SCHEDULE 14A INFORMATION
Proxy Statement Pursuant To Section 14(a) Of the Securities
Exchange Act of 1934
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Check the appropriate box:
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the Commission only (as
permitted by Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material Pursuant to Rule 14a-11(c) or Rule 14a-12
KFx, Inc.
(Name of Registrant as Specified in Its Charter)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on
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KFx Inc.
3300 East First Avenue, Suite 290
Denver, Colorado 80206
April 14, 2003
Dear Stockholder:
You are cordially invited to attend the 2003 Annual Meeting of
Stockholders of KFx Inc., which will be held at 10:00 a.m. local time on
Thursday, May 22, 2003 at our executive offices located at, 3300 East First
Avenue, Suite 290, Denver, Colorado 80206.
The Notice of Annual Meeting and the Proxy Statement that follow
describe the business to be conducted at the meeting. We will also report on
matters of current interest to our stockholders.
The Annual Report for the year ended December 31, 2002 is enclosed, and
I hope you will read it carefully. Feel free to forward to us any questions
you may have if you are unable to be present at the meeting. Our World Wide
Web homepage on the Internet is a convenient way to communicate with us. Our
homepage is located at http://www.kfx.com.
Also enclosed is a proxy authorizing two of our officers to vote your
shares for you if you do not attend the meeting. Whether or not you are able
to attend the meeting, I urge you to complete your proxy and return it to our
transfer agent, Interwest Transfer Company, Inc., in the enclosed addressed,
postage-paid envelope, as a quorum of the stockholders must be present at the
meeting, either in person or by proxy, for the conduct of business.
Sincerely,
Theodore Venners
Chairman of the Board of Directors,
President and Chief Executive Officer
KFx Inc.
3300 East First Avenue, Suite 290
Denver, Colorado 80206
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held May 22, 2003
April 14, 2003
To the Stockholders of KFx Inc.:
The 2003 annual meeting of the Stockholders of KFx Inc. (the "Company")
will be held on Thursday, May 22, 2003 at 10:00 a.m. local time at our
executive offices located at, 3300 East First Avenue, Suite 290, Denver,
Colorado 80206. The purpose of the meeting is to consider and take action upon
the following matters:
1. Election of three directors.
2. Ratification and approval of an amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized shares
which the Company has authority to issue from 100,000,000 to
140,000,000.
3. Approval of Deloitte & Touche LLP as our independent accountants for the
year ending December 31, 2003.
4. Such other business as may properly be brought before the meeting and
any postponements, continuations, or adjournments thereof.
Only stockholders of record as of the close of business on April 4, 2003
are entitled to notice of and to vote at the meeting or at any postponements,
continuations or adjournments thereof.
The by-laws require that the holders of a majority of the stock issued
and outstanding and entitled to vote be present or represented at the meeting
in order to constitute a quorum for the transaction of business. It is
important that your stock be represented at the meeting regardless of the
number of shares you hold. Whether or not you are able to be present in
person, please sign and return promptly the enclosed proxy in the accompanying
envelope, which requires no postage if mailed in the United States.
THE ENCLOSED PROXY IS BEING SOLICITED BY OUR BOARD OF DIRECTORS. OUR
BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSED ITEMS.
YOUR VOTE IS IMPORTANT.
This notice, the proxy and Proxy Statement enclosed herewith are sent to
you by order of our Board of Directors.
Rudolph G. Swenson
Secretary
PROXY STATEMENT
The enclosed proxy is solicited by the Board of Directors of KFx Inc.
for use at the 2003 annual meeting of the Stockholders (the "Annual Meeting")
of KFx Inc., a Delaware corporation (the "Company" or "KFx") to be held on
Thursday, May 22, 2003 at 10:00 a.m. local time at our executive offices
located at, 3300 East First Avenue, Suite 290, Denver, Colorado 80206, and all
postponements, continuations or adjournments thereof. This Proxy Statement and
the enclosed proxy were first furnished to our stockholders on or about April
14, 2003.
VOTING PROCEDURES
The presence in person or by proxy of a majority of our outstanding
shares of common stock, $.001 par value (the "Common Stock"), entitled to vote
at the meeting is necessary to provide a quorum for the transaction of
business at the meeting. Your shares can only be voted if you are present in
person or are represented by returning a properly signed proxy. Your vote is
very important. Whether or not you plan to attend the meeting in person,
please sign and promptly return the enclosed proxy card, which requires no
postage if mailed in the United States. All signed and returned proxies will
be counted towards establishing a quorum for the meeting, regardless of how
the shares are voted.
Shares represented by proxy will be voted in accordance with your
instructions. You may specify your choice by marking the appropriate box on
the proxy card. If your proxy card is signed and returned without specifying
choices, your shares will be voted FOR the nominees for director, FOR the
ratification and approval of the amendment to our Restated Certificate of
Incorporation to effect an increase in the number of authorized shares, FOR
the ratification of the selection of Deloitte & Touche LLP as our independent
accountants for the year ending December 31, 2003, and as the individuals
named as proxy holders on the proxy deem advisable on all matters as may
properly come before the meeting. You may revoke your proxy at any time prior
to the exercise thereof by submitting another proxy bearing a later date, by
giving written notice of revocation to us at our address indicated above or by
voting in person at the meeting. Any notice of revocation sent to us must
include your name and must be received prior to the meeting to be effective.
The election of each director nominee requires the affirmative vote of a
plurality of the votes cast in the election of directors. An affirmative vote
of a majority of the votes cast at the Annual Meeting is required for
ratification and approval of the amendment to the Company's Restated
Certificate of Incorporation, for approval of Deloitte & Touche LLP as our
independent accountants for the year ending December 31, 2003 and all other
matters that may be submitted to our stockholders for consideration. No
stockholder of the Company, whether abstaining, voting for or against Proposal
No. 1, Proposal No. 2 or Proposal No. 3 will be entitled to appraisal rights
or the right to receive cash for shares under Delaware law or otherwise.
Those shares present, in person or by proxy, including shares as to
which authority to vote on any proposal is withheld, shares abstaining as to
any proposal and broker non-votes (where a broker submits a proxy but does not
have authority to vote a customer's shares on one or more matters) on any
proposal, will be considered present at the meeting for purposes of
establishing a quorum. Each will be tabulated separately.
Under the rules of the American Stock Exchange, brokers who hold shares
in street name for customers have the authority to vote on certain items when
they have not received instructions from beneficial owners. Brokers that do
not receive instructions are entitled to vote on the proposals contained in
this proxy other than the ratification and approval of the amendment to the
Company's Restated Certificate of Incorporation.
Abstentions are counted in tabulations of the votes cast on proposals
presented to the stockholders, while broker non-votes are not counted for
purposes of determining whether a proposal has been approved. Votes cast by
proxy will be tabulated by an automated system administered by Interwest
Transfer Company, Inc., our transfer agent. Votes cast by proxy or in person
at the meeting will be counted by the persons appointed by us to act as
election inspectors for the meeting.
Our outstanding shares entitled to vote as of April 4, 2003 (the "Record
Date") consisted of 46,713,012 shares of Common Stock. Only stockholders of
record at the close of business on the Record Date are entitled to vote at the
Annual Meeting. Each share is entitled to one vote.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
---------------------
Our Certificate of Incorporation provides for a board of directors
consisting of three classes. The members of each class serve three-year
staggered terms with one class to be elected at each annual meeting. As
provided in our Bylaws, our Board has currently set the total number of
directors at nine, with three directors in Class I, three directors in Class
II and three directors in Class III. The current terms of the Class III and
Class I directors expire at our annual meeting of stockholders in 2004 and
2005, respectively. The current term of the Class II directors expires at the
Annual Meeting.
Our Board has nominated Vincent N. Cook, Dr. James R. Schlesinger and
Stanley G. Tate for election as Class II directors to serve a three-year term
expiring at the 2006 annual meeting of stockholders and until their successors
are elected and qualified.
Shares represented by properly executed proxies will be voted to elect
the director nominees, unless authority to so vote is withheld. The nominees
are currently members of the Board and have indicated a willingness to serve
as directors if reelected. Our Board has no reason to believe that any
director nominee will be unable to serve as a director or become unavailable
for any reason. If, at the time of the meeting, any director nominee becomes
unavailable for any reason, the persons entitled to vote the proxy will vote,
as such persons determine in their discretion, for such substituted nominee,
if any, nominated by our Board.
OUR BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" PROPOSAL
NO. 1
Directors
The following table sets forth certain information with respect to our
director nominees and the directors who will continue in office after the
meeting, including the name and age of each director and nominee, his
principal occupation and business experience during the past five years, and
the commencement of his term as a director.
