February 2000.
Pilot Plant, Engineering and R&D. Expenses from pilot plant, engineering
and research and development activities were $4,116,000 in the second quarter of
2000, up $1,173,000 from the second quarter of 1999 when these expenses were
$2,943,000. The increase was primarily the result of the continued expansion of
our Tulsa, Oklahoma pilot plant facility, higher research and development
spending and higher consulting expense associated with the design and
engineering of the Sweetwater plant.
General and Administrative Expense. General and administrative expenses
were $3,429,000 in the second quarter of 2000, up $961,000 from the second
quarter of 1999 when these expenses were $2,468,000. The increase is
attributable primarily to higher wages and salaries resulting from our higher
staffing levels, higher rent expense and higher expense for outside consultants.
Investment, Interest and Other Income (Expense). Investment, interest and
other income increased to $817,000 in the second quarter of 2000, up $58,000
from the second quarter of 1999 when this income was $759,000. The increase was
primarily attributable to increased minority interest participation in the
Sweetwater project offset by lower cash balances in the second quarter of 2000.
Provision for Income Taxes. We incurred a loss in both the second quarter
of 2000 and the second quarter of 1999 and did not recognize an income tax
benefit for such loss.
Net Income. In the second quarter of 2000, we experienced a loss of
$4,132,000. The loss was $73,000 higher than in the second quarter of 1999 when
we experienced a loss of $4,059,000. The increase in the loss is a result of
the factors described above.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Joint Development Revenue. Revenues from our joint research and
development and pilot plant operations were $542,000 in the first six months of
2000, down $609,000 from the first six months of 1999 when they were $1,151,000.
The decrease was primarily due to the completion during 1999 of the funding
received under our joint development agreement with ARCO relating to the
construction of the pilot plant at ARCO's Cherry Point refinery in Washington.
We continued to receive funding for the operating of this pilot plant through
June 2000. Testing was completed and the plant was shut down in early July 2000.
Real Estate Sales Revenue. Revenues from the sale of real estate were
$4,035,000 in the first six months of 2000, up $3,515,000 from $520,000 in the
first six months of 1999. The increase was due to the sale of our Reno parking
garage to Fitzgeralds Reno, Inc. during February 2000 and the sale of 51 lots
from our Houston Project during the first six months of 2000, compared to our
sale of the Santa Rosa land in Kansas City during the first six months of 1999.
Real estate sales revenues should decrease as the remaining real estate
inventory is sold.
12
Licensing Revenue. Revenues from license activities were $2,000,000 in the
first six months of 2000 compared to zero in the first six months of 1999.
This increase was a result of our recognition of $2 million in license revenue
which had previously been deferred as a result of expiration of an option held
by a licensee to expand the licensee's licensed territory .
Other Revenue. Other revenues were $75,000 in the first six months of
2000, down $249,000 from the first six months of 1999 when they were $324,000.
The decrease resulted primarily from the lower parking and retail rentals from
our parking garage in Reno, Nevada, which we sold in February 2000.
Cost of Real Estate Sold and Real Estate Operating Expense. The cost of
real estate sold was $3,231,000 the first six months of 2000, up $2,827,000
from $404,000 in the first six months of 1999. The increase resulted from the
sale of our Reno parking garage to Fitzgeralds Reno, Inc. during February 2000
and the sale of 51 lots from our Houston Project during the first six months of
2000 compared to our sale of the Santa Rosa land in Kansas City during the first
six months of 1999. Real estate expenses were $189,000 during the first six
months of 2000, down $201,000 from $390,000 in the first six months of 1999.
This decrease was the result of decreased costs associated with the parking and
retail operation of the Reno garage.
Pilot Plant, Engineering and R&D. Expenses from pilot plant, engineering
and research and development activities were $7,269,000 in the first six months
of 2000, up $2,673,000 from the first six months of 1999 when these expenses
were $4,596,000. The increase was primarily the result of the continued
expansion of our Tulsa, Oklahoma pilot plant facility, higher research and
development spending and higher consulting expense associated with the design
and engineering of the Sweetwater plant.
General and Administrative Expense. General and administrative expenses
were $6,465,000 in the first six months of 2000, up $1,846,000 from the first
six months of 1999 when these expenses were $4,619,000. The increase is
attributable primarily to higher wages and salaries resulting from our higher
staffing levels, higher rent expense and higher expense for outside consultants.
Investment, Interest and Other Income (Expense). Investment, interest and
other income decreased to $1,017,000 in the first six months of 2000, down
$134,000 from the first six months of 1999 when this income was $1,151,000.
