================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Period Ended September 30, 1998
Commission File No. 0-29664
SOLUCORP INDUSTRIES LTD.
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
YUKON N/A
------------------------------ -------------------
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
250 WEST NYACK ROAD, WEST NYACK, NY 10994
- - --------------------------------------- ----------
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code:
---------------------------------------------------
(914) 623-2333
Former name, former address and former fiscal year,
if changed since last report:
---------------------------------------------------
None
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 a 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 [ ]
As of November 16, 1998, there were 19,497,721 shares of Common Stock, no par
value outstanding.
================================================================================
<PAGE>
BASIS OF PRESENTATION
The following unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information without audit. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These unaudited statements should be read in
conjunction with the audited financial statements of the Company and notes
thereto included in the Company's Transition Report for the six month period
ended December 31, 1997. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the results which may be
expected for the full year ending December 31, 1998.
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SOLUCORP INDUSTRIES LTD
Consolidated Statement of Operations and Deficit
(Unaudited - Prepared by Management)
(In U.S. Dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1998 1997 1998 1997
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Environmental clean-up and waste disposal $381,433 $538,261 $1,367,996 $519,165
Training Institute $1,000 0 9,396 25,447
------------ ------------ ------------ ------------
382,433 538,261 1,377,392 544,612
------------ ------------ ------------ ------------
Cost of Sales and Revenue
Environmental clean-up and waste disposal 345,083 278,096 1,200,793 781,940
Training Institute 6,039 0 9,003 7,097
Inventory storage costs 112,843 0 252,589 0
------------ ------------ ------------ ------------
463,965 278,096 1,462,385 789,037
------------ ------------ ------------ ------------
Gross Margin (81,532) 260,165 (84,993) (244,425)
Investment and Other Income 30,701 90,090 139,075 99,089
License fees 500,000 700,000 1,575,758 700,000
------------ ------------ ------------ ------------
449,169 1,050,255 1,629,840 554,664
------------ ------------ ------------ ------------
Expenses
Administrative and general 737,939 386,045 2,507,011 244,940
Corporate development and marketing 85,726 53,992 342,173 214,503
Depreciation and amortization 91,234 80,231 248,905 227,615
Research and development 0 0 0 1,968,910
------------ ------------ ------------ ------------
914,899 520,268 3,098,089 2,655,968
------------ ------------ ------------ ------------
Earnings (loss) from operations (465,730) 529,987 (1,468,249) (2,101,304)
Other income (expense) (527,979) 0 (1,055,947) (36,013)
------------ ------------ ------------ ------------
Earnings (loss) for the period (993,709) 529,987 (2,524,196) (2,137,317)
Deficit, beginning of period (14,778,225) (13,267,253) (13,247,738) (10,599,949)
------------ ------------ ------------ ------------
Deficit, end of period ($15,771,934) ($12,737,266) ($15,771,934) ($12,737,266)
============ ============ ============ ============
Earnings (loss) per share ($0.05) $0.03 ($0.13) ($0.13)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
SOLUCORP INDUSTRIES LTD
Consolidated Balance Sheet
(In U.S. Dollars)
September December
31, 1998 31, 1997
----------- --------
(Unaudited)
ASSETS
Current Assets
Cash $0 $26,646
Accounts receivable 1,727,792 672,791
License fees 166,667 490,910
Loan receivable 0 50,000
Due from related parties 1,651,240 1,981,377
Other receivables 143,114 100,872
Inventories 1,841,958 784,815
Prepaid expenses 217,454 816,495
----------- -----------
5,748,225 4,923,906
Long Term Investments 380,277 368,844
Capital Assets 294,016 350,663
Waste Disposal Rights 1,461,797 1,624,219
----------- -----------
TOTAL ASSETS $7,884,315 $7,267,632
=========== ===========
LIABILITIES
Current Liabilities
Bank overdraft $71,319 $0
Accounts payable & accrued liabilitie 1,725,549 868,198
Loans payable 495,831 270,722
----------- -----------
2,292,699 1,138,920
Due on waste disposal rights 1,265,625 1,265,625
----------- -----------
3,558,324 2,404,545
----------- -----------
SHAREHOLDERS EQUITY
Share capital 20,122,340 18,135,240
Deficit (15,771,934) (13,247,738)
----------- -----------
4,350,406 4,887,502
Less: Cost of 8,000 shares held by
company's subsidiary (24,415) (24,415)
----------- -----------
4,325,991 4,863,087
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $7,884,315 $7,267,632
=========== ===========
The accompanying notes are an integral part of this statement.
<PAGE>
SOLUCORP INDUSTRIES LTD.
