UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 to FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
CEVA INTERNATIONAL, INC.
(Name of Small Business Issuer in its charter)
Nevada 22-3113236
--------------------------------- ---------------------------------
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
75-77 North Bridge Street, Somerville, New Jersey 08876
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(908) 429-0030
--------------
(Issuer's Telephone Number, Including Area Code)
------------------------------------------------
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None None
---- ----
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
-----------------------------
(Title of Class)
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
A. BUSINESS DEVELOPMENT
1. FORM AND YEAR OF ORGANIZATION
CEVA International, Inc. (the "Company") was founded as a New Jersey
corporation in 1991 for the purpose of engaging in the environmental services
business in Central and Eastern Europe (the "CEE"). Since its inception, the
Company's founder, Herbert G. Case, Jr., its current President and Chief
Executive Officer, has spent most of his time living and working in the CEE,
residing in Budapest, Hungary. During this period through the date hereof, Mr.
Case has devoted his full time to establishing the business operations of the
Company. In 1998, the Company was reincorporated in the State of Delaware.
On March 29, the Company and Oro Bueno, Inc., a Nevada corporation,
entered into an Agreement and Plan of Merger, pursuant to which the shareholders
of the Company were offered the opportunity to exchange their Company common
shares for common shares of Oro Bueno, Inc. On May 10, 1999, the Company merged
with Oro Bueno, Inc., as a result of which the shareholders of the Company
exchanged their holdings for approximately 77% of the common shares of Oro
Bueno, Inc. with the remaining balance of such shares, or approximately 23%,
being retained by the shareholders of Oro Bueno, Inc. As part of that merger,
Oro Bueno, Inc. changed its name to CEVA International, Inc. and the Delaware
corporation was dissolved. Currently, therefore, the Company is incorporated
under the laws of the State of Nevada.
The principal offices of the Company are located at 75-77 North Bridge
Street, Somerville, New Jersey 08876. Whenever we refer to "Company" or use the
terms "we", "us" or "our" in this report, we are referring to CEVA
International, Inc.
2. PROPOSED CORPORATE STRUCTURE
Our Company is currently composed of CEVA International, Inc., a Nevada
corporation with its principal offices located in New Jersey, a Czech subsidiary
and a Hungarian subsidiary. We are currently forming a Romanian corporation for
purposes of a joint venture. See, "The Company's Position in the Market -
Romania" below. Our Hungarian subsidiary, CEVA Hungary Ltd, was previously is
50% owned by Hungarian partners although our Company was and remains the
managing shareholder. As of March 31, 2000, one of our Hungarian partners who
owned an equity interest in our Hungarian subsidiary, exchanged his ownership
interest in the Hungarian subsidiary for common shares in our Company. Dr.
Andras Toth exchanged his 5% equity ownership interest in our Hungarian
subsidiary for, 100,000 common shares of our Company. We expect the remaining
Hungarian partners, Mr. Tamas Sonkoly and Mr. Janos Soos, who currently hold 30%
and 15%, respectively, of our Hungarian subsidiary to also convey their
ownership interests in exchange for our Company common shares which shall result
in its reorganization as a wholly owned subsidiary.
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Our Czech subsidiary is owned 40% by our Czech partners and we have control and
management authority. Our Romanian subsidiary, currently being formed, will also
have foreign-based ownership.
The proposed ownership structure, accepted in principle by all shareholders of
our Hungarian and Czech subsidiaries, calls for all these, foreign-based
minority owners to exchange their shares in these subsidiaries for shares in
CEVA International, Inc., resulting in our ownership of 100% of our Hungarian
and Czech subsidiaries.
Our Company's organization structure is based around a combination of
in-country, locally recruited managers with their expertise tied to their
respective business functions. Dennis Konnick has recently been hired as our
Operations Director and is a United States citizen who has relocated to
Ploiesti, Romania. Tom Nail, also a United States citizen, has been rendering
part-time, consulting services to us, has not yet been hired by our Company as a
full-time employee and has agreed verbally to consider accepting the position of
Regulatory & Technical Affairs Director if we offer it to him this year. Mr.
James Atkins, a UK Chartered Accountant became the Company's Chief Financial
Officer, effective June 1, 2000 and is based in Budapest, Hungary. Several of
the individuals identified below with an asterisk (*) are not yet employed by us
but have verbally agreed to consider accepting the positions indicated above
their names in the following chart if we choose to offer them these positions in
the year 2000:
<TABLE>
------------------
Board of Directors
------------------
------------------
Chief Executive
Officer
------------------
EXECUTIVE COMMITTEE Herbert Case
------------------
<S> <C> <C> <C> <C>
---------------- ------------------- ---------------- -----------------
Operations *Regulator & Finance Business
Director Technical Director Development
Affairs Director Director
---------------- ------------------- ---------------- -----------------
Dennis Konnick Tom Nail James Atkins Mihai Maracineanu
---------------- ------------------- ---------------- -----------------
------------------- ---------------- ------------------- ----------------
Country Director Project Managers Compliance Officer Chief Accountant
Hungary Hungary Hungary Hungary
------------------- ---------------- ------------------- ----------------
Janos Soos Jozsef Laszlo Janos Soos Diana Pacsorasz Hungary
------------------- ---------------- ------------------- ----------------
------------------- ---------------- ------------------- ----------------
Country Director Project Managers Compliance Officer Chief Accountant
Romania Romania Romania Romania Romania
------------------- ---------------- ------------------- ----------------
Mihai Maracineanu Marios Bica Mihai Marancineanu Diana Pacsorasz
------------------- ---------------- ------------------- ----------------
------------------- ---------------- ------------------- ----------------
*Country Director Project Manager *Compliance Officer Chief Accountant Czech Republic
Czech Republic Czech Republic Czech Republic Czech Republic
------------------- ---------------- ------------------- ----------------
Jiri Rott Petr Raab Jiri Rott Irena Sopovova
------------------- ---------------- ------------------- ----------------
</TABLE>
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Although we seek to fill certain positions and that certain personnel will
occupy more than one position, the main features of this structure incorporate
the following business priorities:
- Country Directors oversee local office operations, manage local
cultural/political issues
- Project Managers oversee their in-country projects throughout the region
Herbert G. Case, Jr.: President and Chief Executive Officer
Our Company, CEVA International, Inc., was founded in 1991 by Herbert G. Case,
Jr., age 56, our current President and Chief Executive Officer. He has been
responsible for strategy, business development, negotiating with financial
institutions and the overall management of our Company. With more than 30 years
of experience in environmental companies, Mr. Case has a wide network of
relationships in the world of environmental business. In the United States, Mr.
Case was one of the principal parties who assisted in the establishment of the
alternative derived fuel market as replacement fuel for cement kilns during the
1970's and 1980's. Mr. Case serves as a full-time employee of CEVA
International, Inc. without a written employment agreement and resides for most
of the year in Budapest, Hungary.
Janos Soos: Managing Director of our Hungarian Subsidiary, CEVA Hungary
The Company's Hungarian subsidiary, CEVA Hungary, is managed by Mr. Janos Soos.
Mr. Soos, a Hungarian national, 60 years of age, has a degree in economics and
more than thirty years of experience in managing commercial enterprises in
Hungary. He has been a chief executive officer of a Hungarian enterprise in a
related business for four years and Managing Director of CEVA Hungary since
1995. Mr. Soos coordinates all in-country activities and works closely with
clients and government agencies. Mr. Soos is assisted in Hungary by Mr.Jozsef
Laszlo, our Project Manager in Hungary since 1995. Mr. Laszlo, 46 years of age,
is a mechanical engineer with a background in industrial processes and holds
degrees in economics and mechanical engineering. Mr. Soos serves as a full-time
employee of CEVA Hungary at its Budapest, Hungary headquarters and has an
"employment mandate" from our subsidiary to employ him full time through the
year 2003.
Jiri Rott: Managing Director of our Czech Republic Affiliate, CEVATech
The Company's Czech affiliate, CEVATech, has been managed by Mr. Jiri Rott since
1992. Mr. Herbert G. Case, Jr., the founder and majority shareholder of our
Company, currently owns 40% of CEVATech, 60% of which is owned by Mr. Jiri Rott
and one other Czech national. Mr. Case is in the process of transferring his
ownership interest to our Company and is negotiating with Mr. Rott and the other
minority stockholder of CEVATech to exchange their ownership interests in
CEVATech for a certain amount of the common shares of our Company. Mr. Rott, 50
years of age, holds a Master of Science degree from the Faculty of Chemistry of
Silicates Technology, Czechoslovak Academy of Sciences. He has over 25 years
experience in Research and Development, particularly in cement production
technology and environmental protection management. The Czech affiliate is
focusing on providing consulting services and targeting to sell alternative fuel
technology and product to the cement industry. Mr. Rott serves as a full-time
employee of CEVATech without a written employment agreement at our Prague
offices.
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Mihai Maracineanu: Managing Director of our Romanian Subsidiary (in
Organization)
The Company's Romanian subsidiary, in organization, will be managed by Mr. Mihai
Maracineanu. Mr. Maracineanu, 46 years of age, has 23 years of experience in
international trade in the energy sector and holds a Masters of Science degree
in Economics. Mr. Maracineanu has been managing our Romanian businesses since
1996. Mr. Maracineanu has served as an independent contractor to CEVA
International, Inc. and is anticipated to be hired as a full-time employee of
our Romania subsidiary once it is established, anticipated to be in the third
quarter of the current fiscal year ending December 31, 2000. Mr. Maracineanu
resides in Bucharest, Romania and works out of our offices in that City.
Dennis Konnick: Operations Director, CEVA International, Inc. and Subsidiaries
Dennis Konnick, age 53, was hired as the Operations Director for CEVA
International, Inc. and all of our subsidiaries on June 1, 2000. Mr. Konnick's
duties will include the development and implementation of technologies utilized
in the environmental services business in the United States over the last 30
years, the start-up, staffing, and training operating personnel of the Company's
projects throughout Central and Eastern Europe. Dennis Konnick is a graduate of
the Merchant Marine Academy at Kings Point, New York, with a marine (mechanical)
engineering degree. Prior to joining our Company, Mr. Konnick was employed as
the General Manager of Operations for Puralube, Inc. Mr. Konnick has over 25
years experience in operations, incineration, hazardous waste burning and
handling systems, combustion of refuse and refuse derived fuels, waste oil
collection processing, and consumption as fuel. Mr.
Konnick resides in Ploiesti, Romania and works out of our office there.
James Atkins: Chief Financial Officer, CEVA International, Inc. and Subsidiaries
Mr. Akins, age 32, has been hired as the Chief Financial Officer for the Company
and its subsidiaries effective June 1, 2000. His duties will include assisting
in developing the Company's strategic plan, business development, contract
negotiations, assist management in the day-to-day financial operations of our
businesses, including compliance with U.S. accounting and reporting standards
and U.S. federal securities laws disclosure requirements, management information
systems, risk management and management control systems, raising capital, and
banking relationships.
James Atkins is a Chartered Accountant in the United Kingdom with extensive
experience in the environmental sector businesses in the European Union and
Eastern and Central Europe. He trained with Arthur Andersen in the United
Kingdom and worked for two years with Waste Management International PLC in the
United Kingdom and Germany. In 1995, Mr. Atkins moved to Hungary where he worked
as a manager with Deloitte & Touche's Financial Advisory Services Group in
Budapest. In 1998 he established Rochester Financial Advisory, which provides
corporate finance advisory services to environmental companies in Hungary and
Central Europe. Mr. Atkins resides in Budapest and works out of our offices
there.