The decrease was primarily attributable to increased minority interest expense
from the Houston project and lower cash balances invested during the first six
months of 2000 compared to the same period in 1999.
Provision for Income Taxes. We incurred a loss in the first six months of
both 2000 and 1999 and did not recognize an income tax benefit for such loss.
Net Income. In the first six months of 2000, we experienced a loss of
$9,485,000. The loss was $2,622,000 higher than in the first six months of 1999
when we experienced a loss of $6,863,000. The increase in the loss is a result
of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
General
As of June 30, 2000, we had $16,652,000 in cash and short-term investments
and $4,258,000 in current liabilities. We do not currently have any material
outstanding debt or lines of credit. Prior to our merger with SLH, our primary
sources of liquidity were equity capital contributions and prepaid license fees
and our principal liquidity needs were to fund expenditures relating to research
and development and pilot plant activities and to fund working capital. At June
30, 2000, we had $2,527,000 in accounts and notes receivable outstanding . We
currently have short-term investments approximating $3.4 million, which secure
49.9 percent of a letter of credit for the Powder Basin Partnership in which we
are an 49.9 percent investor.
13
Cash flows used in operations were $5,074,000 in the first six months of
2000 compared to $8,068,000 during the first six months of 1999. The decrease
in cash flows used in operations during the first six months of 2000 compared
to the first six months of 1999 was primarily the result of the completion of
construction of the Cherry Point pilot plant at ARCO's Cherry Point, Washington
refinery during 1999 which was constructed under a joint development agreement
between ourselves and ARCO. Cash flows used in operations also decreased
because of the completion of site development for the beginning phases of the
Houston Project, the sale of 51 lots from the Houston Project and the sale of
the Reno garage. This was offset by the receipt of a $3,000,000 licensing fee
(revenue recognition deferred) and the recognition of $2,000,000 of previously
deferred revenue.
Cash flows used in investment activities were $4,178,000 in the first six
months of 2000 compared to $581,000 in the first six months of 1999. The
increase resulted primarily from the increased capitalized costs for our
Sweetwater project.
Cash flows provided by financing activities were $2,177,000 in the first
six months of 2000 compared to $5,997,000 in the first six months of 1999. The
decrease was primarily due to the receipt during 1999 of approximately $6.0
million in satisfaction of a judgment in our favor, which was a contingency of
the merger with SLH, offset by the exercise of employee stock options during the
first quarter of 2000.
In July 2000, the Company completed the sale of 5,650,000 shares of common
stock pursuant to a public offering and received net proceeds of approximately
$92,000,000 after the underwriting discount and offering expenses. We intend to
use a substantial portion of these net proceeds to fund our portion of the
equity financing for our Sweetwater project. We intend to use any remaining net
proceeds to fund costs associated with pilot plant facilities, the development
and construction of additional GTL plants, research and development activities,
the acquisition of complementary technologies, working capital needs and other
general corporate purposes.
The construction of our GTL plants will require significant capital
expenditures. Our other efforts to commercialize the Syntroleum Process will
also involve significant expenditures. We have an effective registration
statement for the proposed offering from time to time of shares of our common
stock for an aggregate initial offering price of $21,125,000. We intend to
obtain additional funding through joint ventures, partnerships, license
agreements and other strategic alliances, as well as various other
financing arrangements. We may also seek debt or additional equity financing
in the capital markets. In the event such capital resources are not available
to us, our GTL plant development and other activities may be curtailed.
Additionally, we estimate that construction and disposal costs to complete
real estate projects in development will be approximately $1.4 million. 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 regulation that would materially adversely affect us.
Initial Specialty Product GTL Plant
We are developing a 10,000 barrel per day specialty product plant, which
we call the Sweetwater plant. We currently anticipate that this plant will
produce synthetic lube oil, normal paraffins, process oils and light paraffins.
The plant is expected to use a fixed tube reactor design because this design
produces a high yield of the desired products with high wax content and has
lower scale-up risks than other reactor designs. The plant is also expected to
include additional refining equipment necessary to produce the targeted
specialty products. We plan to construct this plant through a joint venture. In
February 2000, we selected a site for the plant about four kilometers from the
North West Shelf liquid natural gas facility on the Burrup Peninsula of Western
Australia.
14
The State of Western Australia recently announced its intention to assist
the Sweetwater project with an AUD$30 million (approximately U.S.$19 million)
common use infrastructure package, including a desalinization plant to which our
project will supply steam and from which our project will receive cooling water.