Nominees for Election
Principal Occupation or Employment During the Past Director
Name and Age Five Years; Other Directorships Since
------------ ------------------------------- -----
Vincent N. Cook (68) A founding stockholder of KFx. Mr. 1996
Cook has been President and Chief
Executive Officer of Visions
Incorporated International Partners
and Associates since 1989. Mr. Cook
has served on the board of our
subsidiary, Pegasus Technologies,
Inc., since 2001, and was elected
as Chairman of the Board in January
2003. Mr. Cook has served as a
consultant to and the Vice Chairman
of the Board of Directors of
Science Applications International
Corporation since 1992.
James R. Schlesinger (74) Appointed to our Board in March 2003
2003. Dr. Schlesinger is a senior
advisor to Lehman Brothers, is
Chairman of the Board of Trustees
of The MITRE Corporation and serves
on several boards as a director or
trustee, among which are the boards
of Peabody Energy, BNFL Inc., and
Sandi Corporation. Mr. Schlesinger
is a former director of Seven Seas
Petroleum Company. Dr.
Schlesinger's distinguished career
in government includes his service
as Chairman of the Atomic Energy
Commission in 1973, Director of
Central Intelligence in 1973,
Secretary of Defense 1973-1975,
Assistant to the President in 1977
and Secretary of Energy 1977-1979.
Among the many awards he has earned
are the National Security Medal,
five department and agency medals,
and the Dwight D. Eisenhower
Distinguished Service Medal.
Stanley G. Tate (75) A founding stockholder of KFx. Mr. 1997
Tate has been the principal
stockholder and President of Tate
Enterprises, a holding company
whose entities are involved in real
estate development, construction,
investments and consulting and
receivership activities, since
1987.
Principal Occupation or Employment During the Past Director
Name and Age Five Years; Other Directorships Since
------------ ------------------------------- -----
Stanford M. Adelstein (71) Chairman of the Board and President 1998
(Class III Director) of 1998 Northwestern Engineering
Company, a holding company whose
subsidiaries are engaged in real
estate management, wood products,
asphalt paving, and manufacturing
ready-mix concrete, since 1966.
Jack C. Pester (68) Mr. Pester served as our consultant 1994
(Class I Director) from April 1999 through January 2000.
Mr. Pester retired in April 1999
from his position as Senior Vice
President of international refining
and marketing for The Coastal
Corporation, a diversified energy
company, which position he held
since 1987. Mr. Pester is a past
president of the Independent
Refiners Association of America and
the Petroleum Marketers Association
of America. Mr. Pester is a
director of AmerUS Life Insurance
Company (formerly American Mutual
Life Insurance Company) of Des
Moines, Iowa.
James S. Pignatelli (59) Chairman of the Board, Chief 2001
(Class I Director) Executive Officer and President
of Unisource Energy Corporation, an
electric utility holding company,
and Chairman of the Board, Chief
Executive Officer and President of
Tucson Electric Power Company, its
principal subsidiary, since July
1998. Previously he served those
companies as Senior Vice President
and Chief Operating Officer. Mr.
Pignatelli has spent his entire
business career in the electric
utility industry. Mr. Pignatelli
serves on the boards of directors
of Millennium Energy Holdings,
Inc., TMC Healthcare, Greater
Tucson Economic Council, Southern
Arizona Leadership Council, Habitat
for Humanity Advisory Board and the
Arizona Council on Economic
Education. His memberships include
the Tucson Airport Authority,
Tucson 30, Arizona-Mexico
Commission and the State Bar of
California.
Mark S. Sexton (47) Chairman of the Board, Chief Executive 1999
(Class III Director) Officer and President of Evergreen
Resources, Inc., an independent
energy company, since 1996. From
1989 to 1996 Mr. Sexton was Vice
President of Operations for
Evergreen Resources, Inc. and
President of Evergreen Operating
Company, its wholly-owned
subsidiary. Mr. Sexton is a
registered professional engineer in
Colorado.
Richard S. Spencer III (50) Mr. Spencer is the manager and Chief 2002
(Class III Director) Executive Officer of
Westcliff Capital
Management, LLC. Mr. Spencer has
been the manager or
president of Westcliff Capital
Management LLC or its predecessor
company since May 1993. Westcliff
Capital Management LLC is an
investment adviser for certain
investment funds and institutional
investors, some of which are
stockholders of KFx. Mr. Spencer is
a director of Diedrich Coffee,
Inc., and a former director of
Huntway Refining Company. From 1992
through 1996, Mr. Spencer was vice
president and portfolio manager of
Wentworth, Hauser and Violich, a
registered investment adviser. Mr.
Spencer is a certified public
accountant.
Theodore Venners (55) Chairman of our Board since July 1992
(Class I Director) 1993, and President and Chief
Executive Officer since October
1995. Mr. Venners also served as
our President since our inception
to September 1993. Mr. Venners also
served as Chairman of the Board of
our subsidiary, Pegasus
Technologies, Inc., from March 1998
until January 2003. He is a
founding partner of K-Fuel Limited
Partnership and its predecessor,
K-Fuel Partnership, and served as
managing partner of those entities
from 1984 until their merger with
us in December 1992. Mr. Venners is
a director of Northwestern
Engineering Company.
David H. Russell had served as a director pursuant to a Stock Purchase
Agreement dated July 27, 1995 between Mr. Russell and us. On January 8, 2003
Mr. Russell resigned as a director of the Company and terminated his right to
designate a representative to our Board of Directors. By unanimous consent, on
March 5, 2003, our Board elected Dr. Schlesinger to fill the vacancy on the
Board resulting from Mr. Russell's resignation.
Gary Nicholson resigned as a director of the Company in June 2002.
Pursuant to a Common Stock and Warrant Purchase Agreement we entered on March
28, 2002 with Westcliff Capital Management, LLC ("Westcliff"), Westcliff has
the right to nominate two individuals to serve as directors on our Board of
Directors (the "Westcliff Nominees"). Pursuant to this agreement, by Board
resolution, on June 3, 2002, Richard S. Spencer III was elected to our Board
as a Westcliff Nominee. Mr. Spencer replaced the vacancy on the board
resulting from Mr. Nicholson's resignation in June 2002. A second Westcliff
Nominee has not been named. Pursuant to a series of agreements we have with a
subsidiary of Black Hills Corporation ("BKH"), BKH has the right to designate
one nominee for election to our Board of Directors. BKH has waived this right
to designate one nominee for election to our Board of Directors.
Board Meetings
During 2002 our Board met four times. During 2002, all directors, except
Mr. Russell, attended at least 75% of the aggregate of (i) the total number of
meetings of the Board during 2002 and (ii) the total number of meetings held
by all committees of the Board on which such director served in 2002.
Committees of the Board
Audit Committee. The Board has an Audit Committee and, during 2002, its
members were Stanley G. Tate (Chairman), Vincent N. Cook and David H. Russell.
During 2002 the Audit Committee met once. David H. Russell resigned from the
Board and the Audit Committee on January 8, 2003. James S. Pignatelli was
appointed to fill this vacancy on the Company's Audit Committee. Each member
of the Audit Committee is "independent" within the meaning of the American
Stock Exchange listing standards. The Audit Committee makes recommendations
concerning the engagement of independent public accountants, reviews with the
independent public accountants the plans and results of the audit engagement,
considers the range of audit and non-audit fees, reviews with the independent
accountants the adequacy of our accounting and internal control policies and
procedures, oversees and periodically confirms the independence of our
independent auditor and reviews the results of the audit for each fiscal year
with the independent public accountants, which review should cover and
include, among other things, the audit report and the published financial
statements. The Board adopted the Audit Committee Charter in June 2000. The
Audit Committee met with our independent accountants in March 2002 to discuss
the preparation, scope and status of the audit for the year ended December 31,
2001. In July 2002, the Chairman of the Audit Committee met with the
independent accountants to discuss the results of the audit for the year ended
December 31, 2001. PricewaterhouseCoopers LLP had been the Company's
independent accountants for ten years. In February 2003, the Company engaged
Deloitte & Touche LLP as independent accountants and PricewaterhouseCoopers
LLP was dismissed as independent accountants.
Compensation Committee. The Board has a Compensation Committee and,
during 2002, its members were Mark S. Sexton (Chairman), Stanford M. Adelstein
and Jack C. Pester. The Compensation Committee, among other things, advises
the Board on all matters pertaining to compensation programs and policies,
approves the compensation payable to each of the officers of the Company,
reviews proposed compensation of executives as provided in the Company's
executive compensation plan and administers the Company's stock option plans.
The Compensation Committee met twice in 2002.
Executive Committee. The Board formed an Executive Committee in April
1999 and, during 2002, its members were Jack C. Pester (Chairman), Vincent N.
Cook, Mark S. Sexton, Richard S. Spencer, III, Stanley G. Tate and Theodore
Venners. The Executive Committee has all of the authority of our entire
Board of Directors in our business and affairs, except where action of our
entire Board is required by statute. The Executive Committee met six times
in 2002.