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Diana Pacsorasz: Chief Accountant for our Hungarian Subsidiary, CEVA Hungary
Prior to being hired by the Company in January, 2000, Diana Pacsorasz was
employed as an analyst for KPMG in Budapest, Hungary. Ms. Pacsorasz, age 30,
provides support services for the Chief Financial Officer and is currently
assisting in the implementation of financial systems at all of our subsidiaries'
locations. Ms. Pacsorasz resides in Budapest and works out of our offices there.
Jozsef Laszlo: Project Manager for our Hungarian Subsidiary, CEVA Hungary
Jozsef Laszlo, 47 years of age, has been working for our Hungarian subsidiary,
CEVA Hungary since 1995. Mr. Laszlo is a certified Mechanical Engineer as well
as a certified Economics Engineer and speaks fluent German and Russian. Mr.
Laszlo is a resident of Budapest, Hungary and works out of our offices there.
Green Globe, LLC: our LTTD partner in Central and Eastern Europe
Our LTTD technology partner, Green Globe LLC, is owned and managed by Mr. David
Green. Mr. Green, 49 years of age, provides the LTTD technology and full service
support to our Central and Eastern European soil remediation projects. Mr. Green
has over 25 years of experience in the environmental sector and operations of
LTTD technology equipment. Our Company contracted with Mr. Green in 1997 to
supply LTTD technology to Central and Eastern Europe. Mr. Green is the President
and Chief Executive Officer of Phoenix Soil, LLC, a leading operator of LTTD
equipment in the United States.
B. BUSINESS OF ISSUER
We are engaged in the business of providing technology and services to
public and private clients in Central and Eastern Europe in the alternative
energy and environmental reclamation industries.
1. PRINCIPAL PRODUCTS AND SERVICES AND THEIR MARKET
Glossary of Technical Terms
In order to understand our business, we have provided the following
glossary of definitions of words and terms that we use in our business.
"Acid Tar": means the residuals generated from specialty petroleum
refining, containing sulfuric acid.
"Alternative Fuel" or "AF": means the recycled fuel produced by processing
petroleum residuals into a liquid or solid recycled fuel product with standards
equivalent to primary fossil fuels. These alternative fuels are used to
partially replace primary fuels in large industrial furnaces and boilers such as
cement kilns and utilities.
"Bioremediation": The use of bacteria to degrade organic materials in
soils.
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"Coal Tar": A crude mixture of aromatic hydrocarbons produced from the
destructive distillation of coal.
"Hazardous Waste Landfill": A specially constructed land disposal
facility, which is designed to prevent the escape of contaminants to the
surrounding environment.
"Hydrocarbon": Organic materials containing hydrogen and carbon, such as
oil and oil products.
"Incineration": The high temperature burning of organic waste materials to
destroy or breakdown harmful components into a less harmful state.
"Liquefaction": A process to homogenize and melt a solid by heating,
grinding and blending with additives to produce a uniform material stable at
ambient temperatures.
"Low Temperature Thermal Desorption" or "LTTD": Process utilizing a direct
heat exchange rotary kiln to volatilize organic material in soil and solid
matrices. Reduces residual hydrocarbon contamination.
"Petroleum Wastes: Residues produced from the refining of crude petroleum,
spent oils and petroleum based products generated after use by commercial or
private consumers.
"Remediation": The act of cleaning up contaminated land.
"Slop and Waste Oil": Used oils generated in the refining of crude
petroleum and spent oils from commercial and private use.
"Sludge": A general term used to designate a thick suspension of waste
products having the consistency of paste or soft mud.
"Soil Washing": A process to chemically and mechanically separate
contaminants from soil.
"Solidification": The process of making non-solid materials compact and
free flowing, hard and consistent in characteristics.
"Solvents": A liquid substance capable of dissolving or dispersing one or
more other substances.
"Tank Rail Bottoms": The residuals of materials or products that settle
out in railroad tank cars while being transported.
"Tipping Fees": Monetary charge, usually per ton, for waste materials to
be treated, processed or disposed of.
Remediation of Hydrocarbon Contamination.
We recover energy-content by processing high concentrations of
hydrocarbons contained in petroleum wastes into Alternative Fuel ("AF"). Our AF
business is applicable to the wastes generated by heavy industries such as the
petroleum refining (by-products filter cake, oily filter
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media, separator waste, sludges, acid tar, slop and waste oil, tank rail
bottoms), steel (coal tar bottoms), chemical (solvents, chemical tars) mining
(coal tars), manufactured gas and pharmaceutical industries. The processed
alternative fuel then can be used by cement kilns, power plants and other
industrial boilers as a cheaper source of energy.
Heavy industries often contaminate soil and other solid mixtures by hydrocarbons
in ways where they energy content cannot be directly recovered. In these
instances, we employ Low Temperature Thermal Desorption ("LTTD"), a soil
remediation process. Sites where these sorts of contamination can be found are
often neighboring the sites of wastes processed for AF.
The Alternative Fuel Process
Alternative Fuel technology is used to clean up pollutants by converting them
into a reusable fuel form. The alternative fuel ("AF") is derived from either
the liquefaction or solidification of residual petroleum and oily wastes and
by-products.
Technology
The Company's liquefaction process was developed in the United States to
rejuvenate solidified coal tar. Liquefying the solidified tar enables this
material to be utilized as raw materials or as supplementary fuel. The liquefied
material can be re-used in waste fuel recycling programs in cement kilns and
other industrial furnaces. Using the technology of liquefaction helps eliminate
land disposal-related liability and increases useable/saleable tar product
volume, resulting in environmental and economic benefits. The liquid fuel is
referred to as "liquid AF", or alternative fuel.
Solidification processes were developed to prepare AF into a form to replace
coal in large industrial boilers, power plants and cement kilns.
End Use
According to the 1992 Portland Cement Association's publication "A Sensible
Solution-Putting Waste to Work", (website:http://www.portcement.org) both
liquefied and solidified waste derived fuels can be utilized in cement kilns.
The use of cement kilns to recycle hazardous industrial wastes has become an
important component of environmentally acceptable handling procedures in the
Western world. The use of hazardous waste derived fuels in cement kilns affords
many specific economic benefits, including the
- reduction in energy cost
- reduction in the need for capital investment in centralized waste
management sites
- preservation of natural resources
Competitive Technologies
AF is principally considered a clean-up technology which is an alternative to
other forms of disposal or remediation. The fact that a valuable by-product is
created is important economically because it reduces the net cost of the clean
up. CEVA Hungary's management has determined that the average price to produce
AF is $166.00 U.S. per ton, less the value of the energy recovered.
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According to an internal business assessment performed by our management, the
competitive technologies include:
Hazardous waste landfill: There is limited capacity in Central and
Eastern Europe; because of their generally remote locations, landfills
require transportation and handling resulting in costs and expenses in the
$200 per ton range for disposal.
Incineration: There are only a limited number of incinerators in
Central and Eastern Europe; because of this limited capacity and the
generally remote location of these incinerators, transportation and
handling costs make incinerator disposition an expensive alternative,
costing in the range of between $500 to $1,000 per ton.
The Alternative Fuel Market
Central and Eastern Europe has vast reserves of coal-chemical and petroleum
tars, and residues generated by the coke, steel, manufactured gas and oil
refining industries. We obtain these tars, convert them to alternative fuel and
sell them as a fuel to select energy users at acceptable levels of environmental
contamination.
Generation side: Remediation is primarily compliance-driven and covers
industries such as the petroleum refining, steel, coal and chemical industries
that produce hydrocarbon residues that need to be treated.
An analysis of the top 100 Central European companies shows that 44 are
potential customers since they are operating in industries that create the type
of hazardous waste we process.
User side: Use of alternative fuels by cement kilns, powerplants and industrial
boilers as a source of cheaper energy. This business is driven by customary
commercial considerations.
The Need for Remediation
In Hungary and in the Czech Republic, the market is compliance driven, while in
Romania it is commercially driven.
Hungary
The AF, or alternative fuel business depends on the existing stock and on-going
generation of tars and similar materials (e.g. waste oils). To date, we have
identified acid and non-acid tars located at MOL Rt. Hungarian Oil and Gas
Company ("MOL") sites, which represent a potential 5 to 10- year supply of AF
materials. This estimate is based on visits made by CEVA Hungary's management to
the MOL sites, the capacity of our equipment to process the AF and user outlets
for the AF.
Czech Republic
The management of CEVA Hungary has identified acid and non-acid tars located at
the Ostramo and Paramo oil refineries, which, as well, represent a potential
10-year supply of AF materials, based on visits to these sites, the capacities
of our equipment to process the AF and the anticipated and projected volume to
be consumed by AF users.
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Romania
Acid and non-acid tars located at the refineries on or adjacent to the Ploiesti
and Campinu regions, represent, according to estimations made by our management
as a result of site visits, a potential 30 year supply of AF materials. This is
based on supplying our contracted cement partner, S.C. CIMUS S.A., with 50,000
tons per year of AF.
The levels of AF materials are shown in the following table, as determined by
our management's internal calculations:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
----------------------- -------------------------------------------------------- --------------------------------
Country Potential Supply Potential
Annual Production
(In Tons) (In Tons)
----------------------- -------------------------------------------------------- --------------------------------
Hungary MOL (acid tar) 100,000 - 160,000 2,000
MOL (non-acid tar) 100,000 52,000 - 90,000
Total 200,000 - 260,000 54,000 - 92,000
----------------------- -------------------------------------------------------- --------------------------------
Czech Republic Refineries Mixed
Total 300,000
50,000
----------------------- -------------------------------------------------------- --------------------------------
Romania Refineries (acid tar) 600,000 - 850,000 100,000
Refineries (non-acid tar) 600,000 100,000
Total 1,200,000 - 1,450,000 200,000
----------------------- -------------------------------------------------------- --------------------------------
</TABLE>
The Demand for Remediation
Generation Side
In Central and Eastern Europe, acid tar remediation has priority over non-acid
tar and other waste-oil remediation efforts, which are considered of secondary
importance currently. In Hungary and the Czech Republic, legislation will compel
generators to clean up their acid tars within the next 5-10 years. (The Budapest
Sun, March 19-25, 1998). The main generators of acid tar wastes are refineries -
for example, MOL, Ceska Rafinerska, and Romanian National Oil Company.
Identified stocks of acid tar wastes range from 100-600 thousand tons per
country. New acid tar generation ranges from near zero in Hungary to about 60
thousand tons annually in Romania. Other tars have been and continue to be
generated by the steel and chemical industries.
User Side
Our AF processing is a cost-efficient tar remediation technology. Cement kilns
are the ideal users for waste-derived fuel: Article, "A Sensible
Solution-Putting Waste to Work", The Portland Cement Association, 1992
(http://www.portcement.org). This fact is underscored since the possible fuel to
AF replacement rate is very high (50-100%), and cement plants typically have
high levels of fuel consumption, up to 80,000 tons of total fuel annually: The
length of the kiln in cement plants allows for complete hydrocarbon combustion.
There are 5-10 cement producers per country. Most of these have been purchased
by Western European strategic investors.
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Industrial boilers can also support some smaller volume AF usage, up to 10,000
tons per client annually.
Power plants are also possible AF users at lower replacement rates. Quality of
AF must be high and ideally power plants require the use of fluidized beds to
burn solid AF.