Schedule of Administrative and General Expenses (US Dollars)
Three and Nine Month Periods Ended September 30, 1998 and 1997
Three Months Ended September 30,
-----------------------------------------------
1998 1997
--------------------------------- ----------
U.S. Canada Total Total
-------- ------- -------- --------
Automobile $5,393 $0 $5,393 $7,557
Bad Debts 0 0 0 0
Bank charges and interest 1,393 50 1,443 7,420
Consulting and management fees 126,291 0 126,291 144,871
Foreign exchange (gain) loss 10,422 (2,068) 8,354 (127,227)
Insurance 19,826 0 19,826 26,774
Legal. accounting and audit 127,194 15,742 142,936 16,604
Office, printing and related 56,884 1,712 58,596 15,357
Rent 32,751 1,679 34,430 31,402
Salaries and wages 271,393 18,180 289,573 239,448
Telephone 32,612 2,368 34,980 17,259
Transfer and filing fees 0 (7) (7) 0
Travel 13,074 3,050 16,124 6,580
-------- ------- -------- --------
$697,233 $40,706 $737,939 $386,045
======== ======= ======== ========
Nine Months Ended September 30,
------------------------------------------------
1998 1997
----------------------------------- ----------
U.S. Canada Total Total
---------- -------- ---------- --------
Automobile $23,780 $0 $23,780 $16,042
Bad Debts 86,600 0 86,600 41,690
Bank charges and interest 11,883 251 12,134 28,385
Consulting and management fees 541,102 0 541,102 44,095
Foreign exchange (gain) loss 62,534 (1,279) 61,255 (133,233)
Insurance 40,087 0 40,087 13,645
Legal. accounting and audit 429,078 50,128 479,206 204,311
Office, printing and related 219,259 8,509 227,768 (55,146)
Rent 92,703 5,224 97,927 71,270
Salaries and wages 740,670 56,429 797,099 5,900
Telephone 68,417 7,861 76,278 (8,849)
Transfer and filing fees 0 394 394 17,890
Travel 58,490 4,891 63,381 (1,060)
---------- -------- ---------- --------
$2,374,603 $132,408 $2,507,011 $244,940
========== ======== ========== ========
<PAGE>
SOLUCORP INDUSTRIES LTD
Consolidated Statement of Cash Flows
(Unaudited - Prepared by Management)
(In U.S. Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities
Net profit (loss) for the period ($2,524,196) ($2,137,317)
Items not involving cash:
Depreciation & amortization 248,905 227,615
Writedown of investments 36,013
----------- -----------
Funds provided (used) from operations (2,275,291) (1,873,689)
Non-cash working capital changes (373,752) (683,077)
----------- -----------
Cash provided by (used in) operating activities (2,649,043) (2,556,766)
----------- -----------
Financing activities
Issue of common shares 1,987,100 4,392,858
Due from related parties 330,137 (1,146,484)
Loans receivable 50,000 0
Loans payable 225,109 (14,667)
----------- -----------
Cash provided by (used in) financing activities 2,592,346 3,231,707
----------- -----------
Investment activities
(Increase) decrease in capital assets (29,836) (73,473)
Deferred charge (250,000)
(Increase) decrease in long-term investments (11,432) (158,639)
----------- -----------
Cash provided by (used in) investment activities (41,268) (482,112)
----------- -----------
Increase (decrease) in cash position (97,965) 192,829
Cash position, beginning of period 26,646 10,451
----------- -----------
Cash position, end of period ($ 71,319) $ 203,280
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
1. Significant Accounting Policies
a) Generally Accepted Accounting Principles
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada, which differ
in some respects from those in the United States. Except as disclosed
in note 22, no differences have been reported as they are not
considered significant.
b) Basis of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. At September 30, 1998 the Company's
subsidiaries and its percentage equity interest in each are as
follows:
ESM Industries (Canada) Inc. 100%
World Travel Plazas Inc. 100%
World Tec Equities Inc. 100%
EPS Environmental, Inc. 100%
Environmental Training Institute Inc. (incorporated in the US) 100%
c) Cash and Cash Equivalents
For purposes of balance sheet classification and the statements of
cash flows, the Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
d) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
e) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, loans and other receivables,
accounts payable and accrued liabilities and loans payable approximate
fair market value because of the immediate or short-term maturity of
these financial accounts. The fair values of the long-term investments
are not readily determinable due to uncertainties in their
realization; however, where available, the quoted market prices have
been disclosed. The fair value of the amount due on the waste disposal
rights is not determinable due to uncertainty regarding payment.
1
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
f) Inventory
Inventory is valued at the lower of cost or net realizable value. Cost
is determined on a first-in, first-out bases.
g) Long-term Investments
Investments are recorded at cost less a provision for permanent
impairment in value.
h) Capital Assets
Capital assets are recorded at cost. Amortization is provided over the
estimated useful lives of the assets on the following bases:
Computer 30% declining balance
Furniture and office equipment 20% declining balance
Leasehold improvements 5 years straight-line
Remediation equipment 30% declining balance
Patent costs 10 years straight-line
i) Waste Disposal Rights
Waste disposal rights are recorded at cost net of amortization. These
rights are being amortized at the greater of $10 per ton of waste
delivered or $216,500 per year. The Company conducts an annual review
of the carrying value to ensure it is not in excess of the estimated
recoverable amount of this asset (see note 10). Any excess amount
identified as a result of this review is charged to income in that
year as a write-down of the carrying value.
j) Reporting Currency and Translation of Foreign Currency
The Company adopted the United States dollar as its reporting currency
for its financial statements prepared after March 31, 1996. The United
States dollar is the currency of the primary economic environment in
which the Company conducts its business, and is considered the
appropriate functional currency for its operations. Accordingly, the
financial statements of the Company have been translated using the
temporal method with translation gains and losses included in
earnings. Under this method the operations of the Company have been
converted into U.S. dollars at the following rates of exchange:
(i) Monetary assets and liabilities - at the rate of exchange
prevailing at the balance sheet date.
(ii) All other assets and liabilities - at the exchange rate
prevailing at the time of the transactions.
2
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
(iii) Revenue and expenses - at the average exchange rates prevailing
during the period.
k) Share Issue Costs
Share issue costs are charged directly to the deficit.
l) Revenue Recognition
Revenue from on-site remediation projects is recognized using the
percentage of completion method of accounting. Under this method
contract revenue is determined by applying to the total estimated
income on each contract, a percentage which is equal to the ratio of
contract costs incurred to date, to the most recent estimate of total
costs which will have to be incurred upon the completion of the
contract. Costs and estimated earnings in excess of billings
represents additional earnings over billings, based upon the
percentage completed, as outlined above. Similarly, billings in excess
of costs and estimated earnings represent excess of amounts billed
over income recognized. Provision for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
At September 30, 1998 there were no on-site projects in process.
Revenue from in-line remediation projects is recognized using the
completed contract method. Under this method revenue is recognized
when work is completed and invoiced.
Revenue from license fees, option payments and royalties are
recognized as the accrue in accordance with the terms of the relevant
agreements.
m) Research and Development
Research and development expenditures less related government grants
are charged to operations.
n) Earnings (Loss) Per Share
The earnings (loss) per share is computed using the weighted-average
number of common shares outstanding during the year.
o) Accounting for Stock-Based Compensation
In October 1995 the FASB issued SFAS No. 123 "Accounting for
Stock-Based Compensation". The statement encourages all entities to
adopt a new method of accounting to measure compensation cost of all
employee stock compensation plans based on the estimated fair value of
the award at the date it is granted. Companies are, however, allowed
to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting, which generally does not
result in compensation expense recognition for most plans. Companies
that elect to remain with the existing accounting are required to
disclose in a
3
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
footnote to the financial statement pro forma net income and, if
presented, earnings per share, as if SFAS No. 123 had been adopted.