Corporate Governance and Nominating Committee. The Board formed a
Corporate Governance and Nominating Committee in 2003 and, during 2003, its
members were Jack C. Pester (Chairman), Stanford M. Adelstein and Mark S.
Sexton. The Corporate Governance and Nominating Committee, among other things,
identifies, evaluates and recommends individuals qualified to be directors of
the Company and is in charge of developing and recommending corporate
governance guidelines for the Company. In evaluating candidates for nomination
to the board, the committee takes into account the applicable requirements for
directors under the Exchange Act and the listing standards of the American
Stock Exchange. The committee considers stockholder nominees for election to
the Board if timely advance written notice of such nominees is received by the
Secretary of the Company.
Compensation of Directors
Compensation. Directors who are not our employees have historically
received an annual retainer of $4,000 and a fee of $500 for attending each
regular meeting of the Board and $300 for participating in each meeting of the
Board held by means of telephone conference call and for participating in
certain meetings of committees of the Board. Each non-employee director also
received an annual automatic grant of options to purchase 10,000 shares
pursuant to the 1996 Stock Option and Incentive Plan (the "1996 Plan"). See
"1996 Stock Option and Incentive Plan" below. The Board of Directors
discontinued payment of cash fees and the automatic grant of options under the
1996 Plan to the Board beginning July 1, 1999. In lieu of cash compensation
for the second half of 1999 and for all of 2000 and 2001, Board members
received stock appreciation rights, or SARs, granted pursuant to our 1999
Stock Incentive Plan (the "1999 Plan"). During 2002 all of the SARs were
exercised and the Company issued three year options in satisfaction of the
SARs. See "1999 Stock Incentive Plan" below. During 2002 the Board established
a fee of $1,000 for attending meetings of the Board, excluding telephonic
meetings and committee meetings. Each Board member also received options to
purchase 20,000 shares each year for serving on the Board and its committees,
granted pursuant to our 2002 Stock Incentive Plan (the "2002 Plan"). See "2002
Stock Incentive Plan" below. Directors were also reimbursed for out-of-pocket
travel and other expenses incurred in attending meetings.
Mr. Venners is an employee of the Company and did not receive any
compensation from us for his service as a director or as a member of the
Executive Committee. Mr. Nicholson is an employee of our subsidiary, Pegasus
Technologies, Inc., and did not receive any compensation from us for his
service as a director. Mr. Cook is the Chairman of our subsidiary, Pegasus
Technologies, Inc., and did not receive any compensation from us for his
service as a director. Mr. Cook received options to purchase up to 60,000
shares of our common stock at an exercise price of $2.75 in consideration of
his additional obligations as Chairman of Pegasus.
Compensation Pursuant to Plans
2002 Stock Incentive Plan. In June 2002, our stockholders approved and
adopted the 2002 Plan. We have reserved 2,000,000 shares of common stock for
issuance under the 2002 Plan. As of April 4, 2003, stock options for 510,000
shares had been granted, leaving 1,490,000 shares available under the 2002
Plan. The Compensation Committee of the Board of Directors has awarded each
Board member 20,000 options under the 2002 Plan as compensation for their
service in 2002 and 20,000 options as compensation for their service in 2003.
The options were immediately vested on the date of grant. If a non-employee
director acquired shares upon exercise of such options and ceased to serve as
a director for any reason other than death before the first anniversary of the
date of grant of the options, the Company had the right to repurchase the
shares at the exercise price. The exercise price for the options is $2.75 per
share.
1999 Stock Incentive Plan. In April 1999, we adopted the 1999 Plan and
reserved 2,000,000 shares of common stock for issuance upon the exercise of
options, SARs, dividend equivalent rights, restricted stock and other awards
granted under the 1999 Plan. Awards granted under the 1999 Plan to directors
may be nonqualified stock options, SARs, dividend equivalent rights,
restricted stock or other awards. The 1999 Plan authorizes the Compensation
Committee (the plan administrator) to determine the terms and conditions of
any award, except that the exercise price of nonqualified stock options cannot
be less than 85% of the fair market value of the common stock on the date the
option is granted. The awards may be granted subject to vesting schedules and
restrictions on transfer and repurchase or forfeiture rights in favor of us as
specified in agreements issued under the 1999 Plan. The Compensation Committee
may accelerate the vesting and release from any restrictions on transfer and
repurchase or forfeiture rights of any outstanding award, or prevent such
acceleration or release, with respect to any merger, consolidation, change of
control or similar corporate transaction involving us. During 2002 all of the
SARs were exercised and the Company issued three year options in satisfaction
of the SARs. As of April 4, 2003, stock grants and options for 1,975,000
shares had been granted, leaving 25,000 shares available for grant under the
1999 Plan.
1996 Stock Option and Incentive Plan. From 1996 through 1998, directors
who were not our employees received an annual grant of options to purchase
10,000 shares of common stock under the 1996 Plan. Under the terms of the 1996
Plan, the grant of nonqualified stock options to non-employee directors was
automatic on the third business day after the annual meeting of stockholders.
The options were immediately vested on the date of grant. If a non-employee
director acquired shares upon exercise of such options and ceased to serve as
a director for any reason other than death before the first anniversary of the
date of grant of the options, the Company had the right to repurchase the
shares at the exercise price. We have reserved 1,500,000 shares of common
stock for issuance under the 1996 Plan. As of April 4, 2003, stock options for
1,229,334 shares had been granted, leaving awards for 270,666 shares available
for grant under the 1996 Plan.
1992 Amended and Restated Stock Option Plan. In December 1993, our
stockholders approved and we adopted an Amended and Restated Stock Option Plan
(the "Amended Plan"), which amended and restated the 1992 Stock Option Plan.
We have reserved a total of 1,000,000 shares for issuance under the Amended
Plan. The Amended Plan provides for the granting, to executive and other key
employees, of incentive stock options and the granting of non-qualified stock
options to such persons as the Board of Directors (the administrator of the
Amended Plan) shall select. As of April 4, 2003, 422,000 shares have been
granted, leaving stock options for 578,000 shares available for grant under
the Amended Plan.
EXECUTIVE OFFICERS
------------------
Set forth below is certain information regarding our executive officers,
including age, principal occupation during the last five years and the date
each first became an executive officer.
Executive Officer
Name (Age) Present Executive Office Since
---------- ------------------------ -----
Theodore Venners (55) Chairman of our Board, President 1992
and Chief Executive Officer. More
detailed information regarding Mr.
Venners' business experience is set
forth under "Directors."
Jerry Mitchell (39) A. Vice President of Finance since 2002
November 2002 and acting Chief
Financial Officer since January
2003. Mr. Mitchell was Vice
President of Finance and Chief
Financial Officer of Reliable Power
Systems from May 2001 until April
2002. From 1997 to 2001 Mr. Mitchell
was Senior Manager of Budget and
Analysis for Duke Energy Field
Services. Mr. Mitchell is a
certified public accountant.
Rudolph G. Swenson (65) Secretary and Treasurer since 1992 1992
and Vice President of Contracts and
Patents since June 1996. From
January 1994 to June 1996, Mr.
Swenson served us as Chief Financial
Officer. Mr. Swenson is a past
member of the Board of Directors of
the Black Hills Regional Eye
Institute.
Patrick S. Flaherty (38) Vice President of Finance and 2001
Chief Financial Officer from July
2001 until his resignation in
January 2003. Mr. Flaherty served as
Controller of our subsidiary,
Pegasus Technologies, Inc. since
March 2000. Mr. Flaherty joined
Steris Corporation as Division
Controller and Director of Finance
in 1996. Mr. Flaherty is a certified
public accountant.
Gary Nicholson (45) Chief Executive Officer of our 2000
subsidiary, Pegasus Technologies,
Inc. since 2000. Mr. Nicholson has
over 25 years of experience in the
power utility industry. Prior to
joining Pegasus, Mr. Nicholson
served as a director and vice
president at Data Systems and
Solutions ("DS&S"), a joint venture
between Rolls Royce Controls, Ltd.
And Science Applications
International Corporation. Mr.
Nicholson held this position at DS&S
for two years. From 1985 to 1998 Mr.
Nicholson held various upper
management positions at Rolls-Royce
Advanced Controls, Ltd. in the
United Kingdom.
EXECUTIVE COMPENSATION
----------------------
Summary Compensation Table
The following table sets forth certain information for each of the last
three fiscal years concerning compensation paid by us to our Chief Executive
Officer and each executive officer who earned a total annual salary and bonus
that exceeded $100,000 for 2002 (the "Named Executive Officers").