Competition
Tar Remediation
There is limited direct competition with our remediation business in the
Countries of Hungary, the Czech Republic and Romania. The AF business is
relatively complex in comparison to burning at incinerators or simply
transporting to landfills. Our AF business requires matching AF materials
sources and supplies with AF end-users; we must also process the AF materials
and then transport them to the user. Our AF business has a two-sided benefit:
mitigating contamination while recovering their energy potential by processing
into alternative fuel. Our competitors who simply burn tars at incinerators,
which generate additional wastes (ash, emissions), are more capital intensive,
and expensive. Landfills are the least desirable of alternatives, since
materials are simply "stored" underground and will always remain as a future
liability and ongoing environmental risk. In addition, fees are charged without
regard to beneficial reuse and they tend to be some distance from the waste
generators, presenting additional transportation costs. In Central and Eastern
Europe, land is a valuable commodity and its use as a landfill site will forever
restrict and limit the development and use of such lands.
Alternative Fuel Usage
Our AF business' largest competitive threats are fuel oil, coal and gas supplies
and their respective prices. Fuel users may be reluctant to switch fuels to an
alternative fuel with which they are not familiar. Alternative fuels must be
significantly discounted (currently 40% in Hungary based on our experience) in
order to induce switching. At low oil or coal prices, alternative fuel can be
less competitive in commercial markets.
Other alternative sources of fuel used by cement plants and industrial boilers
include tires, plastic and solvents, require processing and collection with
costs in excess of economic benefits created at the user side.
Tipping fees and government subsidies, as in the West, will balance this,
inequity as the region's infrastructure develops.
Barriers to Entry
Our AF business market segment is characterized by high barriers to entry. As in
the case of soil remediation, these include
Credibility: the technical nature and complexity of the business
requires credibility and a track record. As time goes on, our business
track record becomes stronger, making it harder for latecomers to compete.
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Permits: By being first in the market, we set the standards for
permitting, cutting off market access for competitors with inferior
technology.
Client Relationship: The business is based on long-term
relationships with clients, and the operations and assets of the service
provider become integrated with those of the client. This increases the
cost of switching away from the incumbent supplier.
The Company's Position in the Market
Hungary
We completed a remediation processing project at Nyirbogdany, a Hungarian site
owned by MOL, RT., Hungarian Oil and Gas Company ("MOL"). At this site, we
converted material into a liquid AF fuel. The Company has constructed a
processing facility jointly with MOL at the Nyirbogdany site. In addition, we
completed a trial-processing project in 1997 with MOL that successfully produced
an AF solid fuel. We are now working jointly with MOL to obtain permits for
cement kilns, and other outlets so that we can supply them with our processed AF
solid and liquid fuel..
We have an option for an additional remediation project for the production of AF
liquid fuel at other MOL sites.
During May, 2000, our Hungarian subsidiary, CEVA Hungary, jointly with
Heidelberger Cement in Vacs, Hungary, successfully obtained a permit to supply
their cement kilns with solid and liquid AF from MOL.
Approximately 50% and 90% of our business was done for MOL during 1998 and
during 1999, and 100% through the first quarter of 2000, respectively. MOL Rt.,
Hungarian Oil and Gas Company is one of Hungary's largest companies, and is
traded on the Budapest Stock Exchange. Revenue for 1999 was $3.2 billion with
net income, before special deductions, of $287 million. They operate five
manufacturing facilities in Hungary and approximately 400 gas stations
throughout the country. MOL has adopted a strong environmental compliance policy
and we have been working with them since 1995 to implement cost effective,
environmentally sound, proven US technologies to solve certain of their waste
problems. Because of MOL's leadership in this field in Hungary, our management
has chosen to focus on this long term potential with a highly motivated and
financially stable partner to introduce advanced US technologies.
Romania
We have a contract with S.C. CIMUS S.A., a cement company located in Campulung,
Romania, to process and supply supplemental fuels derived from refinery wastes.
The contract, dated August, 1998, is exclusive and runs for a 20-year period and
requires that we supply its kilns with a targeted minimum 1,800 tons of
alternative fuel per month. We shall be paid fees on a monthly basis based upon
the heat value of the alternative fuel and the cement plant's fuel savings costs
as well as $30,000 per month for technology and equipment, after January 1,
2000.
In September, 1998, CEVA and S.C. CIMUS S.A. signed an agreement with the
Petrobrazi S.A. refinery to start processing certain oily wastes. Total acid and
non-acid tar wastes at this refinery are estimated at approximately 200,000
tons. We completed a technical study and trial, processing a test
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amount of the wastes into alternative fuel and are now negotiating a contract to
install additional processing equipment and utilize all of this refinery's waste
as AF for the Romanian-based alternative fuel-processing program.
We entered into an exclusive 10 year contract with the VEGA S.A. refinery in
1997 to remove that refinery's waste materials for use in our alternative fuel
program. At the time, this refinery was state-owned, and has since been sold to
a private company through Romania's privatization program. Recently, the new
owners have advised us of their intent to start the joint program to start
processing its wastes. In addition, we have proposals with four other refineries
in the region to remove and process their wastes into AF.
We submitted a preliminary proposal in October, 1999 to supply AF to LaFarge
Romcim, the largest cement producer in Romania.
Recently, S.C. CIMUS S.A. was purchased by a global cement company which
owns one other cement facility in Romania and is in the final stages of closing
the acquisition of a third. We are in discussions to expand our services to
these two additional plants in Romania. On May 24, 2000, we signed an agreement
to jointly develop a regional AF processing facility to produce fuel and raw
material replacements to other cement plants in Romania.
Approximately 10% of our business revenues generated in 1998 and 1999
continuing through the first quarter of 2000 were derived from our contract with
S.C. CIMUS S.A.
Czech Republic
We are in preliminary talks with Cementworks Prachovice, a Czech cement plant
and intend to negotiate the installation of our AF equipment at this site. We
are also in discussions with various refineries and power plants in the Czech
Republic with respect to supplying alternative fuels. Through relationships with
other Czech engineering and design firms we are submitting proposals for future
cooperation in the field of lagoon remediation and sludge processing outside the
Czech Republic.
SOIL REMEDIATION BUSINESS LINE
The Soil Remediation Process
Central and Eastern Europe has large quantities of contaminated soil, which need
to be cleaned. Contaminated soil is found principally in heavy industries
including oil and gas refineries, railways, energy plants, mining sites, as well
as in and around former Soviet military bases.
The LTTD Technology
We have selected a technology known as "low temperature thermal desorption"
("LTTD") as the method to clean contaminated soil in this marketplace. This
technology has been developed by Astec, Industries, Inc. of Chattanooga,
Tennessee, a leading manufacturer of LTTD equipment, and has been determined by
our management to be the most cost-effective solution for treating moderate to
heavily contaminated soils. We determined that in the Hungarian market that the
costs (developed with Astec and our technology partner, Green Globe, LLC) were
more efficient for destroying the types of contaminants found in the soils of
Central and Eastern Europe, which contaminants include
13
<PAGE>
a high percentage of high boiling, long chain heavy petroleum residues and tars.
The LTTD system was introduced to the United States market in 1989 and has
proved to be a successful, cost-effective method of removing light and heavy
refinery and hydrocarbon wastes from all types of soil. Contaminant destruction
efficiencies in the afterburners of these units are greater than 99.99%
according to methods prescribed by United States Environmental Protection Agency
stack tests performed on equipment manufactured by Astec Industries, Inc..
Decontaminated soil retains its physical properties and ability to support
biological activity.
An LTTD unit of equipment contains several large compartments where at one end,
contaminated soil is fed into the unit on conveyor belts and is treated by heat
processing in various enclosed chambers; once treated, the "clean" soil is
deposited at the other end of the unit. The LTTD equipment heats the soil to
temperatures ranging from 90 to 320 degrees Centigrade (200-600 degrees
Fahrenheit) to vaporize the petroleum, physically separating it from the soil.
The vapor stream is then captured and sent to the afterburner where it is
thermally destroyed.
The LTTD technology itself is not a "rocket science" but only about five known
companies manufacture LTTD equipment. The operation of the LTTD machine requires
experience. Astec Industries, Inc. estimates that a one or two year learning
period is required for efficiently operating a thermal desorber. Being an
experienced operator translates into lower costs and more efficient operation.
Service Agreement with Green Globe, LLC
We partnered with a United States based LTTD operator, Green Globe, LLC, ("Green
Globe") for soil decontamination projects in Central and Eastern Europe. Green
Globe is owned by David Green a United States citizen whose main operations are
based in Waterbury, Connecticut. In the Fall of 1998, we entered into a contract
with Green Globe pursuant to the general terms of which, we agreed to give Green
Globe all soil decontamination projects generated through our business
relationships in Central and Eastern Europe. Green Globe agreed to provide,
transport, install an LTTD equipment unit in the region and train our local
workforce to operate the unit. After provision for costs, profits generated
would be shared equally between Green Globe and us. In order to reduce
importation and tariff charges, Green Globe and our Hungarian subsidiary, CEVA
Hungary Kft entered into a lease agreement for the LTTD units, requiring
quarterly lease payments. In connection with these agreements, Green Globe
transported and installed a large LTTD unit to Budapest, Hungary, in preparation
to begin a soil decontamination project commissioned by a City of Budapest,
municipal district governmental authority known as District XVIII. Our Hungarian
subsidiary was awarded a contract to treat approximately 24,000 cubic meters of
soil and 2,900 cubic meters of heavy oil for the price of approximately
$2,000,000. Green Globe and our Hungarian subsidiary's management team completed
this phase of the project in December, 1998. Although the District XVIII
municipal government has paid approximately $1,000,000 of the contract amount,
it has failed to pay the remaining approximate $1,000,000 balance due us for
completion of the project. After months of meetings with representatives of the
District XVIII government, during which no claims against us for non-performance
or other set-offs were made, we have been forced to commence a legal proceeding
against the District XVIII municipal government to collect payments under the
contract. Since we are not aware of any legitimate claims District XVIII has in
connection with this contract, we expect to obtain a judgment awarding all the
monies due under the contract, plus interest, and possibly damages resulting to
our business because of District XVIII's failure to abide by the agreement.
Since District XVIII has failed to make the above identified contract payments,
the
14
<PAGE>
equipment rental payments due from CEVA Hungary to Green Globe, LLC as well
as any profit sharing payments have not been made. See, "RISKS RELATED TO THE
BUSINESS" "The District XVIII Litigation" and "Potential Liabilities to Our LTTD
Partner - Green Globe, LLC" as well as Item 8 - Legal Proceedings, below.
Applicability and Limitations
The target contaminant groups for an LTTD system are oil and other organic
compounds (hydrocarbons). Such compounds are generated by the petroleum
refining, chemical, railroads, mining industries and governmental organizations,
such as the military, airports, and state-owned dumpsites.
The low temperature desorption processes are best suited for removal of organics
from soil, sand, gravel, or rock fractions. The high-absorption capacity of clay
decreases the partitioning of organics to the vapor phase.
According to Astec Industries, Inc. and our LTTD technology partner, Green
Globe, LLC, the following factors may limit the applicability and effectiveness
of the LTTD technology and process:
- There are specific feed size and materials handling requirements
that can impact applicability or cost at specific sites.
- high moisture content of the soil decreases capacity of the LTTD
equipment unit.
- highly abrasive feed potentially can damage the LTTD equipment.