The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December
15, 1995; however, companies are required to disclose information for
awards granted in their first fiscal year beginning after December 15,
1995. Currently, the Company's stock-based compensation plan is
accounted for using Canadian generally accepted accounting principles
similar to the intrinsic value method prescribed by APB No. 25. The
Company is in the process of computing the effect of adopting SFAS No.
123 and has not yet made a decision on whether to adopt the U.S.
accounting policy for the fiscal period ended September 30, 1998.
Management believes the financial impact of adopting SFAS No. 123
would be immaterial.
2. Accounts Receivable
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------------------------
<S> <C> <C>
Tristate Restoration Company, Inc. (note 7a) $ 0 $293,361
Smart International Ltd. 1,506,984 203,796
Other 341,516 216,741
-------------------------------
1,848,500 713,898
Allowance for bad debts (120,708) (41,107)
-------------------------------
$ 1,727,792 $672,791
===============================
</TABLE>
3. License Fees
By a letter of intent dated June 4, 1997 and an agreement dated
September 15, 1997 the Company granted to Smart International Ltd.
(Smart) the right to manufacture chemicals for the Company and the
right to exclusively engage in remediation projects in China using the
Company's technology. The agreement is for a ten-year term commencing
from June 1, 1997 with an option to renew for a further 10 years. As
consideration, Smart has agreed to pay an annual license fee of
$2,000,000 per year plus a royalty of $5 per ton for each ton of
processed material in excess of 100,000 tons per contract year. At
September 30, 1998 the Company has received $1,118,750 of the
$2,500,000 billed towards the license fee and has accrued an amount
receivable of $166,667 for license fees earned. No royalties were
earned.
4
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
4. Loan Receivable
September 30, December 31,
1998 1997
--------------------------
Loan receivable, 5% per annum, due
November 30, 1997 $ 0 $50,000
==========================
$25,000 of the $50,000 was collected in February 1998. The remaining
$25,000 was fully reserved against at September 30, 1998.
5. Due From Related Parties
Advances, primarily to directors, and employees related to directors
in the amount of $1,655,240 (December, 1997 - $1,981,377) bear
interest at 8.50%, are secured with marketable securities (market
value at September 30, 1998 - $ 51,901) and have no specific terms of
repayment.
6. Inventories
September 30, December 31,
1998 1997
---------------------------
Raw chemicals $ 1,816,574 $731,576
Blended chemicals 23,456 13,626
Goods for resale 1,928 39,613
------------------------
$ 1,841,958 $784,815
========================
7. Prepaid Expenses
September 30, December 31,
1998 1997
--------------------------
Employment agreement (note 7a) $ - $250,000
Deposit on inventory purchase (note 7b) - 244,250
Consulting agreements (note 7c) 176,563 283,911
Rental expense 38,452 28,334
Other 2,439 10,000
-------------------------
$ 217,454 $816,495
=========================
5
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
a) Employment agreement
In May, 1998, the Company filed a suit in the United States
District Court for the District of New Jersey against Tristate
Restoration Company, Inc., and the two shareholders of Tristate
alleging conversion, fraud, and breech of contract. Accordingly,
as previously reported, the account receivable from Tristate and
the related employment agreements have been fully reserved
against.
b) Deposits on Inventory Purchase
Subsequent to December 31, 1997 the $244,250 deposit was applied
to net purchases of raw chemicals totaling $415,250.
c) Consulting Agreements
(i) The Company issued 50,000 shares at $4.50 per share related
to a consulting agreement which has a two-year term ending
November 19, 1999.
6
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
8. Long-term Investments
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------------------------------
<S> <C> <C>
(a) 100,500 shares of Earthworks Industries Inc. plus accrued shares
of 42,601 (December 31, 1997 - 36,165) (note 11 and 18(d))
(Market value $ 11,685) $110,720 $99,287
(b) Convertible debenture from Travel Plaza Developments Inc. (Travel
Plaza). The Company elected on December 28, 1994 to convert the
$50,000 debenture into 250,000 shares of Travel Plaza. Final
regulatory approval for this conversion from the Alberta Stock
Exchange is still pending subject to their acceptance of a
financing arrangement and the approval of minority shareholders.
On August 21, 1996, pending the finalization of the required
financing to compute the project, construction has been
temporarily suspended and the stock of Travel Plaza has been
halted from trading. Due to these uncertainties, the Company has
written this investment down to a nominal value. 1 1
(c) Convertible loan to Cortina Integrated Waste Management Inc., a
subsidiary of Earthworks industries inc. (public company), Due
September 5, 2000 with interest at 15% Per annum. The Company is
entitled to Convert all or a portion of the loan into Shares of
Earthworks Industries Inc. at any Time. During the term of this
loan, the Company has the right to offset royalty Payments due to
Earthworks Industries Inc. Against the loan balance. 208,821 208,821
(d) Investment in EPS Chemicals, Inc. 1 1
(e) 70,000 shares of Global Technologies Inc. (note 11). 60,734 60,734
---------------------------------------
$380,277 $368,844
=======================================
</TABLE>
7
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
9. Capital Assets
September 30, December 31,
1998 1997
-------------------------
Computers $ 24,047 $24,047
Furniture and office equipment 100,940 100,940
Remediation equipment 456,466 426,630
Leasehold improvements 15,927 15,927
Incorporation costs 688 688
Patent costs 53,177 53,177
-------------------------
651,245 621,409
Less: Accumulated amortization 357,229 270,746
-------------------------
$ 294,016 $350,663
=========================
10. Waste Disposal Rights
During the year ended June 30, 1995, the Company entered into a one-year
agreement effective from August 1, 1994 with a non-related public company,
Thermo Tech Technologies inc. (Thermo Tech), to deliver 3,500 tons per
month of suitable organic waste to a bio-conversion facility located in
Corinth, New York at $55 per ton on a put or pay basis. The Company
delivered only approximately 5% of the waste contemplated under the
one-year agreement. The Corinth facility experienced technical start-up
problems and was shut down in July 1995 to correct an engineering design
problem. On September 14, 1995 and January 17, 1996 the Company and Thermo
Tech signed confirmation agreements which resulted in a ten (10) year
extension from the put or pay agreement to commence when either the Corinth
facility became operational, or as an alternative, when organic waste was
delivered to another Thermo Tech facility. The agreements obligated the
Company to pay an initial amount of $2,165,625 for the right to deliver
216,500 tons of acceptable organic waste ($10 per ton) plus an additional
$45 per ton during the ten (10) year term of the agreement.