In addition, we have entered into a gas purchase agreement with the North West
Shelf Gas Partners, whose members include affiliates of BHP Petroleum, BP Amoco,
Chevron, Mitsui, Mitsubishi, Royal Dutch Shell and Woodside Energy Ltd. Subject
to certain conditions, North West Shelf Gas Partners agreed to supply the
Sweetwater plant with the natural gas required to operate the plant at full
capacity for 20 years.
In November 1999, we signed a project development agreement with Tessag, a
wholly-owned subsidiary of RWE AG, to provide us with a fixed price for the
design and construction of the Sweetwater plant. Tessag also agreed to pay
liquidated damages up to certain levels in the event certain process and product
specifications are not achieved. We currently expect that Tessag will complete
the plant design and, subject to completion of plant financing, begin
construction in 2001. We expect the plant to be operational in 2003, although
construction of the plant will be subject to the risk of delay inherentin any
large construction project.
Subsequent to the end of the second quarter, we entered into a license
agreement with the Commonwealth of Australia to license the Syntroleum Process
as part of a program designed to unlock the value of Australia's energy reserves
and improve the quality of the environment. Under the license agreement, the
Commonwealth made an AUD$30 million (approximately U.S.$19 million) deposit, of
which AUD$15 million (approximately U.S. $9 million is held in escrow pending
satisfaction of certain conditions relating to the construction of the
Sweetwater project. AUD$20 million (approximately U.S.$12 million) of the
license fee may be credited against future site license fees. At the same time,
we entered into a loan agreement with the Commonwealth under which the
Commonwealth will make a non-amortizing, interest-free loan to us in the amount
of AUD$40 million (approximately U.S.$25 million) with a 25-year maturity to
support the further development and commercialization of GTL technologies in
Australia and under which we have agreed to conduct a feasibility study on
constructing a large-scale GTL fuels plant in Australia. Loan proceeds are to
be made available to the Company in three successive advances. Pending
satisfaction of certain conditions relating to the financing, construction and
completion of the Sweetwater project, proceeds will be held in escrow. Should
the conditions not be fully satisfied by August 2004, any license and loan
proceeds remaining in escrow will be returned to the Commonwealth.
In January 2000, we received $2 million dollars from Methanex Corporation
towards the cost of engineering work being performed by Tessag pursuant to a
letter of intent that provided for the contribution by Methanex of an additional
$43 million in exchange for an equity interest in the plant, subject to the
execution of definitive agreements and the satisfaction of certain conditions.
In May 2000, Methanex informed us that it was terminating its participation in
the Sweetwater project.
In June 2000, we entered into a non-binding letter of intent with a
subsidiary of Enron with respect to its contemplated contribution of $21 million
in exchange for a 13% equity investment in the Sweetwater project. Under the
letter of intent, Enron would receive a $1 million credit toward its investment
in the Sweetwater project as a result of its prior contribution toward the
development of the project, resulting in net equity funding to be received from
Enron of $20 million. As a result of this investment, Enron would have the right
to receive cash flow distributions in excess of 13% if the plant does not meet
specified performance targets.
Upon Enron's funding of its net capital contribution, it would become
entitled to convert its interest in the Sweetwater project into a maximum
of 1,640,625 shares of our common stock during a period beginning one
year after the date on which the project completes successful performance
testing and ending on the tenth anniversary of execution of definitive
agreements relating to the transaction contemplated in the letter of intent.
In addition, upon Enron's funding of its net capital contribution, it would
receive a warrant to acquire no more than 1,640,625 additional shares of our
common stock at an exercise price equal to $21.00 per share.
Consummation of the transaction contemplated by the letter of intent
requires the satisfaction of a number of substantial conditions, some of which
are not within our control, including Enron management approvals, satisfactory
completion of certain due diligence by Enron, funding of commitments with
respect to other debt and equity financing and the negotiation and execution of
definitive agreements. As a result, the transactions contemplated by the letter
of intent may not be realized or may only be realized under terms and
conditions that differ materially from those contemplated by the letter of
intent.
15
In addition to the $2 million contributed by Methanex and the $1 million
contributed by Enron, through June 30, 2000 we had made a substantial financial
contribution toward the Sweetwater plant's development.
The capital costs of this plant are currently expected to be funded
primarily by non-recourse senior and subordinated debt at the project level, as
well as equity financing. We are currently exploring sources of debt and equity
capital to fund final design and construction. However, we can give no
assurance that the necessary capital for this project will be obtained.