- heavy metals in the decontaminated soil may produce a treated
solid residue that requires stabilization and further treatment.
Competitive Technologies
There are other technologies that compete with our LTTD equipment technology for
the treatment of contaminated soil. These competitive technologies include
bioremediation, soil washing, transportation and deposit at landfills and the
burning of contaminated soils at incinerators. However, according to our LTTD
technology partner, Green Globe, LLC, and our management's internal review, each
of these competitive technologies has some disadvantages:
- Bioremediation, although not as capital intensive as the
requirements to put an LTTD equipment unit in operation, is a very
time consuming process that does not always work. In addition,
bioremediation is recognized throughout the world as effective to
treat lightly contaminated soil and requires a large operating
area and space. According to our local managers, bioremediation
costs are in the approximate range of $35 to $45 a ton.
- "Soil washing" is another widely used technology in Western
Europe. Soil washing is an effective technology to clean soils
contaminated with heavy metals. However, soil remediation is an
expensive process and generally does not neutralize oil and gas
residue or hydrocarbon contamination.
15
<PAGE>
- Another soil remediation technique is to simply transport these
soils to a hazardous waste landfill. However, there are very few
licensed and permitted hazardous waste landfills in Central and
Eastern Europe. For example, the Country of Hungary has only one
hazardous waste landfill in Aszod, operated by Pyrus/Rumpold and
it has an annual capacity of approximately 5,000 tons. This method
to "store" contaminated soil is very expensive, with prices
according to local market information in the approximate range of
$200 a ton.
- Another method to dispose of decontaminated soil is to burn it in
incinerators. Incineration is the most expensive process to treat
contaminated soil. Because of its high cost, incineration is
primarily used to treat the more hazardous types of wastes. There
is a very limited capacity for incinerator disposal in Central and
Eastern Europe, with standard costs in the range of $500 to $1,000
a ton for treatment, according to market prices by Dorog
incinerator in Hungary and local in country CEVA managers.
Our price range is between $45 to $95 per ton. More importantly, LTTD technology
will process difficult to process materials, such as coal tar, heavy oils and
various refinery tars in soils which cannot be efficiently removed by
bioremediation. Further LTTD technology is designed to meet US EPA emissions
standards. The cleanup is final and easily quantifiable and actual stack
emissions tests between October - December 1998 performed by Krona Kft. for
Hungarian Environmental Authorities demonstrated that the unit in Hungary met
Hungarian and European standards. It takes an average of 12 minutes to clean one
ton of soil.
The Soil Remediation Market
Our LTTD technology to clean soils can be used primarily for soils contaminated
directly by private industry, government owned lands and the transportation
industry. Sites where these sorts of contamination can be found include oil
refineries, steel manufacturers, oil pipelines, utilities, chemical
manufacturing plants or disposal areas, contaminated marine sediments, disposal
wells, electroplating/metal finishing shops, fire fighting training areas,
hangars/aircraft maintenance areas, landfills, leaking, collection and system
sanitary lines, leaking storage tanks, oxidation ponds/lagoons and vehicle
maintenance areas.
The market for the cleaning of contaminated soil is driven by legislation, which
either provides direct government funding or compels companies to finance their
own clean-up efforts. Driven by ever-stricter environmental clean-up legislation
as the countries of Central and Eastern Europe seek to join the European Common
Market, demand to meet EU environmental standards is expected to cost all 12 EU
applicants $123 billion. (The Wall Street Journal Europe, December 13, 1999).
We are in frequent discussions with representatives of MOL and expect to begin
soil decontamination projects at their facilities. We expect to either transport
MOL's contaminated soil to the current site where Green Globe's LTTD equipment
unit is now located, or to relocate this LTTD equipment to a MOL site in the
near future.
In Romania, our principal activities there have been to organize a supply of oil
and gas wastes for processing into alternative fuel for utilization in cement
plants and other power generating operations that require large amounts of
energy. As oil and gas residues are removed from the surface of soil storage
basins, a large soil cleaning need will emerge in Romania. Economic Factors and
a lack of
16
<PAGE>
legal enforcement laws and regulations, however, suggest that the Country of
Romania is still a few years away from enacting legislation that would drive
soil clean-up projects.
Hungary and Czech Republic
Our investigation of the soil cleaning markets in the Countries of Hungary and
the Czech Republic indicates a sufficient demand to support at least one LTTD
equipment unit in each of these countries.
Romania
In the Country of Romania, it is estimated by the Ploiesti local environmental
agency office (Serban Ionescu Homoriceanu Director, letter dated February 17,
1998) that there is currently over 6,000 hectares of soil that requires clean up
or remediation in Prahova County. However, due to lack of funding, at the
government level, weak legislative and enforcement initiatives, effecting the
budgeting and clean-up programs at the private enterprise level, the current
"demand" for soil remediation is behind that of Hungary. Our current business
plan does not include the installation of an LTTD equipment unit into Romania
until 2001; however, the demand and this market is expected to intensify as the
economy of Romania evolves. The December, 1999 formal invitation to enter the
process for accession into the European Common Market will accelerate the demand
for environmental compliance with the Union's standards and our services.
17
<PAGE>
Identified contaminated soil quantities are summarized in the following table,
prepared in a June 1998 internal business assessment by our management:
<TABLE>
<CAPTION>
----------------------- ----------------------------------------------------------- ------------------------------
Countries Estimated Soil Remediation Quantity Estimated
Annual Increases
(In Tons) (In Tons)
----------------------- ----------------------------------------------------------- ------------------------------
<S> <C> <C> <C>
Hungary Refineries/RR(1) 1,500,000
Other(2) 2,000,000
Total 3,500,000 50,000(5)
----------------------- ----------------------------------------------------------- ------------------------------
Czech Republic Unipetrol1 1,200,000
Other(3) 3,800,000
Total 5,000,000 75,000(1)
----------------------- ----------------------------------------------------------- ------------------------------
Romania Oil refineries 480,000,000
Other(4) 20,000,000
Total 500,000,000 Unknown
----------------------- ----------------------------------------------------------- ------------------------------
</TABLE>
1. Our estimate
2. In Hungary includes chemical plants, steel industry, military sites and
state owned dumps
3. In Czech Republic includes railways, steel industry, chemical industry,
automobile industry, mining, military sites
4. In Romania includes railways, mining, steel, and automobile industry
5. Independent estimate (Kalman Morvay, Budapest, Hungary March 1998)
Economic Barriers to Entry Into the LTTD Soil Remediation Business
The LTTD segment of the soil remediation market is characterized by high
barriers to entry. These barriers include:
Service Provider Credibility: Environmental service clients often do
not feel confident in their understanding of the dimensions of
contamination, remediation, and residual risks, but believe them to be
substantial; therefore, clients will tend to seek service providers in
whom they have confidence for the particular challenge and technology
involved. It takes time and track record to build such credibility.
Market Access, Economies of Scale, and the First Mover Advantage:
For LTTD, the number of potential customers in the medium term is few,
perhaps as few as two major customers each in Hungary and the Czech
Republic, and not more than five per country. The rated capacity of one
LTTD line is up to 300,000 tons per year, which is estimated to be equal
to 80% of the annual demand projected for LTTD's market segment in
Hungary, according to the Business Assessment performed for CEVA.
Therefore, an investment in an LTTD line can only be justified by
strong existing or prospective relationships with one or two key
customers. However, given that the investment is made based upon such
relationships, the capacity of the unit will probably preclude another
such unit from being installed in the country, providing a possibly
insurmountable first mover advantage for this market segment. This follows
the US example, in which LTTD lines tend to enjoy a regional monopoly.
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<PAGE>
Permits: In order to provide environmental services, specific
technologies, and in order to handle, process, dispose of and transport
wastes and, as with an LTTD equipment unit, generate stack emissions, a
business operator is required to obtain various permits in the Central and
Eastern European countries. Often, these permits require months to obtain
and, in the case of final permits, may require years to obtain.
Obtaining permits requires a local presence and familiarity with the
national and regional written and unwritten rules of the permitting
process. "First movers" have a potential market advantage: since a first
mover is often the first person or business to proceed through a country's
new permitting process, the first mover can set the permitting standard.
If the first mover takes advantage of this development stage permit
processing, it can set "high technological standards" or the type of
technology it intends to employ for remediation in the target country. We
have undergone permitting processes in Hungary and in the Country of
Romania as the "first mover". Our permits to operate the LTTD equipment
unit we, together with our partner, Green Globe, LLC, installed in
Budapest, Hungary was the first ever issued for LTTD technology in the
history of Hungary. Similarly, we were the first mover in the permit
process with respect to the installation and operation of AF processing
and feed equipment now situated at the CIMUS cement plant in Campulung,
Romania. As a result of these initiatives by us, other competitors
desiring to install an LTTD equipment unit in Hungary, will more than
likely have to meet the technological standards that are contained in our
existing operating permits. These permits as has happened in the United
States environmental markets, tend to become a significant "asset" of the
environmental firm or business.
Experience: Due to the evolution of the general, including soil,
remediation markets in Western Europe, the LTTD technology is not a widely
used in Western Europe as in the United States. European environmental
companies are, by and large, less familiar with the LTTD technology, and
it will take some time for the LTTD technology to be recognized and
utilized in Western Europe to the level it is in the United States. The
same may be said for Central and Eastern Europe: it will take several
successful projects and their results to be distributed before this
technology gains wide approval. The successful LTTD technology treatment
of the Budapest municipal District XVIII project by us and Green Globe has
aided the recognition of our LTTD technology as a viable remediation
technology.
In the United States, LTTD technology is widely recognized and has
established itself as the industry standard for the soil remediation
market segment treatable by this technology. As with the introduction of
any new technology, our presence in the Hungarian soil remediation market
for the past several years facilitate our identifying market
opportunities: Because the utilization of this LTTD technology requires
"staying power" , this time and capital commitment has discouraged other
United States environmental enterprises from attempting to penetrate, so
far, these markets in Central and Eastern Europe.
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<PAGE>
Competition
Hungary
According to our CEVA Hungary management Korte Kft. can be considered as our
main competitor in the Hungarian market for refinery services. Korte Kft. has
wide scale operations and resources ranging from site auditing, groundwater
cleaning, environmental technology engineering and sludge dewatering
technologies.
The next key competitor is Pyrus the operator of the country's largest landfill.
Pyrus has recently acquired PORR Ktm a biological soil remediation Company.
Currently, no other enterprise in Hungary other than our Company provides AF and
or LTTD technology services.
The following table published in The Budapest Business Journal, "Environmental
Services", February 2 - 8, 1998 shows some of our competitors in Hungary:
<TABLE>
<CAPTION>
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
Technology 1997 Revenue No. Of Years Est. Major Clients Contracts (%)
(in Thousands Employees in Hungary Gov't/
$U.S.) Private Sect.
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Dorog Incineration
(Sarp
Industries)
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
Pyrus Landfill 3,650 65 1952 Teraszol, Netta, 25/75
Titania, Ikarusz,
Oroshazo Glass
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
Elgoscar Intl Biological 2,392 53 1991 TVK, MAV, 58/42
Treatment Malev, KTLM,
APV Rt.
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
Bekes Dren 1,750 16 1993 MOL 70/30
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
RWE Hungary 1,250 38 1993 Zwack Unicum, 0/100
Emasz, Matav,
McDonalds,
Colgate, KTM
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
BGT Hungaria Biological 600 7 1992 10/90
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
Intonviro Biological 480 6 1991 MOL, GE, Ganz, 20/80
APV Rt,
Hungaro-camion
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
PORR Kim 5 1995 KTM, Va-Elin 60/40
(PYRUS) AG, MAV, BKV,
APV Rt.