The Company paid Thermo Tech $900,000 of the initial amount leaving
$1,265,625 still to be paid. Thermo Tech recently resolved their lease
terms at the Corinth facility, and they are now retrofitting the plant to
obtain the required permits. Since the schedule to make the plant
operational is not yet determinable, Thermo Tech has agreed to defer
Solucorp's balance due on the waste disposal rights. Accordingly, the
$1,265,625 is reflected as a non-current payable. Furthermore, it is still
the Company's position that it will fully recover its investment in waste
disposal rights over the ten-year contractual period by delivering waste to
either the Corinth facility or an alternative Thermo Tech facility.
8
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
The carrying value for the waste disposal rights represents a significant
portion of the Company's assets. Measurement of the recoverability of the
carrying value is based on an assessment of the waste disposal rates
currently existing in the New York and New Jersey areas, and at other areas
where Thermo Tech plants are located, and on the assumption that the
Corinth plant will be in operation in the near future. As of September 30,
1998, the Company has determined that no write-down is necessary. However,
it is reasonably possible, based on existing knowledge, that changes in
future conditions in the near term could require a material change in the
estimated recoverable amount.
11. Other Assets
In March 1998 the Company gave KBF Pollution Management, Inc. (KBF) an
up-front license fee of $500,000 in the form of 190,550 shares of
restricted common stock pursuant to a 5 year license agreement to market
worldwide KBF's selective separation technology (SST). At September 30,
1998 the remaining unamortized deferred charge of $475,000 was totally
reserved against, because the Company is currently involved in a legal
dispute with KBF.
12. Loans Payable
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
------------------------------------
<S> <C> <C>
IDM Environmental Corp., due on demand with interest at 10.25%,
secured by the Company's treasury stock, 100,500 shares of Earthworks
Industries Ltd. (note 8a) and 70,000 shares of Global Technologies
Inc. (note 8a) held as investments by the Company. $200,748 $200,748
Non-interest-bearing demand loans 229,775 0
Global Technologies Inc., due on demand ($100,000 Cdn). 68,129 69,974
----------------------------
$495,831 $270,722
============================
</TABLE>
9
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
13. Share Capital
a) Authorized:
200,000,000 common shares of no par value
b) Issued:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
(Unaudited) (Unaudited)
-------------------------------------------------------------
Shares Amount Shares Amount
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning 18,652,497 $18,135,240 15,062,463 $11,472,295
-------------------------------------------------------------
Issued pursuant to
Stock options 494,000 959,100 1,317,394 2,288,284
Private placements 207,457 363,050
Warrants 36,557 63,975 128,790 146,680
Shares for debt settlements 50,000 100,000 361,304
Conversion of debentures 264,355 395,000
Finders/consultant agreements 142,593 361,500 58,000 101,000
Employment agreements 100,000 250,000
License agreement 190,550 500,000
-------------------------------------------------------------
913,700 1,984,575 2,437,300 4,304,954
-------------------------------------------------------------
Alloted for cash 1,443 2,525 27,470 87,904
-------------------------------------------------------------
Balance, ending 19,567,640 $20,122,340 17,527,233 $15,865,153
=============================================================
</TABLE>
c) During the nine month period ended September 30, 1998 the Company
granted employees, directors and other individuals associated with
Company stock options to acquire up to 465,000 shares with an
expiration date of February 19, 2003 at an adjusted price of $1.81 per
share. Subsequent to September 30, 1998, these options were further
reduced to $1.20 from the $1.81 previously reported. In addition,
subsequent to September 30, 1998 the Company reduced the price on
options with an expiration date of November 4, 2002 to $1.20 from the
$1.81 previously reported. At September 30, 1998 stock options were
outstanding as follows:
Shares Exercise Price Expiration Date
- - --------------------------------------------------------------------------------
250,000 $1.38 December 21, 1999
47,500 $1.75 July 13, 2000
71,500 $1.75 September 12, 2000
47,000 $1.75 January 6, 2002
1,638,329 $1.75 June 9, 2002
872,210 $1.20 November 4, 2002
431,000 $1.20 February 19, 2003
10
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
d) At September 30, 1998 warrants were outstanding as follows:
Shares Exercise Price Expiration Date
- - --------------------------------------------------------------------------------
155,443 $1.75 - $2.00 June 25, 1999
750,000 $2.75 September 10, 2000
25,000 $4.00 April 4, 2001
300,000 $7.50 June 3, 2001
e) At September 30, 1998, 1,675,000 (September 30, 1997 - 1,675,000)
common shares were held in escrow. However, pursuant to an escrow
agreement dated April 30, 1988 these shares were subject to release on
or before June 22, 1998 in the event that the Company attained certain
cash flow targets. Since these cash flow targets were not achieved
these escrowed shares are in the process of being cancelled.
14. Income Taxes
At December 31, 1997, the Company had accumulated tax losses aggregating
$9,636,000, which may be carried forward and applied against taxable income
in future years up to 2003. The Company does not record the income tax
benefit of these losses.
15. Subsequent Events
On October 6, 1998 the Company granted to its employees, directors,
officers and consultants, 1,985,000 incentive stock options to acquire the
Company's common stock at $1.20 per share.
Subsequent to September 30 1998, IDM Environmental Corp. (IDM) informed the
Company that they foreclosed on the securities collateralizing their 10.25%
demand loan yielding them $41,440.