Long-Term Compensation
Annual Compensation Awards
-------------------------- -------------------------------------
Securities
Name and Underlying
Principal Positions Year Salary Bonus Options (#)
------------------- ---- ------ ----- -------------------------------------
Theodore Venners 2002 $155,000 $10,000 --
Chairman of the Board 2001 120,000 60,000 100,000
President and CEO 2000 120,000 60,000(1) --
Rudolph G. Swenson 2002 $107,500 $ 5,000 --
Vice President, 2001 85,000 30,000 75,000
Secretary and Treasurer 2000 80,000 -- --
Patrick S. Flaherty(2) 2002 $112,980 $20,000 --
Vice President and CFO 2001 95,961 15,000 50,000
2000 69,907 15,000 --
Gary Nicholson 2002 $200,000 $25,000 --
Chief Executive Officer 2001 170,833 75,000 200,000
of Pegasus 2000 87,500 75,000 --
-------------------
(1) Payment of half of the bonus was deferred to 2001. Accordingly, Mr.
Venners received a $30,000 bonus payment during 2000 and received the
remaining $30,000 in 2001.
(2) Patrick S. Flaherty resigned as Vice President and Chief Financial Officer
on January 22, 2003, and was replaced by Jerry A. Mitchell as Vice President
and acting Chief Financial Officer. Mr. Mitchell did not receive compensation
in excess of $100,000 in 2002 and was therefore not included in the above
chart.
The foregoing compensation table does not include certain fringe benefits
made available on a nondiscriminatory basis to all our employees, such as
group health insurance, paid parking, certain educational and training
programs, vacation and sick leave. In addition, we make available certain
non-monetary benefits to our executive officers with a view to acquiring and
retaining qualified personnel and facilitating job performance. We consider
such benefits to be ordinary and incidental business costs and expenses. The
aggregate value of such benefits in the case of each executive officer listed
in the above table, which cannot be precisely ascertained but which is less
than $50,000 and less than 10% of the annual salary of each such executive
officer, is not included in such table; except that in the case of Mr.
Nicholson we re-imbursed him for approximately $65,000 in moving and travel
related expenses during 2001.
Equity Compensation Plan Information
We have adopted stock incentive plans to provide incentives to attract
and retain officers, directors and key employees and consultants. We currently
have reserved a total of 6,500,000 shares of our $.001 par value common stock
for granting awards, including 1,000,000 shares under our 1992 Plan, 1,500,000
shares under our 1996 Plan, 2,000,000 shares under our 1999 Plan and 2,000,000
shares under our 2002 Plan. A total of 131,000 shares have been issued under
our 1999 Plan. In the aggregate, there remain 6,369,000 shares available for
issuance under outstanding and future awards pursuant to the 1992 Plan, the
1996 Plan, the 1999 Plan and the 2002 Plan.
The following table sets forth a description of our equity compensation
plans as of December 31, 2002:
------------------------------------------ --------------------------- ------------------------- -------------------------------
Number of securities Number of securities
to be issued upon Weighted-average remaining available for
exercise of exercise price of future issuance under equity
outstanding outstanding compensation plans,
options and other rights options and other excluding securities
Plan Category rights reflected in column (a)
------------------------------------------ --------------------------- ------------------------- -------------------------------
(a) (b) (c)
------------------------------------------ --------------------------- ------------------------- -------------------------------
Equity compensation plans approved by
security holders 4,435,334 $3.06 1,933,666
------------------------------------------ --------------------------- ------------------------- -------------------------------
Equity compensation plans not approved
by security holders 0 -- 0
------------------------------------------ --------------------------- ------------------------- -------------------------------
Stock Options and SARs Granted During 2002
No new stock awards were made during 2002 to executive officers of the
Company. During 2002, the executive officers exercised SARs that had been
granted in previous years. Pursuant to the terms of the SARs, we elected to
satisfy our obligations under the SARs by issuing options at the same strike
price as the SARs with a term of three years. We issued a total of 1,705,000
options in satisfaction of our outstanding SAR obligations. There are no
longer any SARs outstanding.
2002 Year-End Option Values
The following table reports certain information regarding outstanding
stock options held at December 31, 2002 by the Named Executive Officers.
2002 Year-End Option Values
Value of Unexercised
Number of Unexercised In-the-Money
Shares Options at 12/31/02 Options at 12/31/02
Acquired on Value (Exercisable / (Exercisable /
Name Exercise Realized Unexercisable) Unexercisable) (1)
----------------------- ----------------- ------------- -------------------------------- ---------------------------------
Theodore Venners - - 1,170,000 / 30,000 $ 197,500 / $0
Rudolph G. Swenson - - 250,000 / 0 58,200 / 0
Patrick S. Flaherty - - 50,000 / 0 0 / 0
-------------------
(1) Based on the closing price of $2.59 of the common stock on the American
Stock Exchange on December 31, 2002, and is calculated by subtracting
the exercise price per share from the applicable closing price.
Compensation Committee Interlocks and Insider Participation
Mr. Theodore Venners, our Chairman of the Board, Chief Executive Officer
and President, serves as a director of Northwestern Engineering Company. Mr.
Stanford Adelstein, the Chairman of the Board and the President of
Northwestern Engineering Company, serves as our director and a member of our
Compensation Committee.
Committee Report on Executive Compensation
Executive Compensation
All decisions on compensation for our executive officers are made by the
Compensation Committee of the Board. The executive compensation program
presently consists of annual base salary, short-term incentives in the form of
annual cash bonuses and long-term incentives in the form of stock options.
The committee believes that the compensation of executive officers
should reflect the scope of their responsibilities, our success and the
contributions of each executive to that success. In addition, the committee
believes that base salaries should approximate the mid-point of competitive
salaries derived from market surveys and that short-term and long-term
incentive compensation should reflect our performance and the contributions of
each executive.
External competitiveness is an important element of the committee's
compensation policy. The competitiveness of compensation for our executives is
assessed by comparing it to market data.
The process of determining each of the elements of compensation for our
executive officers is outlined below.
Base Salary
Base salaries are intended to approximate the mid-point of competitive
salaries for similar organizations of comparable size, market capitalization
and complexity. Executive salaries are adjusted gradually over time and only
as necessary to meet this objective. Increases in base salary may be moderated
by other considerations, such as geographical or regional market data,
industry trends and internal fairness. It is the committee's intention that
over time the base salaries for the CEO and the other executive officers will
approach the mid-point of competitive data.
Cash Bonus
The committee establishes a median potential bonus for each executive
officer by using the market data on total cash compensation from the same
executive compensation surveys as used to determine salaries. The committee's
determination with respect to bonuses is based on a subjective evaluation of
the contributions of each executive that are not captured by operating
measures but are considered important in the creation of long term stockholder
value.
Stock Incentive Program
Our primary goal is to excel in the creation of long-term value for our
stockholders. The principal incentive tool used to achieve this goal is the
periodic award to key employees of options to purchase our common stock.
The committee and management believe that awards of stock options to
purchase our shares accomplish many objectives. The grant of options to key
employees encourages equity ownership in us, and closely aligns management's
interest to the interests of all the stockholders. The emphasis on stock
options also results in management's compensation being closely linked to
stock performance. In addition, because they are subject to vesting periods of
varying durations and to forfeiture if the employee leaves us prematurely,
stock options are an incentive for key employees to remain with us long term.
Awards are not made annually in conjunction with the annual review of
cash compensation, but are made periodically. The committee considers total
compensation of executives, actual and anticipated contributions of each
executive (which includes a subjective assessment by the committee of the
value of the executive's future potential within the organization), as well as
the value of previously awarded options as described above, in determining
awards.
Policy on Deductibility of Compensation
The committee has also considered the application of Section 162(m) of
the Internal Revenue Code to our compensation practices. Section 162(m) limits
the tax deduction available to public companies for annual compensation paid
to senior executives in excess of $1 million unless the compensation qualifies
as "performance based." The annual cash compensation paid to our individual
executives does not approach the $1 million threshold, and we believe that our
stock incentive plans qualify as "performance based." Therefore, we do not
believe any further action is necessary in order to comply with Section
162(m). From time to time, the committee will re-examine our compensation
practices and the effect of Section 162(m).
2002 CEO Compensation
Cash compensation for Mr. Theodore Venners is reviewed by both the
compensation committee and the full Board. The committee and the Board
evaluate Mr. Venners' performance and compensation using a process similar to
that used for our other executive officers.
Awards to Mr. Venners of stock options to purchase our shares of common
stock are reviewed and determined periodically by the compensation committee
using criteria similar to that used for our other executive officers. No
awards of options or other stock based compensation was made to Mr. Venners in
2002.
The Compensation Committee of the Board of Directors
Mr. Mark S. Sexton, Chairman
Mr. Stanford M. Adelstein
Mr. Jack C. Pester
Comparative Performance Graph
The Securities and Exchange Commission requires that we include in this
Proxy Statement a line-graph presentation comparing cumulative, five-year
stockholder returns (assuming reinvestment of dividends) for our common stock
with a broad-based market index and either a nationally recognized industry
standard or an index of peer companies selected by us. The following graph
assumes $100 invested on December 31, 1997 in our common stock, the Russell
2000(R) Index and a peer group of companies. The stock price performance shown
on the following graph is not necessarily indicative of future price
performance.