----------------- ---------------- --------------- --------------- ------------- --------------------- -----------------
</TABLE>
20
<PAGE>
Although these and other companies represent competition, they also are
potential partners. We may compete with these companies to become the lead or
general contractor in a clean-up project. However, even if not the lead or
general contractor, we may still serve as a subcontractor, bringing our LTTD
technology to the project.
Czech Republic
There is only limited information available about our existing competitors in
the Czech Republic. Some competitors have shown interest in thermal remediation
as the preferred technology to clean and remediate soil. Based on management's
knowledge, these competitors include Watco, (a hazardous waste subsidiary of the
Belgian utility, Tractabel, which is owned by Suez-Lyonnaise des Eaux), and
Thermo Eurotek (a Dutch subsidiary of the United States technology group, Thermo
Electron). Watco has installed a small soil thermal treatment unit in Ostrava at
the Karolina industrial site clean up
There are several foreign competitors in the Czech environmental market. Among
the most aggressive are German companies (Rumpold and RWE Entsorgung) and an
Austrian company (A.S.A.), all of which are mainly focusing on the municipal
solid waste markets.
Romania
There is only limited information available about competitors in Romania. We are
aware of Rhone Poulenc which has established an office and begun investigation
of the groundwater contamination in the Ploiesti region. Septos, Ltd., a
Polish/French enterprise, has initiated a preliminary review of using refinery
wastes as secondary fuel, and AVR, a Dutch and partially state-owned
incinerator, has offered disposal services to Romanian refineries.
Our Position in the Soil Remediation Market
Hungary
District XVIII. We completed a soil remediation project in December, 1998
pursuant to a contract with a municipal Department of the City of Budapest known
as District XVIII. We cleaned approximately 24,000 cubic meters of soil at a
price of approximately $45 per ton, with a total contract price of approximately
$1,485,000. Notwithstanding the successful completion of this project, District
XVIII failed to pay to us the remaining approximately $1,000,000 due on this
project. As a result, we began a lawsuit against District XVIII in the Hungarian
courts to collect this amount due us in addition to damages: see, "RISKS RELATED
TO THE BUSINESS" "The District XVIII Litigation" and "Potential Liabilities to
Our LTTD Partner - Green Globe, L.L.C." as well as Item 8-Legal Proceedings.
Currently, we are negotiating with the potential buyer of the District XVIII
site and the Environmental Inspectorate for the Central Danube Valley to
complete the cleanup of the property and to remediate approximately 60,000 tons
of soil.. If successful, we will also be permitted to accept at the District
XVIII LTTD positioned site third party soils through December 31, 2001. During
this period we plan to process petroleum contaminated soils from MOL, Budapest
Power, MAV, the Hungarian State owned railroad, former Soviet military sites and
various generators.
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<PAGE>
Czech Republic
South Bohemia: In November, 1998, our Czech affiliate, CEVATech, signed a letter
of intent with the Center for Chemical Safety (the "SCHB"), one of the leading
environmental services contractors in the Czech Republic, for cooperation and
subcontracting in two major projects in South Bohemia. In the tender process for
clean-up at the South Bohemian Wood site, CEVATech was one of the two remaining
bidders, and the only one offering the preferred thermal remediation technology.
The results of this tender were announced and the initial award went to ASA. The
project would involve treating 92,000 tons of material at a price of
approximately $50 per ton. The work has not yet begun and CEVATech is in
discussions with ASA to serve as a subcontractor to remediate the soil with our
LTTD equipment technology.
In another project, the South Bohemian Gas Manufacturer is issuing a tender for
soil remediation in 2000. This project would involve the treatment of
approximately 30,000 tons at various sites.
CUSTOMERS AND OPPORTUNITIES
Our soil remediation business is primarily applicable to hydrocarbon
contamination caused by the petrochemical, chemical, transportation and utility
industries.
Our tar remediation business is applicable to the wastes generated by the
petroleum refining (by-products, filter cake, oily filter media, separator
waste, sludge, acid tar, slop and waste oil, tank bottoms), steel (coal tar
bottoms), chemical (solvents, chemical tars) mining (coal tars), manufactured
gas and pharmaceutical industries. The processed alternative fuel ("AF") can be
used by cement kilns, power plants and other industrial boilers as a cheaper
source of energy.
22
<PAGE>
The following table lists our actual and potential customers. A review of the
top 100 companies in Central and Eastern Europe reveals approximately 44 of
which are candidates to be our customers:
<TABLE>
<CAPTION>
---------------- -------------------------- --------------------------------- ----------------------------------------------
Business Actual Prospective Customers - Potential Customers - Opportunities
Line Customers in Discussion
---------------- -------------------------- --------------------------------- ----------------------------------------------
<S> <C> <C> <C>
Hungary
---------------- -------------------------- --------------------------------- ----------------------------------------------
LTTD Budapest Power Rt. MOL Hungarocamion, BKV (transport), Malev
MAV (airline). TVK (chemicals), Ganz, Lehel, GE
Budapest Chemical Works Tungsraum, RABA (mfg). Chemical plants, Gas
stations
---------------- -------------------------- --------------------------------- ----------------------------------------------
AF MOL Vac Cement DAM (steel works), Dunaferr (steel works),
Labattan, Hejocsaba, Beremend, Belapatfalva,
Sajobabony, Tiszavasvar, Mosonmagyarovar
(cement plants)
---------------- -------------------------- --------------------------------- ----------------------------------------------
Czech
Republic
---------------- -------------------------- --------------------------------- ----------------------------------------------
LTTD None Regional gasworks, Unipetrol (Chemopoetroll,
South Bohemia Wood Ceska Rafinerska, Kaucuk, Benzina), Moravske
Company naftove doly (petroleum), Ceske produktovody a
South Bohemia Gasworks ropovdy (pipeline), OKD (mining, Chemapol,
Deza (chemicals, Ceska aerolinie, Skoda Pizen
---------------- -------------------------- --------------------------------- ----------------------------------------------
AF Ostramo refinery Koramo refinery, Tisova, Hodonin, Porici,
Paramo refinery Ledvice (power plants), Ceskomoravsky Cement,
Prahovice cement Prachovice Cement
Chemopetrol
---------------- -------------------------- --------------------------------- ----------------------------------------------
Romania
---------------- -------------------------- --------------------------------- ----------------------------------------------
LTTD None None RENEL (power generator)
Petrotel, Astra, Steaua, Petrobrazi, Vega,
Arpechim,
Rafo-Onesti, Darmanesti (refineries), miolia
Supiacu de Barcau
---------------- -------------------------- --------------------------------- ----------------------------------------------
AF Petrobrazi refinery Vega refinery Romcim, Romcif, Moldocine, Casial cement
CIMUS Cement plant Astra refinery plants.
Petrotel refinery
Arpechim refinery
Steaua refinery
---------------- -------------------------- --------------------------------- ----------------------------------------------
</TABLE>
23
<PAGE>
The following is a brief summary of some of the companies in Central and Eastern
Europe who have specific waste management problems whose remediation falls
within our scope of services, according to an internal study performed for us
from information supplied by CEVA Hungary management:
Hungary
MOL: MOL is the largest oil and gas company in Hungary. In 1997, MOL allocated
$45 million for prevention and the elimination of environmental damages incurred
on its sites due primarily to recent Hungarian environmental law initiatives
required; MOL also spent $20.8 million on satisfying certain environmental
liabilities, $2.7 million on waste disposal and approximately $1.6 million on
sewage treatment. In excess of $5.4 million was spent by MOL on remediation and
the prevention of soil and groundwater contamination dispersion.
Over 90,000 tons of hazardous waste were produced by MOL's operations in 1997,
including 56,000 tons of production waste and 14,000 tons of contaminated soil.
TVK: TVK is a major chemical producer. Again, due to increased Hungarian
environmental legal initiatives, TVK spent approximately $10.7 million in 1997
for the prevention and elimination of environmental damages: approximately $8.0
million was spent on developments aimed at decreasing environmental liabilities;
approximately $2.6 million was spent on remediation of existing contamination;
approximately $800,000 was spent on waste water treatment; approximately
$400,000 on hazardous waste treatment, and; in excess of $1 million was spent on
other environmental liabilities.
MAV: MAV is the Hungarian state-owned railway company. The cost of clean-up of
contamination inherited from the past decades at current MAV sites is estimated
to be in excess of $50 million. In 1998, and for the years following, MAV
budgeted approximately$6 million annually on clean-up activities. This budget is
expected to be supplemented by external sources of financing and governmental
grants.
Between 1993 and 1995 MAV prepared an environmental assessment of contamination
at its sites. The major source of contamination derived from mishandling,
wrongful storage and transportation of petrochemicals. Other sources included
lubricants spilling from the diesel rails and machine maintenance areas. The
railways produce approximately 60,000 tons of hazardous waste annually.
Dunaferr: Dunaferr is a large steel manufacturer. The 1998 environmental budget
was approximately $5 million and the same amount of funds are expected to be
allocated for environmental purposes annually over the next years. Dunaferr's
main source of environmental problems include air emissions and the disposal of
hazardous wastes. Hazardous wastes include oily steel by-products, scraps and
waste oil. Dunaferr disposes of over 60,000 tons of waste a year and recycles
approximately 400,000 tons of such materials annually.
Czech Republic
Industrial companies represent the majority of end-users for hazardous waste
management and disposal equipment and services. The most important end-users are
chemical companies, iron works, the paper and pulp industry, and coal power
plants.
24
<PAGE>
According to a March, 1998 publication by the U.S. & Foreign Commercial Section,
American Embassy, Prague, Czech Republic, total Czech waste generation is
approximately 90 million tons annually, consisting of 39 million tons of
industrial waste, 13 million tons of waste originating from energy generating
processes, 5 million tons of waste generated by mining activities, 6.5 million
tons of agriculture and forestry activity, 2.5 million tons of urban waste, 24
million tons of other waste, including approximately 8.1 million tons of toxic
and noxious waste.
CEZ: CEZ is the dominant electric energy producer in the Czech Republic and
produces the most amount of waste in this Country. Each year, it is estimated
that CEZ produces approximately 42 million tons of ash, of which 860,000 tons is
classified as hazardous waste. For years, CEZ has been storing ash ash and there
currently are estimates of millions of tons of ash in landfills that need to be
remediated. At this time, CEZ has not determined how it will handle the disposal
and remediation of these wastes which new environmental laws now require.
Other Large Industrial Companies
Chemical, iron processing and mining companies operate their own landfills,
which historically have not complied with environmental regulations.
State Owned Dump Sites
There are a number of dump sites that have been abandoned by former state-owned
companies. These dump sites have not been regulated and were used as the dumping
grounds where industrial wastes were dumped. Currently, the type and extent of
the wastes deposited in and around these dump sites is unknown. The State, or
the government of the Czech Republic, is active and is expected to continue to
be active in the oversight and clean-up initiatives, providing necessary
financial resources and determining the extent and parameters for remediation.
There are two major governmental sources of environmental project financing: the
Czech National Privatization Fund and the State Environmental Fund.
Romania
In Romania, the petrochemical industry represents the main focus for
environmental concerns. The history of the Romanian petroleum sector goes back
more than 140 years; current oil production is estimated to be approximately 6.5
million tons per year*.