11
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
16. Segmented Information
<TABLE>
<CAPTION>
US Services & Consolidated
Products Canada Totals
--------------------------------------------
(a) Three Months Ended September 30, 1998:
(Unaudited)
<S> <C> <C> <C>
Revenue $ 382,433 $ -- $ 382,433
License fees 500,000 -- 500,000
Cost of sales 463,965 -- 463,965
--------------------------------------------
Operating earnings (loss) 418,468 418,468
Administrative and general 697,233 40,706 737,939
Corporate development and marketing 71,731 13,995 85,726
Amortization and depreciation 91,234 -- 91,234
--------------------------------------------
Segmented loss $ (441,730) $ (54,701) (496,431)
--------------------------------------------
Unallocated:
Other income (expense) (527,979)
Investment and other income 30,701
------------
LOSS FOR THE PERIOD $ (993,709)
===========
IDENTIFIABLE ASSETS $ 7,323,718 $ 560,597 $ 7,884,315
===========================================
(b) Three Months Ended September 30, 1997:
(Unaudited)
Revenue $ 538,261 $ -- $ 538,261
License fees 700,000 700,000
Cost of sales 278,096 -- 278,096
--------------------------------------------
Operating earnings (loss) 960,165 -- 960,165
Administrative and general 335,447 50,598 386,045
Corporate development and marketing 53,992 0 53,992
Research and development 0 0 0
Amortization and depreciation 79,219 1,012 80,231
--------------------------------------------
Segmented profit (loss) $ 491,507 $ (51,610) 439,897
---------------------------
Unallocated:
Writedown of investment 0
Investment and other income 90,090
-----------
PROFIT (LOSS) FOR THE PERIOD $ 529,987
===========
IDENTIFIABLE ASSETS $ 4,571,338 $ 827,343 $ 5,398,681
===========================================
12
</TABLE>
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
16. Segmented Information
<TABLE>
<CAPTION>
US Services & Consolidated
Products Canada Totals
---------------------------------------------
(c) Nine Months Ended September 30, 1998:
(Unaudited)
<S> <C> <C> <C>
Revenue $ 1,377,392 $ -- $ 1,377,392
License fees 1,575,758 -- 1,575,758
Cost of sales 1,462,385 -- 1,462,385
-------------------------------------------
Operating earnings (loss) 1,490,765 1,490,765
Administrative and general 2,374,603 132,408 2,507,011
Corporate development and marketing 274,386 67,787 342,173
Amortization and depreciation 242,545 6,360 248,905
-------------------------------------------
Segmented loss $(1,400,769) $ (206,555) (1,607,324)
---------------------------
Unallocated:
Other income (expense) (1,055,947)
Investment and other income 139,075
-----------
LOSS FOR THE PERIOD $(2,524,196)
===========
IDENTIFIABLE ASSETS $ 7,323,718 $ 560,597 $ 7,884,315
===========================================
(d) Nine Months Ended September 30, 1997:
(Unaudited)
Revenue $ 544,612 $ -- $ 544,612
License Fees 700,000 700,000
Cost of sales 789,037 -- 789,037
-------------------------------------------
Operating earnings (loss) 455,575 -- 455,575
Administrative and general 48,420 196,520 244,940
Corporate development and marketing 220,609 (6,106) 214,503
Research and development 1,968,537 373 1,968,910
Amortization and depreciation 226,603 1,012 227,615
-------------------------------------------
Segmented loss $(2,008,594) $ (191,799) (2,200,393)
---------------------------
Unallocated:
Writedown of investment (36,013)
Investment and other income 99,089
-----------
LOSS FOR THE PERIOD $(2,137,317)
===========
IDENTIFIABLE ASSETS $ 4,571,338 $ 827,343 $ 5,398,681
=========== =========== ===========
13
</TABLE>
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
17. Contingencies
a) Pending Litigation
During May 1998, the Company and two of its officers were served with a
putative class action complaint alleging purported violations of the federal
securities laws [GESTEN v. SOLUCORP INDUSTRIES, LTD., et al,. 98 Civ. 3248 (LMM)
(SDNY)]. Since that time, three additional class action complaints were filed
against the Company and various of its personnel. The substantive allegations of
all four of the complaints, some of which have never been served on the Company
or the individual defendants, consist of no more than extensive quotations from
prior statements purportedly made by the Company and general allegations that
such statements were false and misleading. The Company has reviewed its prior
statements and is convinced that none of such statements were false or
misleading. The Company and the individuals named in the four complaints, after
consultation with their attorneys, concluded that the actions filed against them
have no merit and determined to vigorously defend the actions.
The Company and the individuals named in the GESTEN action filed a motion
to dismiss that complaint. While that motion to dismiss was pending, the
plaintiffs in the four class actions filed a motion to consolidate the four
actions into one action, as part of the GESTEN case, and to file one amended
consolidated complaint if the motion is granted. The Company and the individual
defendants have not opposed consolidation and agreed to withdraw their motion to
dismiss the GESTEN complaint until after the Court ruled on the consolidation
motion. The consolidation motion was granted by the court by order dated October
23, 1998. The consolidated amended complaint has not yet been filed.
As of March 20, 1998 Solucorp entered into an exclusive licensing agreement with
KBF Pollution Management, Inc (KBF) covering KBF's Selective Separation
Technology. On August 25, 1998 Solucorp and KBF both announced that they had
agreed to modify the licensing agreement to a world marketing and distribution
agreement. However, on or about September 24, 1998, Solucorp received a letter
from counsel for KBF notifying Solucorp of KBF's purported termination of the
licensing agreement and of purported claims against Solucorp. On September 23
1998 KBF announced that it had purported to terminate the license agreement and
had filed a complaint against Solucorp in the United States District Court for
the Southern District of New York. During October 1998 the national law firm of
Greenburg Traurig dismissed the lawsuit filed against Solucorp by KBF after
receiving a letter from Solucorp's attorneys, Heller, Horowitz & Feit, P.C.
notifying KBF that "the purported claims under the Federal Securities laws were
totally frivolous and, accordingly, there was no basis for federal court subject
matter jurisdiction." A demand for immediate voluntary dismissal of the federal
case was made by Solucorp's attorney precipitating KBF's dismissal of the
lawsuit.
With the dismissal of KBF's federal lawsuit, KBF filed a civil action against
Solucorp in the State of New Jersey. The civil suit sets forth allegations as
described in KBF's previous Federal lawsuit but does not include the frivolous,
bogus allegations of Securities Laws violations. Solucorp denies the allegations
and intends to counter sue KBF and related parties for substantial damages.
Solucorp's claims emanate from,
14
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
among other things, misrepresentations of KBF's product marketability and
violation of non-circumvent clauses involving Solucorp clients, among other
misrepresentations and falsehoods made by KBF and related parties.
b) Waste Disposal Rights
Recoverability of the waste disposal rights is subject to the realization of
management's assumptions as discussed in note 10.
18. Related Party Transactions
During the three and nine month periods ended September 30, 1998, the Company
paid consulting fees and salaries of $109,147 and $315,971, respectively
(September 30, 1997 - $97,858 and $299,474, respectively) to directors, former
directors and/or private companies controlled by directors and/or individuals
related to directors.