Comparison of 5 Year Cumulative Total Return Among KFx Inc., the Russell
2000(R) Index, The Peer Group of Companies, and the Standard & Poor's 500
from December 31, 1997 to December 31, 2002
(Assumes Initial Investment of $100)
[OBJECT OMITTED]
12/29/98 12/31/99 12/31/00 12/31/01 12/31/02
------------ ------------- ----------- ----------- -----------
KFX 46 52 50 92 80
Russell 2000(R) 98 119 115 118 94
Peer Group 94 121 172 96 58
S&P 500 129 156 141 125 97
KFx's Peer Group is comprised of the following companies: AES
Corporation; Calpine Corporation; Ballard Power Systems Inc.; Huaneng Power
International Inc.; Consolidated Energy Inc.; Massey Energy Company; Arch
Coal Inc.; Covanta Energy Corporation; Active Power Inc.; FuelCell Energy,
Inc.; Plug Power, Inc.; USEC Inc.; H Power Corporation; Penn Virginia
Corporation; Proton Energy Systems, Inc.; Beacon Power Corporation; Millenium
Cell, Inc.; Hydrogenics Corporation; Alliance Resources Partners, LP;
Evergreen Solar, Inc.; Westmoreland Coal Company; Rentech Inc; York Research
Corporation; U.S. Energy Systems, Inc; Yanzhou Coal Mining Company, Ltd.; and
Suncor Energy, Inc. All companies in the Peer Group are listed on U.S. stock
exchanges or the Nasdaq system.
We are excluded from the Peer Group for purposes of the comparative
performance graph.
From July 21, 1994 to January 29, 1996, our common stock was traded on
the Nasdaq SmallCap Market under the trading symbol "KFXI." Beginning January
30, 1996, our common stock was traded on the American Stock Exchange under the
trading symbol "KFX."
STOCK OWNERSHIP
---------------
The following table sets forth certain information, as of April 4, 2003,
with respect to the holdings of (1) each person who is the beneficial owner of
more than five percent of our common stock, (2) each of our directors, (3) the
CEO and each Named Executive Officer, and (4) by all of our directors and
executive officers as a group.
Beneficial ownership of the Common Stock is determined in accordance
with the rules of the SEC and generally includes any shares of Common Stock
over which a person exercises sole or shared voting or investment powers, or
of which a person has a right to acquire ownership at any time within 60 days
of April 4, 2003. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in this table have sole voting and
investment power with respect to all shares of Common Stock held by them.
Applicable percentage ownership in the following table is based on 46,713,012
shares of Common Stock outstanding as of April 4, 2003.
Unless otherwise indicated below, the address of each of the principal
stockholders is c/o KFx, Inc. 3300 East First Avenue, Suite 290, Denver,
Colorado 80206.
Sares Beneficially
Name and Address Owned Percentage of Class
---------------- ----- -------------------
Stanford M. Adelstein 365,000 (1) *
Vincent N. Cook 717,500 (2) 1.5%
Cristobal Energy Co., Inc. 3,172,640 6.8%
1270 Stone Canyon Road
Los Angeles, California 90077
Gary Nicholson 200,000 (3) *
Westcliff Capital Management, LLC 21,491,250 (4) 33.5%
200 Seventh Avenue, Suite 105
Santa Cruz, California 95062
Jack C. Pester 366,126 (5) *
David H. Russell 1,349,000 (6) 2.9%
Mark S. Sexton 1,294,166 (7) 2.7%
Stanley G. Tate 1,072,247 (8) 2.3%
Theodore Venners 4,031,604 (9) 8.5%
Rudolph G. Swenson 395,100 (10) *
Richard S. Spencer III 21,491,250 (11) 33.5%
Dr. James R. Schlesinger 383,333 (12) *
Patrick S. Flaherty 50,000 (13) *
James S. Pignatelli 65,000 (14) *
Jerry A. Mitchell 50,000 (15 *
RAM Trading 5,123,447 (16) 9.99%
c/o Caledonia Bank & Trust Limited
Caledonian House
P.O. Box 1043 George Town, Grand Cayman
Security Benefit 4,820,000 (17) 10.1%
One Security Benefit Place
Topeka, Kansas 66636-0001
All directors and executive officers
as a group (14 persons) 31,830,326 (18) 46.5%
-------------------
* Less than 1 percent.
(1) Represents 200,000 shares owned by Northwestern Engineering Company, of
which Mr. Adelstein is Chairman of the Board and controls 95% of the
outstanding voting shares of capital stock, and 165,000 shares which Mr.
Adelstein has the right to acquire within 60 days of April 4, 2003,
pursuant to the exercise of options.
(2) Includes 300,000 shares owned by an investment partnership controlled by
Mr. Cook, 20,000 shares owned by a trust for which Mr. Cook is the
Trustee, and 305,000 shares which Mr. Cook has the right to acquire
within 60 days of April 4, 2003 pursuant to the exercise of options. Mr.
Cook disclaims beneficial ownership of the 300,000 shares owned by the
investment partnership and 20,000 shares owned by the trust.
(3) Includes 200,000 shares which Mr. Nicholson has the right to acquire
within 60 days of April 4, 2003, pursuant to the exercise of options.
(4) These securities are owned directly by investment limited partnerships
of which Westcliff Capital Management, LLC ("Westcliff") is the general
partner and investment adviser, and by other investment advisory clients
of Westcliff. Westcliff has discretionary authority to vote and dispose
of such securities on behalf of its clients, and thus is deemed to have
indirect beneficial ownership thereof. Mr. Spence is the controlling
owner of Westcliff. See footnote 11, below. Includes (a) 7,288,750
shares which such partnerships and other advisory clients have the right
to acquire within 60 days of April 4, 2003, pursuant to the exercise of
warrants, (b) 3,240,000 shares which such partnerships and other
advisory clients have the right to acquire within 60 days of April 4,
2003, pursuant to the exercise of an option to purchase shares of common
stock granted by the Company and (c) 6,885,000 shares which such
partnerships and other advisory clients have the right to acquire within
60 days of April 4, 2003, pursuant to the exercise of warrants that may
be acquired upon exercise of the option described in the immediately
preceding clause (b).
(5) Includes 345,000 shares which Mr. Pester has the right to acquire within
60 days of April 4, 2003, pursuant to the exercise of options.
(6) Includes 112,500 shares which Mr. Russell has the right to acquire
within 60 days of April 4, 2003, pursuant to the exercise of options.
(7) Includes 66,666 shares which Mr. Sexton has the right to acquire and
1,000,000 shares which Evergreen Resources, Inc. has the right to
acquire pursuant to the exercise of warrants, and 227,500 shares which
Mr. Sexton has the right to acquire pursuant to the exercise of options,
all within 60 days of April 4, 2003. Mr. Sexton disclaims beneficial
ownership of the warrant held by Evergreen Resources, Inc.
(8) Includes 66,667 shares which Mr. Tate has the right to acquire pursuant
to the exercise of warrants, 260,000 shares which Mr. Tate has the right
to acquire within 60 days of April 4, 2003 pursuant to the exercise of
options and 14,500 shares owned by the Stanley Tate Revocable Trust for
which Mr. Tate serves as trustee.
(9) Includes 820,000 shares which Mr. Venners has the right to acquire
within 60 days of April 4, 2003 pursuant to the exercise of options and
66,667 shares which Mr. Venners has the right to acquire pursuant to the
exercise of a warrant.
(10) Includes 245,000 shares which Mr. Swenson has the right to acquire
within 60 days of April 4, 2003 pursuant to the exercise of options.
(11) These securities are owned directly by investment limited partnerships
of which Westcliff is the general partner and investment adviser, and by
other investment advisory clients of Westcliff. As the controlling
person of Westcliff, Mr. Spencer is deemed to have indirect beneficial
ownership of such securities. Includes (a) 7,288,750 shares which such
partnerships and other advisory clients have the right to acquire within
60 days of April 4, 2003, pursuant to the exercise of warrants, (b)
3,240,000 shares which such partnerships and other advisory clients have
the right to acquire within 60 days of April 4, 2003, pursuant to the
exercise of an option to purchase shares of common stock granted by the
Company and (c) 6,885,000 shares which such partnerships and other
advisory clients have the right to acquire within 60 days of April 4,
2003, pursuant to the exercise of warrants that may be acquired upon
exercise of the option described in the immediately preceding clause
(b).
(12) Includes 303,333 shares which Dr. Schlesinger has the right to acquire
within 60 days of April 4, 2003 pursuant to the exercise of warrants.
(13) Includes 50,000 shares which Mr. Flaherty has the right to acquire
within 60 days of April 4, 2003 pursuant to the exercise of options.
(14) Includes 65,000 shares which Mr. Pignatelli has the right to acquire
within 60 days of April 4, 2003 pursuant to the exercise of options.
(15) Includes 50,000 shares which Mr. Mitchell has the right to acquire
within 60 days of April 4, 2003 pursuant to the exercise of options.