------
*Publication, "Black Sea Embassy Review: Romania", September, 1999, published by
The Black Sea Regional Energy Centre, Sofia, Bulgaria.
25
<PAGE>
SNP Petrom SA: Petrom is an integrated company which operates all existing oil
fields, some gas fields, two refineries and an oil product distribution system
including 500 gas stations. It produces approximately 6.5 million tons of oil
and refines approximately 10 million tons per year. Petrom budgeted $150 million
to spend on environmental initiatives in 1998, focusing efforts on reducing
pollution sources and on remediation. In our discussions with senior executives
of SNP Petrom, they identified 11 sites containing an aggregate of more than 1
million tons of tar and soil requiring treatment and remediation.
Other:
In 1998, OAO Lukoil Holding, Russia's second largest oil producer, acquired a
51% stake in Petrotel, another Romanian oil producer, for approximately $300
million, according to an article in Budapest Business Journal, February 16 - 22
1998, up to $30 million will be invested in environment protection projects" by
Petrotel, Similarly, following the acquisition of S.C. VEGA, another Romanian
refinery, the acquiring Romanian oil services company, ROMPETROL S.A. is
planning up to $8 million for the cleanup of lagoons and soil with CEVA (April
2000 proposal from Rompetrol to EBRD by Cantemir Mambet).
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GOVERNMENT REGULATION AND ENFORCEMENT
REGIONAL OVERVIEW*
The Czech Republic, Hungary and Poland have joined the OECD, with Slovakia and
Slovenia expected to follow in the near future. These countries, with the
exception of Slovakia, have also been invited to negotiations to join the
European Common Market, with membership envisaged as early as 2002. Thus, the
harmonization of domestic structures and legislation with those of the European
Union is considered a high priority.
Each of the countries has enacted comprehensive environmental legislation. Their
regulatory systems are currently undergoing changes mainly related to:
- harmonizing and integrating domestic environmental legislation
with that of the European Common Market.
- improving the environmental regulatory framework by eliminating
gaps and removing inconsistencies.
- enacting specific pieces of legislation (e.g. waste management
acts).
Domestic environmental legislative initiatives include the approximately 200
pieces of European Common Market legislation, which will have to be adopted by
the countries in Central and Eastern Europe seeking membership. According to
1997 estimates, the cost to bring all ten "accession" countries of Central and
Eastern Europe into compliance with the environmental regulations of the
European Common Market is estimated to be in the range of $100 and $130 billion.
Enforcement measures continue to be inconsistent. Enforcement policies mainly
rely on monetary penalties, but also include environmental standards,
restrictions, and permitting systems. Additionally, enforcement policies are
often implemented by local governments without coordination at the national
level, which results in considerable differences in both requirements and levels
of enforcement. Also, with the rapid growth in the number of small and
medium-sized enterprises, compliance monitoring is often difficult.
The main environmental policy instrument applied to industry is the permit
system, which includes fee payments for the permitting process and the
assessment of fines for non-compliance. Generally, the collected environmental
fees and fines are earmarked for environmental purposes, and comprise the
sources for the major part of the revenues of state environmental funds and for
municipal, environmental protection budgets.
Generally, all the surveyed countries of Central and Eastern Europe have
established three levels of environmental administration:
-----------
*Information in this "REGIONAL OVERVIEW" section has been obtained from the
publication "Environmental Technology Market: Regional Overview", Part I,
December, 1997 Central and Eastern Europe, the Regional Environmental Center,
Szentendre, Hungary. (website: http://www.rec.org)
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- national level ministries, (e.g. Ministry of Environment, or other
ministries with environmental related duties).
- regional level (county, provincial) environmental departments
under the control of regional authorities, inspection bodies,
water management boards, and the like. - municipal level
departments created and supervised by local authorities.
Hungary
Regulations
Hungary has one of the most advanced systems of environmental management in
Central and Eastern Europe.
The most significant piece of environmental legislation is the Act No. L111 of
1995 of the General Rules of Environmental Protection. This is a framework
environmental law, containing the fundamental principles and basic legal
institutions related to the environment. The Act formulates the legal basis of
the liability for environmental damages. The Act sets forth the responsibilities
of the government, municipalities, citizens and companies.
Key elements include:
- Hungarian law requires companies to remediate contaminated
company-owned land and stored waste. The laws are considered
fairly strong and are stricter than in some countries of Western
Europe.
- Laws and regulations are becoming more stringent because of the
Country's movement towards full membership in the European Common
Market. In this regard, the Hungarian government plans to fully
conform its environmental laws, rules and regulations to those of
the European Common Market by 2002.
- In some privatization transactions, environmental clean-up
responsibility was made a part of the primary agreements.
Enforcement
At the top of the Hungarian state environmental hierarchy is the Ministry of
Environment and Regional Policy. This ministry is responsible for the drafting
of environmental legislation and its implementation and administration.
There are 12 regional environmental inspectorates in Hungary with separate
environmental administrative authority at the regional level. These
inspectorates are subordinate to the Chief Environmental Inspectorate, the
authority at the national level, and works under the supervision of the Ministry
of Environment and Regional Policy.
With respect to local environmental issues, especially waste management issues,
municipalities have retained a certain amount of administrative power, defined
by Act No. LXV of 1990 on Municipalities and under the respective environmental
laws:
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- Local Environmental Inspectorates are responsible for
enforcement. They have the power to mandate and require companies
to clean-up environmental problems under their control and have
the power to conduct inspections.
- Any company which fails to comply with environmental
requirements is now subject to fines.
- With the increase in environmental regulation oversight, waste
removal "load"charges are expected to develop during the year
2000.
- Charges for products that contain waste are expected to develop
as a regulatory measure to further incentivize companies to comply
with applicable environmental laws and regulations.
- Potential legal measures include the suspension of operations in
the event of environmental non-compliance with penalties and
prison sentences as further available enforcement measures.
- Substantial private as well as public companies are increasingly
responsive to environmental issues because of their developing
high visibility.
Czech Republic
Regulations
The Czech Republic has relatively strong environmental laws, similar to those
found in Hungary. The new waste law, effective, on January 1, 1998, was
structured to harmonize Czech standards with those of the European Common
Market.
Enforcement
Governmental enforcement measures including mandatory clean-ups have begun at
Czech companies.
Romania
Regulations
The environmental laws in Romania remain generally weak . However, hazardous
waste laws in Romania have been rewritten and will be implemented by the end of
1999 to bring it into compliance with Western standards. Romania was formally
invited to begin the process for accession into the European Common Market,
which will further force additional legislation to meet the European standards.
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Enforcement
Enforcement of environmental regulations remains sporadic, although we believe
that the more substantial Romanian enterprises are beginning to address
contamination problems on a specific basis due to privatization.
ENVIRONMENTAL EXPENDITURES
A major change is expected (and in Hungary already taking place) in the
financing of environmental projects: the prior funding mechanism for
environmental projects was provided by state and municipal budgets is now
decreasing while businesses are increasing their budgetary contributions to
environmental projects.
At present, our ability to secure the necessary financing for environmental
projects is one of our major problems. Countries in Central and Eastern Europe
generally have six sources of funds on which to draw to support environmental
investments. These sources are state and regional budgets, extra-budgetary
funds, investments of commercial enterprises, commercial credit, foreign
investments and foreign assistance programs.
For Central and European countries, environmental spending will have to increase
from present typical levels of 1% to over 2% of their gross domestic production
("GDP") to meet the environmental clean-up requirements.of the European Common
Market.: "It is expected that in actual numbers, environmental expenditures will
grow at the rate of between 6% and 12% annually": "Environmental Technology
Market: Regional Overview", Part I, December, 1997 Central and Eastern Europe,
the Regional Environmental Centre, Szentendre, Hungary.
The following table summarizes annual environmental expenditures by country in
the region (1995), Table 1.1: TOTAL ENVIRONMENTAL EXPENDITURES IN 1995*:
<TABLE>
<CAPTION>
==================================================================================================
Country Expenditure Share of GDP
(in millions $ U.S.)
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Czech Republic 1,185 2.6%
--------------------------------------------------------------------------------------------------
Hungary 385 1.1%
--------------------------------------------------------------------------------------------------
Poland 1,308 1.1%
--------------------------------------------------------------------------------------------------
Slovakia 232 1.0%
--------------------------------------------------------------------------------------------------
Slovenia 150 0.8%
==================================================================================================
</TABLE>
*"Environmental Technology Market: Regional Overview", Part I, December, 1997
Central and Eastern Europe, the Regional Environmental Centre, Szentendre,
Hungary.
State Environmental Funds
All surveyed countries have established national environmental protection funds
to provide non-budgetary revenue earmarked for environmental projects. The
rationale behind the establishment of the funds was to ensure a steady flow of
the significant amounts of money needed for environmental
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protection. The dominant share of these funds' revenues come from outside
national budgets, so that the protection of the environment does not directly
compete for limited resources with other social programs.
The resources of state funds can account for a significant proportion of a
country's environmental spending. State environmental funds' main activities are
to provide financial support for investments, usually through loans offered with
preferential conditions. Other forms of support are also used, and include
grants, subsidies to bank credits, equity involvement and others. The form of
financing available from these funds depend on the project type, the investor,
and the financing institution.
LONG TERM STRATEGY
Our business is likely to develop along a path from being a provider of specific
technologies to being a broad-based environmental services company within the
hazardous waste sector.
We have identified two major environmental problems in Central and Eastern
Europe and have selected two proven technologies which we have imported from the
United States which we believe can efficiently and competitively provide a
solution to environmental problems. The two principal problems are soil
contamination by hydrocarbons and the generation of hydrocarbon waste products
from the oil refinery and other businesses. Our solutions are low temperature
thermal desorption ("LTTD") and the processing and manufacturing of alternative
fuels from these waste products ("AF").
Our management which is responsible for implementing these technologies in
Central and Eastern Europe have an aggregate of five decades of experience with
these technologies in the United States.
Our business goals over the coming three to five years is to develop a number of
valuable assets through the successful implementation of these technologies:
- Develop a strong reputation and track record of successful,
competitive and efficient service to blue chip companies.
- Establish long term commercial relationships with blue chip
companies in the key, environmentally sensitive sectors.
- Develop familiarity with the authorities and key decision makers
across the region.
- Acquire a detailed understanding of permitting procedures across
the region
- Gain access to subsidized financing from PHARE, World Bank, and
other sources
- Develop a vast network of contacts across the very fragmented
environmental services sector in the region
- Gain a detailed knowledge of the environmental problems and
policies of those companies.
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- Gain a detailed knowledge of the competitive environment within
other slices of the environmental services sector.
- Develop experience at managing complex, multi-technology
clean-up projects
- Develop experience at managing projects across a range of
countries in the region
We are an environmental services and not a technology Company. This means that
we provide and execute solutions for companies and governmental bodies with
environmental problems. Our current focus on using our LTTD technology and AF
processing technologies does not preclude the us from using other technologies
at times when it may be appropriate. It is expected that through the current two
service lines, we can rapidly establish an important reputation from which we
can leverage our entre entree into other services and solutions. Once our LTTD
and AF business lines mature, we expect opportunities to expand as discussed
below.