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. For example, our
proposed funding plan with the Commonwealth of Australia will be in Australian
dollars. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
''Accounting for Derivative Instruments and Hedging Activities.'' SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement. Companies must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133, as amended by SFAS No. 137, and further amended by SFAS No. 138, is
effective for fiscal years beginning after June 15, 2000. However, companies may
elect to adopt SFAS No. 133 prior to that date. SFAS No. 133 cannot be applied
retroactively and must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997. We are currently in the
process of determining timing and the effect of adopting SFAS No. 133.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We had short-term investments in the form of U.S. Treasury securities as of
June 30, 2000. The majority of these securities mature in less than 90 days.
Our policy is to hold short-term securities to maturity, which minimizes
interest rate risk. The average interest rate on these investments at June 30,
2000 was approximately 6%.
We do not currently conduct any material operations in foreign markets.
Accordingly, we do not have material market risk related to foreign exchange
rates.
We do not purchase futures contracts nor do we purchase or hold any
derivative financial instruments.
16
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 commended on June 29, 2000 pursuant to the Registration Statement, and
has since terminated, resulting 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 shares sold do not constitute all of the shares of
common stock covered by the Registration Statement and we may sell additional
shares with an aggregate initial offering price of $21,125,000 pursuant to the
Registration Statement. The managing underwriters for the offering were Merrill
Lynch & Co., Goldman, Sachs & Co., J.P. Morgan & Co., Salomon Smith Barney and
Petrie Parkman & Co.
The aggregate price to the public for the shares sold in the offering was
$98,875,000. The expenses incurred by us with respect to the offering were as
follows:
Underwriter discounts and commissions $5,932,500
Other expenses 450,000
----------
Total . $6,382,500
==========
The amount of other expenses set forth above is a reasonable estimate of
such amount. 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.
The net proceeds to us from the offering were approximately $92 million.
To date, we have not used any such net proceeds. The net proceeds from the
offering are currently invested in short-term cash and cash equivalents. None
of such payments were direct or indirect payments to our directors or officers
or their associates, to persons owning ten percent or more of any class of our
equity securities or to our affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K. On June 30, 2000 the Registrant filed a Current
Report on Form 8-K reporting, under Item 5. Other Events, the Company's
execution of a Purchase Agreement with the underwriters relating to its public
offering of 6,037,500 shares of the Registrant's common stock (including 787,500
shares subject to the underwriter's over-allotment option) under a registration
statement on Form S-3 (No. 333-32968).
17
Exhibits. The following exhibits are filed as part of this quarterly
report:
10.1 License Agreement dated August 2, 2000 between Syntroleum Corporation
and Syntroleum Australia Licensing Corporation.
10.2 License Agreement dated August 3, 2000 between Syntroleum Australia
Licensing Corporation and the Commonwealth of Australia.
10.3 A$Loan Agreement dated August 3, 2000 between Syntroleum Australia
Credit Corporation and the Commonwealth of Australia.
10.4 Deposit Agreement dated August 3, 2000 between Syntroleum Australia
Licensing Corporation, the Commonwealth of Australia and
Westpac Banking Association.
10.5 Deposit Agreement dated August 3, 2000 between Syntroleum Australia
Credit Corporation, the Commonwealth of Australia and Westpac
Banking Corporation.
10.6 Letter Agreement dated August 3, 2000 between Syntroleum Corporation
and the Commonwealth of Australia.
27 Financial Data Schedule.
____________________
* Incorporated by reference as indicated.
18
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 11, 2000 By:
----------------------------
Mark A. Agee
President and Chief
Operating Officer
Date: August 11, 2000 By:
---------------------------
Randall M. Thompson
Chief Financial Officer
(Principal Financial Officer)
19
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ------------------------
10.1 License Agreement dated August 2, 2000 between Syntroleum Corporation
and Syntroleum Australia Licensing Corporation.
10.2 License Agreement dated August 3, 2000 between Syntroleum Australia
Licensing Corporation and the Commonwealth of Australia.
10.3 A$Loan Agreement dated August 3, 2000 between Syntroleum Australia
Credit Corporation and the Commonwealth of Australia.
10.4 Deposit Agreement dated August 3, 2000 between Syntroleum Australia
Licensing Corporation, the Commonwealth of Australia and
Westpac Banking Association.
10.5 Deposit Agreement dated August 3, 2000 between Syntroleum Australia
Credit Corporation, the Commonwealth of Australia and Westpac
Banking Corporation.
10.6 Letter Agreement dated August 3, 2000 between Syntroleum Corporation
and the Commonwealth of Australia.
27 Financial Data Schedule.
____________________
* Incorporated by reference as indicated.
20