(16) Includes 4,572,747 shares which RAM Trading has the right to acquire
within 60 days of April 4, 2003, pursuant to the exercise of warrants.
(17) Includes 800,000 shares which Security Benefit has the right to acquire
within 60 days of April 4, 2003, pursuant to the exercise of warrants
and 20,000 shares relating to shares that Security Benefit has
investment discretion on.
(18) Includes an aggregate of 12,970,000 shares which directors and executive
officers as a group have the right to acquire within 60 days of April 4,
2003 pursuant to the exercise of options and an aggregate of 8,792,083
shares pursuant to the exercise of warrants. Includes 320,000 shares of
which Mr. Cook disclaims beneficial ownership.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers and directors
and persons who own more than 10% of our Common Stock (such persons "Reporting
Persons") to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and the American Stock Exchange, and to
furnish the Company with copies of all such reports. Based solely on the
review of the Forms 3, 4 and 5 furnished to us and certain representations
made to us, we believe that during the year ended December 31, 2002, there
were no filing deficiencies under Section 16(a), except as follows:
Westcliff was late in filing its Form 3. Further, Westcliff has yet to
report its acquisition of five put options with respect to shares of our
common stock, its acquisition of three options to purchase additional shares
of our common stock together with warrants and put options, each with respect
to our common stock, and the cancellation of two such options. Westcliff has
informed us that they intend to file these reports. Each such transaction was
reported on a Form 5 filed by Westcliff. In addition, Jerry A. Mitchell was
late in filing a Form 3 when he was appointed chief financial officer.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Royalty and License Agreements
We are a party to a Royalty Agreement with Edward Koppelman, whereby Mr.
Koppelman is entitled to receive a royalty equal to 25% of our worldwide
royalty and license fee revenue. The royalty to Mr. Koppelman will cease when
the cumulative payments to him reach the sum of approximately $75.2 million.
Mr. Koppelman passed away in October 1997 and all his rights and obligations
as discussed above are held by his estate. In his will, Mr. Koppelman
bequeathed 50% of the royalty stream to Theodore Venners, our Chairman of the
Board, Chief Executive Officer and President.
Pegasus is contingently liable to certain of its founding stockholders
for a royalty equivalent to 2% of the license fee revenues derived from the
sale of its NeuSIGHT product through November 30, 2004. This obligation is
limited to the extent of pretax income without regard to the royalty, subject
to a maximum of $2.5 million and certain other limitations. Pegasus has not
made any payments under this agreement.
Other
On February 9, 2001, KFx closed a transaction with Evergreen Resources,
Inc. ("Evergreen") under which we sold to Evergreen a portion of our Pegasus
Preferred Stock investment in Pegasus, representing an approximate 8.8% as
converted interest in Pegasus, for $1,500,000. We repurchased this preferred
stock for $2,000,000 plus 6% of the repurchase price per annum on May 1, 2002.
In addition, Evergreen was provided with a five-year warrant to purchase
1,000,000 shares of our common stock at $2.25 per share. Evergreen's chairman,
Mr. Sexton, is a member our Board of Directors and serves on our Compensation
Committee.
During 2001, we extended a $500,000 line of credit to Pegasus,
unsecured, due on demand, at the prime rate of interest plus 2% per annum.
Pegasus presently owes us $300,000 under the line of credit. In connection
with this line of credit we received a warrant to purchase 475,000 shares of
Pegasus common stock at a price of $1.07 per share. The warrant expires on
February 26, 2004.
On April 16, 2001, Mr. Venners provided Pegasus with a $300,000
unsecured line of credit, due on demand, at the prime rate of interest plus
2%. During 2002, the interest rate was increased to the prime rate of interest
plus 4% per annum. Mr. Venners received warrants to purchase 285,000 shares of
Pegasus common stock at $1.07 per share. The warrants expire April 15, 2004.
At April 4, 2003, $150,000 was due under this line of credit.
We have a consulting agreement with Venners & Company, Ltd. for investor
and public relations and governmental affairs services. Venners & Company,
Ltd. is controlled by John P. Venners, the brother of Theodore Venners. During
2002, Venners & Company, Ltd. was paid $148,977 in cash for consulting fees.
In 2002, John P. Venners was also paid 20,000 shares of our common stock for
services provided in 2001 and 10,000 shares for services provided in 2002.
Also during 2002, $37,707 was paid to Venners & Company, Ltd. as reimbursement
for expenses relating to our business. We also provide office space for Mr.
John Venners in Arlington, Virginia. We paid $68,319 for the office space in
2002 but received $47,989 in sub-lease income. The consulting agreement
provides for a two-year term, which began January 1, 1994 and is automatically
renewable for successive one-year periods, unless either party terminates it.
Also, we are obligated to include Venners & Company, Ltd. in any cash-based
employee benefit programs of ours. During 2002, we paid medical insurance
premiums of $3,307 for an employee of Venners & Company, Ltd.
On March 8, 2001, Theodore Venners purchased a portion of our Pegasus
preferred shares, representing an approximate 0.6% as converted interest in
Pegasus, for $100,000, subject to our obligation to repurchase the preferred
shares for $133,333 plus 6% per annum. Mr. Sexton, in separate transactions on
April 10 and on May 25, 2001, purchased a portion of our Pegasus preferred
shares, representing an approximate 0.6% as converted interest in Pegasus, for
a total of $100,000, subject to our obligation to repurchase the preferred
shares for $133,333 plus 6% per annum. Mr. Tate, in separate transactions on
May 21 and on November 29,2001, purchased a portion of our Pegasus preferred
shares, representing an approximate 0.6% as converted interest in Pegasus, for
$100,000, subject to our obligation to repurchase the preferred shares for
$133,333 plus 6% per annum. The repurchase of the Pegasus preferred shares was
made on April 30, 2002. As part of these transactions, we granted warrants for
66,667 shares to Mr. Venners and 66,666 shares to Mr. Sexton at $2.636 per
share. We granted Mr. Tate warrants to purchase 14,888 shares of our common
stock at $2.636 per share and warrants to purchase 51,779 shares at a price of
$3.00 per share. The warrants expire five years from the date they were
granted. Mr. Venners is our Chairman and Chief Executive Officer and Mr.
Sexton and Mr. Tate are members of our Board of Directors. On April 30, 2002
the Company satisfied its obligations to repurchase the Pegasus preferred
stock for a total of $3,846,049.
On January 11, 2002, Pegasus borrowed $500,000 from KFx at the prime
rate of interest plus 2% per annum. The entire balance is currently
outstanding. In connection with this loan we received a warrant to purchase
475,000 shares of Pegasus common stock at a price of $1.07 per share. The
warrant expires on January 10, 2005.
In May 2002, we entered into an agreement to issue 100,000 shares of our
common stock and issued a warrant to purchase 112,500 shares of our common
stock with an exercise price of $2.75 per share expiring in May 2010, with
Eastgate Management Corporation in exchange for a $250,000 full recourse note,
which was due on February 1, 2003. In conjunction with this agreement, the
Company entered into an additional agreement with Eastgate to provide
consulting services to the Company. The Company has the right to offset the
note receivable with their obligation for consulting services, as the services
are provided.
During the period from March 28, 2002 through August 21, 2002, we
entered into five separate transactions with a group of investors, including
Westcliff, whereby we issued 6.76 million shares of our common stock at a price
of $2.50 per share and warrants to purchase 9.565 million shares of our common
stock, resulting in cash proceeds to us of $16.9 million. The warrants have an
exercise price of $2.75 per share and are subject to adjustment.
PROPOSAL NO. 2
AMENDMENT TO THE KFX AMENDED CERTIFICATE OF
-------------------------------------------
INCORPORATION
-------------
The Board of Directors has approved and recommends that the stockholders
adopt an amendment to KFx's Restated Certificate of Incorporation to increase
the total authorized shares of the Company from 100 million to 140 million. Of
the 100 million shares of capital stock currently authorized, 80 million
shares are designated as Common Stock having a par value of $.001 per share
and 20 million shares are designated as preferred stock having a par value of
$.001 per share. After giving effect to the increase in authorized shares, the
aggregate number of shares of which the Company shall have authority to issue
will be 140 million, of which 120 million shall be designated Common Stock
with each share having a par value of $.001 and 20 million shares shall be
designated Preferred Stock with each share having a par value of $.001.
Outstanding Shares
As of April 4, 2003, 46,713,012 shares of Common Stock were issued and
outstanding, 6,749,090 shares of Common Stock are reserved for issuance upon
exercise of options that are outstanding or reserved for issuance under the
Company's equity incentive and stock option plan and 25,590,563 shares of
Common Stock are reserved for issuance upon the exercise of outstanding
warrants and options. As of April 4, 2003 there were no issued and outstanding
shares of preferred stock.