Geographical Expansion
The markets in the different countries of Central and Eastern Europe are at
different stages of maturity and are developing at different rates. As the
characteristics of the Czech or Hungarian markets begin to mature, the Balkans,
Slovakia or Romania are expected to develop and the wealth of experience we have
gained in the Hungarian and Czech markets can be reapplied in this next
generation of projects. Next, over the horizon, we expect that the countries of
Bulgaria and the Ukraine to develop environmental markets for our services.
We have learned that the differences in language, legislation and logistical
barriers limit the potential for regional synergies and our business plan does
not anticipate implementation of such synergies or strategy. We expect that our
experience and know-how can be successfully transferred and that our in-country
business partners monitoring their respective markets will permit us to enter
new countries at the right time to take advantage of these opportunities as they
arise.
Following the Oil and Gas Trail
Our AF business focuses initially on the large oil and gas companies whose large
production facilities and deep pockets present a logical market entry point. Our
business will, over time, we believe, begin to penetrate further down the
petrochemical industry ladder. We anticipate serving the chemical industry,
pharmaceutical manufacturers, paint shops, repair shops and gas stations.
We are likely to become a service provider for the waste oil and solvent
collection businesses which are developing in Hungary. As it occurred in the
United States marketplace, the development and attainment of AF processing
capacity will be a key collection repository for waste solvents. The waste fuels
will be blended and sold to the cement industry. We intend to develop a large AF
processing capacity, and a reliable service, so that we are in a position to
potentially become a preferred supplier of AF to cement kilns and other users,
providing us with long term supply contracts. The generation of waste solvents
is an on-going business cycle and can be expected to endure as long as the
petrochemical industry continues its dominant role in industrial processes.
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From Technology Provider to Solutions Provider
Our track record and experience will accelerate over the next few years, as well
as the wealth of other strategic intangible assets discussed above. These
intangibles will enable us to move from being a provider of specific
technologies to a provider of environmental solutions.
Aware of how fragmented the environmental services industry is in Central and
Eastern Europe, with numerous small, undercapitalized, technology providers, a
strategy of selective acquisitions and joint ventures that represent an
attractive business opportunity for us. Such acquisitions can probably be made
at very competitive valuations, acquired, perhaps, with our equity securities
and then incorporated into our group. We will provide a conduit for applications
of the acquired technologies in other markets, utilizing the local presence of
the businesses acquired as a conduit to the local markets. Other less capital
intensive ways of accessing technology can come through simply subcontracting,
technology partnerships or joint ventures. As a result, we can access a
portfolio of solutions and can act as the main contractor in remediation and
clean-up projects, pollution prevention engineering, infra-structural projects,
and the like. Ultimately, we intend to position ourselves as project management
providers.
Employees
As of the date hereof, we employed 20 full-time employees and 7 part-time
employees. We hire independent contractors on an "as needed" basis only. We have
no collective bargaining agreements with our employees. We believe that our
employee relationships are satisfactory. We expect to hire additional employees
based on our future growth rate.
Key Personnel
Our success depends to a material and significant extent on the services of
Herbert G. Case, Jr., our President and Chief Executive Officer as well as our
ability to attract and retain additional key personnel with the skills necessary
to manage our existing business and strategic plans. The loss of Mr. Case or
other key personnel could have a material adverse effect on our business,
results of operations, liquidity and financial position. We do not have an
employment agreement with Mr. Case. If we cannot retain Mr. Case or hire and
retain qualified personnel, our business, results of operations, financial
condition and prospects could be adversely affected.
Year 2000
We have not experienced any computer malfunction or operational problems
resulting from the adoption of Year 2000 date information integration into our
information systems.
Economic Conditions
Our business in Central and Eastern Europe is sensitive to the local financial
condition of the economies in which we work, government environmental regulation
as well as the condition of worldwide financial markets. We have extensively
discussed these topics above. A downturn in economic conditions in one or more
of our Central and Eastern European markets, a governmental
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failure to develop and enforce environmental regulations as well as unforeseen
governmental legislation could have a material adverse effect on our results of
operations, financial condition, business and prospects. Although we attempt to
stay informed of economic and market conditions, government environmental
initiatives, changing permit requirements, any continuing failure on our part to
identify potentially adverse developments and to respond to such trends would
have a material adverse effect on our results of operations, financial
condition, business and prospects.
Stock Price
Our Common Shares have no public market . Several of our shareholders who have
held their stock in our Company for the required periods may, in compliance with
all the applicable regulations, may sell their shares pursuant to Rule 144;
other shareholders who purchased our stock in a Rule 504 private offering
possess non-restricted stock and may sell those shares in certain jurisdictions
where such trades comply with local blue sky laws. When and if our stock is sold
by any shareholder, its selling price may be extremely volatile. We do not
expect any significant trading of our stock and if there are any trades, we
expect the market price of our shares to be subject to significant fluctuations
in response to new business, operating results and other factors, and those
fluctuations may continue in the future. In addition, most stock markets in
recent years have experienced significant price and volume fluctuations that
often are unrelated or disproportionate to the operating performance of
particular companies. These fluctuations, as well as a shortfall in sales or
earnings compared to public market analyst's expectations, changes in analyst's
recommendations or projections, and general economic and market conditions, may
adversely effect the market price of our common stock.
RISKS RELATED TO THE BUSINESS
Described below are what we perceive to be the material risks and uncertainties
facing our Company. There may be additional risks that we are not currently
aware of or that we presently consider immaterial. All of these risks could
adversely affect our business, results of operations, liquidity and financial
position.
Control by Herbert G. Case, Jr. Herbert G. Case, Jr. is the beneficial
owner of 7,215,809 shares of the common stock of our Company, representing
66.143% of all of our common shares outstanding. As a result, Mr. Case has
absolute control of our Company and will be able to elect all of our directors
and control our affairs, including the election of our officers and the
determination of their compensation.
Lack of Profitability: Our Accumulated Deficit; Operating Losses: At
December 31, 1999, we had an accumulated deficit of $4,071,991 representing a
consolidated net loss for the period from its inception through December 31,
1999. The consolidated loss was caused primarily by the costs involved in
establishing our market position in Central and Eastern Europe (the "CEE"). Our
cash flow since inception has been principally the result of equity and debt
financing and limited revenues generated from our operating activities in the
Central and Eastern Europe (the "CEE"). Our ability to achieve profitability is
dependent upon our ability to realize revenues from our contracts with both
public and private entities advertising that exceed costs.
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Competition: Our Competitors in Our Markets Have More Resources. In
seeking to market US technologies and environmental services in Central and
Eastern Europe (the "CEE"), we face difficult and stiff competition from a
number of US and foreign companies that are much better capitalized than we are.
Competition in Hungary, the Czech Republic and Romania, our principal markets,
is well documented. Although management believes that our market position in the
CEE as well as our strategic offering of US technologies to perform
environmental services is extremely valuable to these markets and will give us a
competitive advantage, no assurances can be given that such will be the case.
Government Regulation: Future Laws, Rules or Regulations Could Disrupt Our
Business. Our operations are and will be, subject to and substantially affected
by the foreign laws of the Countries in the CEE, their respective regulations,
orders and permits which govern environmental protection, health and safety,
zoning and other matters. These laws, regulations, orders and permits may impose
restrictions on operations that could adversely affect our results of operations
and financial condition, such as limitations on the expansion of disposal
facilities, limitations on or restrictions upon the treatment of waste or
certain categories of waste or mandates regarding the disposal of and/or
utilization of solid or hazardous waste. In particular, we are, and will be,
subject to extensive and evolving environmental and land use laws and
regulations, which have become increasingly stringent. These laws and
regulations affect our businesses and will affect our businesses in a variety of
ways. In order to develop and operate a low temperature thermal desorption soil
cleaning equipment, a waste derived fuel facility landfill or other waste
management facility, it is necessary to obtain and maintain in effect various
facility permits and other governmental approvals, including those related to
zoning, environmental protection and land use. These permit approvals are
difficult, time consuming and costly to obtain and may be subject to community
opposition by government officials or citizens, regulatory delays, subsequent
modifications and other uncertainties. There can be no assurance that we will be
successful in obtaining and maintaining in effect permits and approvals required
for the successful operation and growth of our business, including permits and
approvals required for the development of additional soil cleaning and/or waste
derived fuel operations. The siting, design, operation and closure/shutdown of
soil cleaning sites, waste derived fuel facilities and their respective
equipment are also subject to extensive regulations. These regulations could
require us to undertake investigatory or remedial activities, to curtail
operations or to close soil cleaning facility or other treatment facility
temporarily or permanently. Furthermore, future changes in these regulations may
require us to modify, supplement or replace equipment or facilities at costs
which could be substantial. It is not possible to predict what impact, if any,
new regulation laws, court decision or local and national laws may have in the
future on our facilities. Currently, we have no insurance that would cover our
loss of profits or business that would result from the application of
governmental laws, rules and regulations to our business activities.
Potential Liabilities Arising out of Environmental Laws and Regulations.
Although we believe that we generally benefit from increased environmental
regulations adopted from time to time by the countries in the CEE and from
enforcement of those regulations, increased regulation and enforcement also
create significant risks for us. The assessment, analysis, remediation,
transportation, handling and management of hazardous substances necessarily
involve significant risks, including the possibility of damages or personal
injuries caused by the escape of hazardous materials into the environment, and
the possibility of fines, penalties or other regulatory action. These risks
include potentially large civil and criminal liabilities to customers and to
third parties for damages arising from performing services for customers.
Currently, we have insurance that provides up to $2,000,000 of liability and
property damage coverage, but we do not have insurance that would cover us
against environmental claims by regulatory agencies or third parties that could
fall outside
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of our existing insurance coverages. These potential liabilities could arise
from our activities that may be in compliance with government laws, rules and
regulations as currently in force but which are no longer so as a result of the
adoption of new governmental laws, rules and regulations. Such claims could be
brought against us solely or against us and our business contractors,
subcontractors or independent contractors who we have hired, on a joint and
several basis. All facets of our business are conducted in the context of a
rapidly developing and changing statutory and regulatory framework. In certain
business sectors, such as in Romania, environmental regulations and laws are
only beginning to be developed. In such instances, the market for our businesses
is not driven by environmental regulations and laws which are in their nascent
stage of development but by the need to reduce traditional fuel costs in the
power sector; accordingly, our existing relationship with cement plants and its
business plan to expand its waste derived fuel operations to other power plants
in these regions provides the economic foundation for our businesses operating
in early regulation-stage countries. Although we are confident that our
relationships with both private and state-owned entities will increasingly
develop and provide expansion for our business activities, there can be no
assurances that such will be the case.
Potential Liabilities Involving Customers and Third Parties. In performing
services for our customers, we potentially could be liable for breach of
contract, personal injury, property damage (including environmental impairment),
and negligence, including claims for lack of timely performance or for failure
to deliver the service promised (including improper or negligent performance or
design, failure to meet specifications, and breaches of express or implied
warranties). The damages available to a client, should it prevail in its claims,
are potentially large and could include consequential damages. Industrial waste
management companies, in connection with work performed for customers, also
potentially face liabilities to third parties from various claims including
claims for property damage or personal injury stemming from a release of
hazardous substances or otherwise. Claims for damage to third parties could
arise in a number of ways, including: through a sudden and accidental release or
discharge of contaminants or pollutants during transportation of wastes or the
performance of services; through the inability, despite reasonable care, of a
remedial plan to contain or correct an ongoing seepage or release of pollutants;
through the inadvertent exacerbation of an existing contamination problem; or
through reliance on reports prepared by such waste management companies.