19. Commitments
a) The Company has a lease for the building it presently occupies in New
York which requires the following payments:
1998 $144,000
1999 $144,000
2000 $144,000
2001 $144,000
2002 and subsequent $ 24,000
b) The Company has entered into numerous non-exclusive finder's
agreements with third parties to promote the company's soil
remediation process. The company will pay between 1% and 7% for
commissions on gross revenues generated by the third parties. These
agreements expire between one and two years.
c) The Company has agreed to pay royalties to Earthworks Industries Inc.
(Earthworks) (a Canadian public company) based on $1/ton (Cdn) for
soil remediated in Canada or $1/ton (US) if soil is remediated in the
United States. The Company will receive one share for each $1 of
royalty paid, to a maximum of 200,000 shares, in minimum blocks of
50,000. These shares are accrued as the soil is remediated. An
additional $1 (Cdn or US) will be paid for each ton remediated on
contracts resulting from the efforts of Earthworks. The Company has
the right to offset royalty payments against the convertible loan from
Cortina Integrated Waste Management, Inc. (note 8(c)).
d) The Company entered into a consulting agreement with a third party who
will provide business development and operational support. The Company
will pay the third party $3,000 per month plus any costs over and
above the monthly consulting fee. The agreement expires on October 1,
1998 with an annual renewal option.
15
<PAGE>
SOLUCORP INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 & 1997
- - --------------------------------------------------------------------------------
e) In October 1995 the Company entered into an exclusive licensing
agreement with a United Kingdom company for the U.K. company to
utilize the Company's soil remediation process and to market the
company's soil remediation technology in the U.K. The agreement
required an annual licensing fee and a royalty per ton of soil
remediated. This agreement will be superseded by a new agreement dated
August 1, 1997, when the U.K. company obtains an official listing on
the Alternative Investment Market. The Company also granted an option
for a twelve month period to the U.K. company for similar licensing
agreements related to various European territories. Consideration
received for granting the option was $200,000. On December 10, 1997
the U.K. company advised its intention to exercise the option and to
proceed with drafting agreements for France, Poland, Hungary and
Portugal.
20. Comparative Figures
The Company changed its year-end to December 31. In accordance with SEC
guidelines the consolidated statement of operations and the consolidated
statement of cash flow for the three month period ended September 30, 1998
was compared to the comparable periods in 1997, whereas the consolidated
balance sheet at September 30, 1998 was compared to the previous year ended
date of December 31, 1997.
21. Economic Dependence
During the nine months ended September 30, 1998, revenues of $522,725 and
$328,000 were earned from two customers, of which $46,071 and $Nil is
included in accounts receivable, respectively.
License fees of $1,575,758 were recognized in the nine months ended
September 30, 1998. See note 3.
22. Reconciliation to United States Generally Accepted Accounting Principles
As discussed in Significant Accounting Policies, these consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in Canada. Differences in accounting principles as they pertain to
these consolidated financial statements are as follows:
Marketable Securities
Under GAAP, the accounting for marketable securities depends on the
classification of securities as held to maturity, trading or available for
sale. The classification would be based on management's intent. Marketable
securities included in long-term investments (note 8) would be classified
as being available for sale. Under U.S. GAAP, such securities would be
recorded at fair value with any changes recorded in a separate component of
shareholder's equity. Realized gains or losses would be recorded on the
income statements. At September 30, 1998 the effect on the presentation of
long-term investment for U.S. GAAP purposes would not be material.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September
30, 1997.
Aggregate revenue (environmental clean-ups and waste disposal projects, Training
Institute fees and license fees) increased to $2,953,150 from $1,244,612; an
increase of $1,708,538 or 137% for the nine months ended September 30, 1998 when
compared to the comparable period last year. This resulted primarily from
increased transportation and disposal activity and from an increase in license
fees. Given the Company's reliance on a relatively small number of customers at
this stage, revenue may vary significantly from period to period. Accordingly,
no specific trend can be identified.
Cost of sales increased $673,348 or 85%. This increase was due to the abnormally
high inventory storage costs and from the increased revenues in 1998.
Gross margin went from a loss of $244,425 in the nine months ended September 30,
1997 to a loss of $84,993 in the current nine-month period. At this point in the
Company's development its project costs do not yet reflect the economy of scale
needed for a normal operation. In addition, the abnormally high inventory
storage costs have also hindered profitability.
Investment and other income increased to $139,075 from $99,089. This increase
occurred primarily from interest charged on related party loans.
For the nine months ended September 30, 1998 total operating expenses were
$3,098,089 versus $2,655,968 in the comparable period last year; an increase of
$442,121 or 17%. Current expenses focused primarily on the Company becoming a
reporting entity with the SEC, the protection and final issuance of the
Company's patents, increasing the sales efforts, and the Company's cooperation
with an ongoing investigation by the SEC. In the comparable period last year
operating expenses were geared primarily toward the successful demonstrations of
its MBS technology for the EPA, and finding reliable chemical suppliers for the
reagents used in MBS.
Other expenses in the nine months ended September 30, 1998 were $1,055,947
versus $36,013 in the comparable period in 1997. The current amount primarily
reflects reserves established for two separate lawsuits. (As previously
reported, the first suit involves a prepaid employment agreement and other
advances made to Tristate Restoration and its officers which the Company is
suing to recover. The second suit involves a prepaid license fee and other
advances made to KBF Pollution Management, Inc. and their officers, which the
Company intends to countersue to recover.) The $36,013 in 1997 reflects the
writedown of an investment.
For the nine months ended September 30, 1998 the Company experienced a loss of
$2,524,196 compared to a loss of $2,137,317 in the comparable period in 1997. In
addition to the low volume in
<PAGE>
relation to the Company's costs and other operating expenses in both nine-month
periods, the Company experienced significant abnormal expenses in both periods
which are discussed above.
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997.
Aggregate revenue as defined above decreased to $882,433 from $1,238,261 in the
comparable period last year; a decrease of $355,828 or 29%. In the three month
period ended September 30, 1997, licensing revenue and environmental clean-up
and waste disposal projects were $200,000 and $156,828 higher, respectively,
than in the current period. In addition, as indicated above, the Company relies
on a relatively small number of customers at this stage, and therefore revenue
may vary significantly from period to period. Accordingly, no specific trend can
be identified.