Reasons for the Amendment
Currently, the Company has 947,335 shares of Common Stock available for
general corporate purposes. As a general matter, the Board of Directors does
not believe this is an adequate number of shares to assure that there will be
sufficient shares available for issuance in connection with possible future
awards under employee benefit plans, stock dividends, stock splits, future
acquisitions, equity and equity-based financing and other corporate purposes.
Therefore, the Board of Directors has proposed the increase in authorized
shares of Common Stock as a means of providing the Company with the
flexibility to act with respect to the issuance of Common Stock or securities
exercisable for, or convertible into, Common Stock in circumstances which the
Company believes will advance the interests of the Company and its
stockholders without the delay of seeking an amendment to the Restated
Certificate of Incorporation at that time. If the proposal to amend the
Restated Certificate of Incorporation is approved, the additional shares will
be available for issuance from time to time for the conversion or exercise of
previously or to be issued convertible securities, warrants and options, for
use in obtaining funds for present and future operations and for use in
conjunction with possible acquisitions of businesses or properties.
Reserved Shares upon Approval of the Amendment
As of April 3, 2003 the investors that entered into a series of private
placements with us in 2002 executed a waiver of their right to make an
additional investment in the Company on the same general terms and conditions
as provided for in that series of private placements (the "Waiver"). The
option to make an additional investment permits the investors to purchase
additional shares of Common Stock and warrants to purchase Common Stock for up
to an aggregate purchase price of $25 million. The investors invested an
aggregate of $16.9 million in the series of private placements entered into in
2002, and for purposes of the option to make an additional investment, the
investors can purchase additional shares of Common Stock and warrants to
purchase Common Stock for up to an aggregate purchase price of $8.1 million.
If this proposal is approved by a majority of our stockholders entitled to
vote on this proposal, 10,125,000 shares of our Common Stock will be reserved
for issuance upon the exercise by the investors of the option to make
additional investments (3,240,000 of those shares will be reserved for the
option to purchase common stock and 6,885,000 shares will be reserved for
issuance upon the exercise of warrants to purchase our Common Stock). The
option to make an additional investment expires on July 19, 2003.
We entered into a consulting and confidentiality agreement with Eastgate
Management Corporation in March 2002. On January 22, 2003 the Board extended
this agreement to August 2005 at a fee of $150,000 per year and for warrants
to purchase 1,000,000 shares of our common stock ("Eastgate Warrants"). On
March 17, 2003 the Board modified the action taken on January 22, 2003 to
provide that the Eastgate Warrants will be issued, and the shares issuable
upon the exercise of the Eastgate Warrants will be reserved for issuance only
upon the approval by our stockholders of an amendment to our Restated
Certificate of Incorporation to increase the authorized number of shares of
$.001 par value common stock from 80,000,000 to 120,000,000. If this proposal
is approved by a majority of our stockholder entitled to vote on this
proposal, 1,000,000 shares of our common stock will be reserved for issuance
upon the exercise of the Eastgate Warrants.
If this proposal is approved by a majority of the stockholders entitled
to vote on this proposal, and after taking into account the reserve
requirements described in the precedent two paragraphs, we will have
29,822,335 shares of Common Stock available for general corporate purposes.
Certain Effects of the Amendment
If the proposed amendment becomes effective, under certain circumstances
it could have an anti-takeover effect, although that is not the intention. For
example, if we became the subject of a hostile takeover attempt, we could
attempt to obstruct the takeover by issuing shares of Common Stock which would
have the effect of diluting the voting power of the outstanding shares and
increasing the cost of the potential takeover. In addition, the increase in
authorized shares, if approved, may have the effect of discouraging a
challenge for control or make it less likely that such a challenge, if
attempted, would be successful. Our Board of Directors and executive officers
have no knowledge of any current effort to obtain control of KFx or to
accumulate large amounts of our Common Stock, and this proposal is not being
presented as an anti-takeover device.
Once authorized, the additional shares of Common Stock may be issued
with approval of the Board of Directors but without further approval of our
stockholders unless stockholder approval is required by applicable law, rule
or regulation. Shares may be issued for such consideration as the Board of
Directors may determine and as may be permitted by applicable law. In the
event the stockholders vote in favor of this proposal, we intend to amend our
Restated Certificate of Incorporation promptly thereafter to provide for the
increase in authorized Common Stock.
The proposed amendment to the Restated Certificate of Incorporation does
not change the terms of the Common Stock. All shares of Common Stock,
including those now authorized and those that would be authorized by the
proposed amendment to our Restated Certificate of Incorporation, are equal in
rank and have the same voting rights, the same rights to dividends and the
same liquidation rights. Holders of the Common Stock do not have preemptive
rights or appraisal rights.
Proposed Amendment to the Restated Certificate of Incorporation
To effect the increase in authorized shares of our Common Stock, it is
proposed that the first paragraph of Article III of our Restated Certificate
of Incorporation be amended to read in its entirety as follows:
"The aggregate number of shares of which the Corporation shall have the
authority to issue is 140,000,000, of which 120,000,000 shares shall be
designated Common Stock with each share having a par value of $.001; and
20,000,000 shares shall be designated Preferred Stock with each share having a
par value of $.001. The designations and the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions for redemption of the shares of each
class of capital stock are as follows:"
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE "FOR" PROPOSAL NO. 2 TO AMEND THE RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES.
PROPOSAL NO. 3
RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
----------------------------------------------------
As previously reported in the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on February 5, 2003 and on March
5, 2003, the Board has selected Deloitte & Touche LLP to serve as our
independent accountants for the fiscal year ending December 31, 2003.
PricewaterhouseCoopers LLP previously served as our independent accountants
since the fiscal year ended December 31, 1992. In January 2003, the Board
terminated the relationship with PricewaterhouseCoopers LLP and selected
Deloitte & Touche LLP to conduct the audit for the fiscal year ended December
31, 2002. These actions were approved by the Company's Board of Directors upon
recommendation of its Audit Committee. Representatives of Deloitte & Touche
LLP will be present at the meeting and will have the opportunity to make a
statement if they desire and will be available to respond to appropriate
questions from stockholders.
PricewaterhouseCoopers' LLP reports on the Company's financial
statements for the two fiscal years ended December 31, 2001 and 2000 did not
contain an adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle, except that
PricewaterhouseCoopers' LLP opinion on our 2001 and 2000 financial statements
included an explanatory paragraph expressing substantial doubt regarding our
ability to continue as a going concern. During the Company's two most recent
fiscal years and the period from January 1, 2002 through February 5, 2003,
there were no disagreements between the Company and PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure of auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused
it to make reference to the subject matter of the disagreements in connection
with its report. None of the reportable events described under Item
304(a)(1)(v) of Regulation S-K occurred within the two most recent fiscal
years of the Company or within the interim period through February 5, 2003.
PricewaterhouseCoopers' LLP letter to the Securities and Exchange Commission
stating its agreement with the statements in this paragraph was filed as
Exhibit 16.1 to the Company's Current Report on Form 8-K, dated February 5,
2003. Representatives of PricewaterhouseCoopers LLP are not expected to be
present at the Annual Meeting.
During the years ended December 31, 2002 and 2001 and through April 4,
2003, the Company did not consult Deloitte & Touche LLP regarding any matters
or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
The Board is submitting its selection of our independent accountants for
ratification by our stockholders at the meeting in order to ascertain the
views of stockholders regarding such selection. In the event of a negative
vote on this ratification, the Board may reconsider its selection.
Auditor Independence Assessment
In addition, the Audit Committee has discussed with the independent
accountants their independence from us and our management, including matters
in the written disclosures and letters provided by the independent auditors to
the Audit Committee as required by the Independence Standards Board Standard
No. 1 (Independence Discussions With Audit Committees).
Audit Committee Report
The Audit Committee has discussed with our independent accountants,
Deloitte & Touche LLP, the overall scope and plans for their audit. The Audit
Committee met with the independent accountants, with and without management
present, to discuss the results of their examination as well as the overall
quality of our financial reporting. During March of 2003, the Audit Committee
met and held discussions with our independent accountants to review the status
of the audit for the fiscal year ended December 31, 2002. The Audit Committee
has discussed with the independent auditors the matters required to be
discussed by SAS 61 (Codification of Statements on Auditing Standards, AU ss.
380), as may be modified or supplemented.
During March of 2002, the Audit Committee met and held discussions
with management and with our independent accountants at the time,
PricewaterhouseCoopers LLP, to review the status of the audit for the fiscal
year ended December 31, 2001. In June of 2002, the Chairman of the Audit
Committee met with PricewaterhouseCoopers LLP to review the audited financial
statements contained in our Annual Report on Form 10-K/A for the year ended
December 31, 2001. The Chairman of the Audit Committee also reviewed and
discussed such financial statements with management. The Audit Committee also
discussed with PricewaterhouseCoopers LLP the matters required to be discussed
by various Statements on Auditing Standards regarding Communications with
Audit Committees.
In reliance on the reviews, meetings and discussions referred to above, the
Audit Committee recommended to the Board of Directors, and the Board has
approved, that the audited financial statements be included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. The Audit
Committee and the Board also have recommended the selection of the Company's
independent accountants for the fiscal year ending December 31, 2003.
The Audit Committee of the Board of Directors
Stanley G. Tate, Chairman
Vincent N. Cook
James S. Pignatelli(1)
-------------------
(1) David H. Russell resigned from the Audit Committee on January 8, 2003.
James S. Pignatelli was appointed to fill this vacancy on the Company's
Audit Committee.
Auditor Fees
The aggregate fees payable to our auditors for the prior fiscal year are as
follows:
Audit Fees. The aggregate fees for the audit of our financial statements for
the fiscal year ended December 31, 2001 paid during 2002, and fees for the
review of interim statements, for the fiscal year ended December 31, 2002 were
$151,971, all of which was paid to PricewaterhouseCoopers LLP. During 2002, we
were billed $151,971 for Audit related fees, of which $60,000 relates to the
2002 audit and the remainder to the 2001 audit.
Financial Information Systems Design and Implementation Fees. The Company did
not incur any auditor fees for information technology consulting services.
Other Fees. The aggregate auditor fees for all other professional services,
excluding Audit Fees and Financial Information Systems Design and
Implementation Fees, identified above, for the fiscal year ended December 31,
2002 were $192,155. These fees are comprised primarily of tax planning
services, tax compliance services, services provided in connection with the
S-3 Registration statements filed during 2002, responses to SEC comment
letters and fees relating to various Form 8-Ks filed during 2002.
The Audit Committee has determined that the provision of non-audit
services listed above by the independent accountants does not adversely affect
their independence in providing audit services.
OUR BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
PROPOSAL NO. 3
SOLICITATION OF PROXIES
-----------------------
This solicitation is being made by mail on behalf of our Board, but may
also be made without additional remuneration by our officers or employees by
telephone, telegraph, facsimile transmission, electronic means, personal
interview or other similar means of communication. The expense of the
preparation, printing and mailing of this Proxy Statement and the enclosed
form of proxy and Notice of Annual Meeting, and any additional material
relating to the meeting, which may be furnished to stockholders by the Board
subsequent to the furnishing of this Proxy Statement, has been or will be
borne by us. We will reimburse banks and brokers who hold shares in their name
or custody, or in the name of nominees for others, for their out-of-pocket
expenses incurred in forwarding copies of the proxy materials to those persons
for whom they hold such shares. To obtain the necessary representation of
stockholders at the meeting, supplementary solicitations may be made by mail,
telephone or interview by our officers or selected securities dealers. We
anticipate that the cost of such supplementary solicitations, if any, will not
be material. In addition, we have retained our transfer agent, Interwest
Transfer Company, Inc., to solicit proxies from stockholders by mail, in
person and by telephone. We will pay Interwest a fee of $1,300 for its
services, plus reimbursement of reasonable out-of-pocket expenses incurred in
connection with the proxy solicitation.
ANNUAL REPORT
-------------
Our Annual Report on Form 10-K for the fiscal year ended December 31,
2002, together with a letter from Mr. Theodore Venners, our Chairman of the
Board of Directors, Chief Executive Officer and President, has been mailed to
stockholders along with this Proxy Statement. We will, upon written request
and without charge, provide to any person solicited hereunder additional
copies of our Annual Report on Form 10-K, for the year ended December 31,
2002, as filed with the Securities and Exchange Commission. Requests should be
addressed to the Investor Relations Department, 3300 East First Avenue, Suite
290, Denver, Colorado 80206. Also, such report may be obtained from our
Internet homepage at http://www.kfx.com.
OTHER MATTERS
-------------
We are not aware of any business to be presented for consideration at
the meeting, other than that specified in the Notice of Annual Meeting. If any
other matters are properly presented at the meeting, it is the intention of
the persons named in the enclosed proxy to vote in accordance with their best
judgment.
STOCKHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
---------------------------------------------
Any stockholder who intends to submit a proposal at the 2004 Annual
Meeting of Stockholders and who wishes to have the proposal considered for
inclusion in the proxy statement and form of proxy for that meeting must, in
addition to complying with the applicable laws and regulations governing
submission of such proposals, deliver the proposal to us for consideration no
later than December 31, 2003. Rule 14a-4 of the SEC's proxy rules allows a
company to use discretionary voting authority to vote on matters coming before
an annual meeting of stockholders, if the company does not have notice of the
matter at least 45 days before the date corresponding to the date on which the
company first mailed its proxy materials for the prior year's annual meeting
of stockholders or the date specified by an overriding advance notice
provision in the company's by-laws. Our by-laws do not contain such an advance
notice provision. Accordingly, for our 2004 Annual Meeting of Stockholders,
stockholders' written notices must be received by us before March 16, 2004.
Such proposals should be sent to Rudolph G. Swenson, our Secretary, at 3300
East First Avenue, Suite 290, Denver, Colorado 80206.
NOTICE TO BANKS, BROKER-DEALERS
AND VOTING TRUSTEES AND THEIR NOMINEES
--------------------------------------
Please advise us whether other persons are the beneficial owners of the
shares for which proxies are being solicited from you, and, if so, the number
of copies of this Proxy Statement and other soliciting materials you wish to
receive in order to supply copies to the beneficial owners of the shares.
It is important that proxies be returned promptly, whether or not you
expect to attend the Annual Meeting in person. We request that you complete,
date and sign the enclosed form of proxy and return it promptly in the
envelope provided for that purpose. By returning your proxy promptly you can
help us avoid the expense of follow-up mailings to ensure a quorum so that the
meeting can be held. Stockholders who attend the meeting may revoke a prior
proxy and vote their proxy in person as set forth in this Proxy Statement.
By Order of the Board of Directors
Rudolph G. Swenson
Secretary
Denver, Colorado
April 14, 2003
[FRONT OF PROXY VOTING CARD]
PROXY
KFX INC.
3300 East First Avenue, Suite 290, Denver, Colorado 80206
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder(s) of KFx Inc. (the "Company") hereby
appoints Jerry A. Mitchell and Rudolph G. Swenson, or either of them with full
power of substitution, as attorneys and proxies of the undersigned, with the
powers the undersigned would possess if personally present, and with full
power of substitution, to vote all shares of common stock of the Company at
the annual meeting of stockholders of the Company to be held on Thursday, May
22, 2003 at 10:00 a.m. local time at the executive offices of the Company,
3300 East First Avenue, Suite 290, Denver, Colorado 80206, and any
postponements, continuations or adjournments thereof, upon all subjects that
may properly come before the meeting, including the matters described in the
proxy statement furnished herewith, subject to any directions indicated below.
I hereby vote my shares of KFx, Inc. Common Stock as specified on the
reverse side of this card.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
------------------------------------------
[BACK OF PROXY VOTING CARD]
This proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder(s). If no direction is made, this proxy
will be voted "FOR" the nominees of the Board of Directors in the election of
directors, "FOR" the ratification and approval of an amendment to the
Company's Restated Certificate of Incorporation and "FOR" the ratification of
the selection of Deloitte & Touche LLP as the Company's independent
accountants for the year ending December 31, 2003. This proxy also delegates
discretionary authority to vote with respect to any other business which may
properly come before the meeting or any postponements, continuations or
adjournments thereof.
IMPORTANT - THIS PROXY MUST BE SIGNED AND DATED BELOW.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSAL NO.
1., PROPOSAL NO. 2 AND PROPOSAL NO. 3.
Please mark your vote as indicated in this example: |X|
FOR AGAINST ABSTAIN
1. ELECTION OF NOMINEES LISTED BELOW:
A. VINCENT N. COOK |_| |_| |_|
B. DR. JAMES R. SCHLESINGER |_| |_| |_|
C. STANLEY G. TATE |_| |_| |_|
2. AMENDMENT TO OUR RESTATED CERTIFICATE OF INCORPORATION |_| |_| |_|
3. RATIFICATION OF SELECTION OF DELOITTE & TOUCHE LLP AS OUR |_| |_| |_|
INDEPENDENT ACCOUNTANTS
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL
MEETING AND PROXY STATEMENT FURNISHED IN CONNECTION HEREWITH, AND HEREBY
RATIFIES ALL THAT THE SAID ATTORNEYS AND PROXIES MAY DO BY VIRTUE HEREOF.
DATED: ______________, 2003
(Seal) ___________________________
(Stockholder's Signature)
___________________________
(Stockholder's Signature)
Note: Please mark, date and sign this proxy card and return it in the enclosed
envelope. Please sign as your name appears on this card. If shares are
registered in more than one name, all owners should sign. If signing in a
fiduciary or representative capacity, please give full title and attach
evidence of authority. Corporations please sign with corporate name by a duly
authorized officer and affix corporate seal.