Cost of sales increased $185,869 or 67% in the three-month period ended
September 30, 1998 when compared to the comparable period in 1997. This increase
was primarily due to the abnormally high inventory storage costs from the
buildup in inventory for the anticipated increased remediation activity in the
remainder of 1998, and from increased transportation and disposal activity.
Gross margin reflected a loss of $81,532 for the three months ended September
30, 1998 versus a profit of $260,165 in the comparable period last year. In
general, aside from an occasional small job which can be profitably priced, the
Company's project costs do not yet reflect the economy of scale needed for a
normal operation. In addition, the abnormal inventory storage costs and
non-billable treatability work at the current revenue level have hindered
profitability.
Investment and other income decreased to $30,701 from $90,090; a decrease of
$59,389. This decrease was essentially from a one-time profit that the Company
earned on a joint venture project in 1997.
Total operating expenses in the current three-month period ended September 30,
1998 increased $394,631 in the current three month period ended September
30,1998 when compared to the comparable period last year. This increase was
primarily from an unfavorable exchange rate swing of $135.581 and from the
expenses associated with the Company's continuing cooperation with an ongoing
investigation by the SEC.
Other expenses in the three months ended September 30, 1998 were $527,979
without any amount in the comparable 1997 period. As noted above, the current
amount reflects a reserve established against a prepaid license fee and other
advances made to KBF Pollution Management, Inc. and their officers which the
Company intends to counter-sue to recover.
For the three months ended September 30, 1998 the Company experienced a loss of
$993,709 compared to a profit of $529,987 in the comparable period in 1997. As
indicated above, the low volume in relation to the Company's costs and other
operating expenses as well as the significant abnormal expenses accounted for
the current loss versus several one-time profitable events in the comparable
period in 1997.
<PAGE>
Liquidity and Capital Resources
At September 30, 1998, the Company had working capital of $3,455,526 a decrease
of $329,460, or 9% from the $3,784,986 reflected at December 31, 1997. Within
the current assets significant increases occurred in accounts receivable and
inventories; whereas significant decreases occurred in unbilled license fees,
due from related parties and prepaid expenses. Within the current liabilities
significant increases occurred in accounts payable and accrued expenses, and
loans payable. The Company also experienced a bank overdraft at September 30,
1998.
The Company has financed its operations through the sale of its securities
pursuant to the Company's stock option plans and to certain private investors,
and the Company expects to continue to provide for its cash and capital needs in
this manner until operations are sufficient to meet these needs.
Cash Flows
During the nine months ended September 30, 1998, the Company decreased its cash
position $97,965 versus an increased cash position of $192,829 in the comparable
period in 1997. In the current period, cash was provided mainly from the
issuance of the Company's capital stock, the repayment of related party loans,
and from non-interest bearing demand loans. This was used primarily to fund the
current loss.
Other
The carrying value of the waste disposal rights ($1,461,797) at September 30,
1998 represented a significant portion of the Company's assets. Measurement of
the recoverability of the carrying value was based on an assessment of the waste
disposal rates currently existing in the New York and New Jersey areas, and at
other areas where Thermo Tech plants are located, and on the assumption that the
Corinth plant will be in operation in the near future. However, it is reasonably
possible, based upon existing knowledge, that changes in future conditions in
the near term could require a material change in the estimated recoverable
amount. Accordingly, the Company is currently amortizing these rights at
$216,500 per year, which has left a net amount of $250,312 at September 30,
1998.
In anticipation of significantly increased remediation over the next few months,
and due to the relatively long lead time required to purchase one of the main
chemical ingredients in MBS, the Company increased its inventory of this
chemical since December 31, 1997. This was the primary reason for the inventory
increasing $1,057,143 from the $784,815 at December 31, 1997.
In February 1998, the British Columbia Ministry of the Environment (BCMOE)
issued its first and only site permit allowing heavy metals contaminated soil
that is treated with the Company's Molecular Bonding System (MBS) to be disposed
in an authorized landfill as "nonspecial" waste. This officially waives the B.C.
law that all treated soil must be disposed of in a hazardous waste landfill, and
consequently allows for significant cost savings on disposal charges for
MBS-treated material.
<PAGE>
The Company filed a patent application which utilizes the Company's Molecular
Bonding System to eliminate heavy metals pollution from a variety of
manufactured items, including mercury switches and batteries commonly containing
lead, cadmium and nickel. These products previously found their way into
municipal landfills or incinerators which subsequently released the hazardous
pollution into the environment.
Laboratory tests conducted by Brookhaven National Laboratory with the Company's
MBS Technology successfully treated mixed radioactive waste. These tests
represent an important step in the Company's attempt to penetrate the
radioactive-based market by potentially providing the U.S. Department of Energy
with a cost effective solution to dispose of mixed waste.
The Company was notified by the U.S. Department of Commerce Patent and Trademark
Office that its MBS Soil Remediation Process Patent Application was examined and
allowed for issuance as a patent.
On May 1, 1998, the Company was informed by the Securities and Exchange
Commission (SEC) that it had temporarily suspended the over the counter trading
in the securities of the Company from May 1, 1998 through May 14, 1998. The
suspension was based upon questions that were raised concerning the accuracy and
adequacy of the public information about various aspects of the Company's
business. The Company is confident that it will demonstrate to the satisfaction
of the SEC that it acted properly.
Pending Litigation
During May 1998 the Company and two of its officers were served with a putative
class action complaint alleging purported violations of the securities laws [
GESTEN v SOLUCORP INDUSTRIES LTD, et al., 98 Civ. 3248 (LMM) (SDNY) ]. Since
that time, three additional class actions complaints were filed against the
Company and various of its personnel. The substantive allegations of the
complaint consist of no more than extensive quotations from prior statements
purportedly made by the Company and general allegations that such statements
were false and misleading. The Company has reviewed its prior statements and is
convinced that none of such statements were false or misleading. The Company and
the individuals named in the complaints, after consultation with their
attorneys, believe that the action filed against them has no merit and have
determined to vigorously defend the action.
The Company and the individuals named in the GESTEN action filed a motion to
dismiss that complaint. While the motion was pending the plaintiffs in the four
class actions filed a motion to consolidate the four actions into one action, as
part of the GESTEN case, and to file one amended consolidated complaint if the
motion is granted. The Company and the individual defendants have not opposed
consolidation and agreed to withdraw their motion to dismiss the GESTEN
complaint until after the Court ruled on the consolidation motion. The
consolidation motion was granted by the court by order dated October 23, 1998.
The consolidated amended complaint has not yet been filed.
As of March 20, 1998 Solucorp entered into an exclusive licensing agreement with
KBF Pollution Management, Inc (KBF) covering KBF's Selective Separation
Technology. On August 25, 1998 Solucorp and KBF both announced that they had
agreed to modify the licensing agreement to a world marketing and distribution
agreement. However, on or about September 24, 1998, Solucorp
<PAGE>
received a letter from counsel for KBF notifying Solucorp of KBF's purported
termination of the licensing agreement and of purported claims against Solucorp.
On September 23 1998 KBF announced that it had purported to terminate the
license agreement and had filed a complaint against Solucorp in the United
States District Court for the Southern District of New York. During October 1998
the national law firm of Greenburg Traurig dismissed the lawsuit filed against
Solucorp by KBF after receiving a letter from Solucorp's attorneys, Heller,
Horowitz & Feit, P.C. notifying KBF that "the purported claims under the Federal
Securities laws were totally frivolous and, accordingly, there was no basis for
federal court subject matter jurisdiction." A demand for immediate voluntary
dismissal of the federal case was made by Solucorp's attorney precipitating
KBF's dismissal of the lawsuit.
With the dismissal of KBF's federal lawsuit, KBF filed a civil action against
Solucorp in the State of New Jersey. The civil suit sets forth allegations as
described in KBF's previous Federal lawsuit but does not include the frivolous,
bogus allegations of Securities Laws violations. Solucorp denies the allegations
and intends to counter sue KBF and related parties for substantial damages.
Solucorp's claims emanate from, among other things, misrepresentations of KBF's
product marketability and violation of non-circumvent clauses involving Solucorp
clients, among other misrepresentations and falsehoods made by KBF and related
parties.
Material Contracts
In March 1998 the Company entered into a world-wide license agreement with KBF
Pollution Management, Inc. (KBF). The five (5) year license with automatic
renewals for successive one year periods permits the Company to market KBF's
patented SST Water Treatment Technology, which removes and recovers metals from
waste water, facilitating beneficial reuse of the metals and purification of the
water. The agreement initially required the payment of an up-front license fee
of $500,000 in the form of 190,550 shares of common stock. As noted above, the
agreement is currently in dispute and litigation.
In June 1998 the Company was awarded a $1.1 million subcontract from
Environmental Waste Technology Inc. pursuant to their general contract with the
New York City Department of Environmental Protection. The contract involves lead
and asbestos abatement, and demolition services in Brooklyn, New York. Work on
the contract started in November 1998, and under the terms of the agreement the
Company will bill for its services as work is completed.
In June 1998 the Company entered into a contract with Geomar Holdings Limited, a
recently formed Delaware limited liability company. Subject to Geomar raising a
specified amount of capital, it will be responsible for funding the acquisition
and development of real estate interests in selected sites which require
remediation of contamination before they can be developed. The contract also
specifies that Solucorp will have exclusive rights as general contractor to
manage all remediation work.
In July 1998 the Company was awarded a subcontract by Roy F. Weston Inc. from
their contract with the US Army Corps of Engineers to remediate hazardous soils
utilizing its MBS technology at the former Waldon Spring Ordnance Work in St.
Charles, MO. The subcontract, which is valued at $352,000, is scheduled to
commence in December 1998.
<PAGE>
Year 2000 Issue
The Company's services do not utilize equipment or systems that depend on
computer software. The Company's accounting systems are personal computer based
and presently utilize off the shelf accounting software. The Company plans to
purchase software upgrades from software vendors, and these purchases are not
expected to have a material impact on the Company's results of operations.
Certain matters discussed herein may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
as such may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of business environment in which the
Company operates, projections of future performance, perceived opportunities in
the market and statements regarding the Company's mission and vision. The
Company's actual results, performance, or achievements may differ significantly
from the results, performance, or achievements expressed or implied in such
forward-looking statements.
<PAGE>
SOLUCORP INDUSTRIES LTD
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Primary Earnings: (*)
Net Income (Loss) ($ 993,709) $ 529,987
=================================
Shares:
Weighted average number of common shares issued and outstanding 19,332,240 17,074,683
Assuming conversion of optionsand warrants issued and outstanding (*) 3,730,093
============
Weighted average number of common shares as adjusted 19,332,240 20,804,776
=================================
Primary earnings/(loss) per common share (*) ($ 0.05) $ 0.03
=================================
Nine Months Ended
September 30,
---------------------------------
1998 1997
------------ ------------
Primary Earnings: (*)
Net Income (Loss) ($2,524,196) ($2,137,317)
=================================
Shares:
Weighted average number of common shares issued and outstanding 19,042,285 16,357,320
Assuming conversion of options and warrants issued and outstanding (*)
Weighted average number of common shares as adjusted 19,042,285 16,357,320
=================================
Primary earnings/(loss) per common share (*) ($ 0.13) ($ 0.13)
=================================
</TABLE>
- - --------------
(*) Fully diluted earnings and other computations entailing conversions of
options and warrants are omitted since they would diminish the loss per
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
30
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: November 16, 1998
SOLUCORP INDUSTRIES LTD.
By: /s/ PETER MANTIA
--------------------------------
Peter Mantia, President
By: /s/ VICTOR HERMAN
--------------------------------
Victor Herman, CFO
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SOLUCORP INDUSTRIES LTD FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30,1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> (71,319)
<SECURITIES> 0
<RECEIVABLES> 3,688,813
<ALLOWANCES> 120,708
<INVENTORY> 1,841,958
<CURRENT-ASSETS> 5,748,225
<PP&E> 294,016
<DEPRECIATION> 357,229
<TOTAL-ASSETS> 7,884,315
<CURRENT-LIABILITIES> 2,292,699
<BONDS> 0
0
0
<COMMON> 20,122,340
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,884,315
<SALES> 1,377,392
<TOTAL-REVENUES> 2,953,150
<CGS> 1,462,385
<TOTAL-COSTS> 4,560,474
<OTHER-EXPENSES> 1,055,947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,524,196)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,524,196)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> 0
</TABLE>