Personal injury claims could arise contemporaneously with performance of the
work or long after completion of projects as a result of alleged exposure to
toxic or hazardous substances. Currently, we have insurance coverage up to
$2,000,000 for injuries we may cause to persons and property.
Risks Inherent in Foreign Investment. Risks inherent in foreign operations
include loss of revenue, property and equipment from expropriation, governmental
royalties and fees and involuntary renegotiations of contracts with or licenses
from foreign governments. We are is also exposed to the risk of changes in
foreign and domestic laws, regulations and policies that govern operations of
overseas-based companies. In the event we achieve and maintain profitable
operations in Hungary and in the other Central and Eastern European countries,
if we retain earnings it will be subject to substantial taxes on all profits
earned, and if we pay dividends, we will be subject to further substantial
taxes. Currently, the Company has no political risk insurance that would cover
or pay us the value of any of our assets located in Central and Eastern Europe
if part or all of these assets were to be expropriated or surcharged by a local
foreign government or agency.
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Inflation and Local Currency Devaluation. We believe that any United
States investors in our stock seek a return on investment based upon the dollar
value of our foreign operating results. Although most of our current contracts
are payable in United States dollars, a few contracts as well as future
contracts for our services and technology are and may be payable in the local
foreign currency, such as Hungarian forints. Significant inflation in Hungary,
the Czech Republic or Romania, or significant future devaluation of the
currencies of these nations would decrease the dollar value of our investments.
The Hungarian economy has been characterized by high rates of inflation and
devaluation of the Hungarian Forint against the U.S. Dollar and certain European
currencies. In 1993, 1994, 1995, 1996 and 1997 the annual reported inflation
rate in Hungary (measured by the national consumer price index) was
approximately 23%, 19%, 30%, 23% and 18%, respectively. The Hungarian Forint was
devalued against the U.S. Dollar in 1993, 1994, 1995, 1996 and 1997 by 14.2%,
15.9%, 26.7%, 18.0% and 23.6%, respectively. In March 1995, an immediate 9%
devaluation of the Hungarian Forint was announced together with a new policy of
daily or "crawling peg" devaluation. This involved daily devaluations amounting
to approximately 1.9% monthly in the second quarter of 1995, 1.3% monthly during
the second half of 1995, 1.2% monthly during 1996, 1.1% through July 1997 and
1.0% beginning in August 1997. The monthly rate is presently 0.9% and is
expected to be further decreased, subject to Hungary's economic condition. The
exchange rate for the Hungarian Forint, as set by the National Bank of Hungary,
declined from 100.70 Forints per U.S. Dollar at December 31, 1993 to 211 Forints
per U.S. Dollar at May 15, 1998. On April 16, 1997, the government of the Czech
Republic announced a package of measures designed to finish vital microeconomic
tasks, such as completing the privatization of the energy distribution companies
and state-owned banks, restructuring firms to maintain competitiveness, and
strengthening the regulatory framework. Following pressure on the currency
resulting in a 15% depreciation, the government announced a further austerity
package on May 28th. The depreciation, along with increases in controlled rents
and utilities at midyear and the floods, is expected to push 1997 inflation
above 10%. This compares to earlier forecasts of up to 8.8% for 1997. Inflation
in 1996 reached 8.8%. We do not carry any insurance policy that would protect
our assets from material and adverse currency fluctuations or devaluations.
Foreign Currency and Exchange Risks and Regulation. We are subject to
significant foreign exchange risk. There are currently no meaningful ways to
hedge currency risk in any Eastern European country. Therefore, our ability to
limit our exposure to currency fluctuations is significantly restricted. The
Hungarian forint (HUF) became convertible for essentially all business
transactions within Hungary on January 1, 1996 and complies with IMF Article
VIII and OECD convertibility requirements. The HUF is generally not traded
outside the country. The HUF exchange rate is set by a basket which is composed
of the deutsche mark (70%) and the dollar (30%). The Hungarian Investment Act
guarantees foreigners the right to repatriate "in the currency of the
investment" any dividends, after-tax profits, royalties, fees, or other income
deriving from the operation or sale of the investment. The Act also grants
foreign employees of a foreign investment the right to transfer all of their
after-tax salaries. There are no onerous foreign exchange requirements, and
there are no known instances of delay in repatriations. Foreign investors are
allowed to keep cash contributions made in a convertible currency in a foreign
exchange account. Companies may use these funds to import duty-free goods
considered as part of the investment. Alternatively, it may import goods using
foreign exchange bought in HUF. Companies are allowed to maintain foreign
currency accounts at Hungarian banks where they keep their export receipts.
Companies must receive permission from the National Bank before taking out a
hard currency loan. In the fall of 1995, the Czech Parliament approved a Foreign
Exchange Act which resulted in expanded convertibility of the Czech crown. In
May of 1997, the CNB board canceled the fluctuation band for the Czech crown's
exchange rate (which had been set at +/-7.5 percent in February 1996).
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The board also decided to abandon the previously used currency basket (65
percent German Mark (DEM), 35 percent USD) and peg the crown to the DEM. As of
July 1997, the exchange rate was roughly 31 crowns to the U.S. dollar and 17 to
19.50 per 1 DEM. We do not have any insurance that would protect our assets
against adverse foreign exchange rates and fluctuations.
Economic Risks: Emerging Markets. Our businesses are located in the
Central and Eastern European Countries of Hungary, Romania and the Czech
Republic. These Countries are generally considered to be less developed or
industrialized as countries located in Western Europe, the United States and
Canada as well as other developed countries. The markets of the Central and
Eastern European countries are referred to as "Emerging Markets". Emerging
Markets often face economic problems that are not common in developed nations.
Deficiencies in regulatory oversight, market infrastructure and business laws
could expose our Company and its businesses to risks beyond those normally
encountered in developed countries, such as access, currency, information,
liquidity, market, operation, political and valuation risks.
Political Risks in the Emerging Markets of Central and Eastern Europe.
Central and Eastern Europe is generally considered by international investors to
be an emerging market. There can be no assurance that political, social and
other developments in these emerging markets will not have an adverse effect on
the market value and potential future liquidity of our Common Stock. In general,
investing in the securities of issuers with substantial operations in markets
such as Central and Eastern Europe involves a higher degree of risk than
investing in the securities of issuers with substantial operations in the United
States and other similar jurisdictions. Our Company is organized under the laws
of the State of Nevada. Although holders of record of our Common Stock will be
able to effect service of process in the United States upon us and may be able
to effect service of process upon our directors, due to the fact that we are
primarily a holding company which holds between 50% and 60% of all the
outstanding equity securities of our Central and European based subsidiaries,
substantially all of the assets of our Company are located outside the United
States. As a result, it may not be possible for stockholders to enforce against
our assets judgments of United States courts predicated upon the civil liability
provisions of United States laws. In addition, awards of punitive damages in
actions brought in the United States or elsewhere may not be enforceable in any
country of Central and Eastern Europe.
Our Inability to Collect Contract Payments in Hungary. In 1998, we entered
into an agreement with a political subdivision of the municipality of Budapest
in the Country of Hungary known as District XVIII to remediate approximately
32,000 tons of contaminated soil. Our technology partner, Green Globe, LLC, a
Connecticut-based environmental company, brought its soil-cleaning equipment to
Budapest to perform the cleaning of the contaminated soil pursuant to its
agreements with us. Green Globe, LLC's equipment, known as a low temperature
thermal desorption unit or an "LTTD" unit, performed the soil cleaning operation
which was completed in December, 1998. Notwithstanding the completion of this
soil-cleaning contract, District XVIII has refused to pay to us the approximate
$1,000,000 U.S. in payments due under our agreement. Following a series of
negotiations with District XVIII, we were forced to institute legal proceedings
in a Hungarian court to collect this contract amount due. Our case against
District XVIII commenced in the first quarter of 2000 and following the first
trial date, held on April 20, 2000, the Hungarian Court awarded us a judgment in
the approximate amount of $65,700 U.S. for late contract payments and we
proceeded with our claim for the approximate $1,000,000 of contract payments
due. The Hungarian court has set June 22, 2000 as the next court date for the
trial of our claims. Although we intend to vigorously prosecute our claims
against District XVIII for the contract payments due us there can be no
assurances that we will succeed to obtain a judgment for the full amount of
38
<PAGE>
approximately $1,000,000 U.S. plus interest and court costs, or that if we were
to obtain such a judgment that we would be able to successfully execute the
judgment and collect this amount. See, Item 8 "Legal Proceedings" below.
Adverse Consequences of District XVIII Non-Payment on Our Relationship and
Agreements with Green Globe, LLC.. In December, 1997, we entered into certain
agreements with Green Globe, LLC, a Connecticut based environmental company
controlled by David Green. Pursuant to the terms of this agreement, Green Globe,
LLC ("Green Globe") agreed to provide all of the equipment and services,
including training, mobilization, conversion to in-country technical standards
and specifications with respect to all "low temperature thermal desorption" soil
remediation projects generated through our Company's business network in Central
and Eastern Europe (the "CEE"). In return for this commitment, we agreed to
share profits, after deduction of costs and expenses, equally with Green Globe.
In order to facilitate entry into Hungary of the capital equipment comprising
the low temperature thermal desorption unit ("LTTD"), our Hungarian subsidiary,
CEVA Hungary, entered into an equipment lease arrangement with Green Globe with
the proviso that our original agreement would control and govern our
relationship. Under the lease agreement, CEVA Hungary committed to make lease
payments to Green Globe to amortize the cost of the LTTD Unit and to cover
certain mobilization costs. As discussed above, Green Globe, LLC performed our
first soil decontamination project utilizing its LTTD unit for the political
subdivision of the City of Budapest, Hungary, known as District XVIII,
completing the work in December, 1998. District XVIII has refused to pay to us
the approximate $1,000,000 U.S. due under our contract to clean the approximate
32,000 tons of decontaminated soil. See, Risk Factor "Our Inability to Collect
Contract Payments in Hungary ", above. As a result of our inability to collect
these contract payments from District XVIII, our Hungarian subsidiary, CEVA
Hungary, has been unable to make all of the equipment lease payments it agreed
to make to Green Globe, LLC under the lease agreement. Accordingly, Green Globe,
LLC has declared us in default of the payments required under the equipment
lease agreement. Although we intend to comply with all of our promises and
agreements with Green Globe, LLC, including, but not limited to, making all
payments required under our agreements, there can be no assurances that Green
Globe, LLC will not institute legal proceedings against us to collect these
payments. In addition, because of these events, there can be no assurances that
Green Globe, LLC will not terminate its relationship with us and our Hungarian
subsidiary, CEVA Hungary, in which case we will be required to contract with a
different technology partner to provide equipment and services for soil
remediation projects in Central and Eastern Europe. There can be no assurances
that we will be able to contract with another technology partner for these
purposes. In the event Green Globe, LLC institutes legal proceedings against us
and/or our Hungarian subsidiary, CEVA Hungary to collect sums that may be due
under our agreements and Green Globe, LLC obtains an enforceable judgment
against us and our assets, such legal proceeding and/or subsequent judgment will
have a material adverse effect on our business, results of operations, financial
condition and prospects. See, Item 8 "Legal Proceedings" below.
Additional Financing. We will require additional financing although we
have no current arrangements to obtain any additional financing. No assurance
can be given that such additional financing will be available on terms that are
satisfactory to us, if they are available at all.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
(i) the consolidated statements of income for the fiscal years ended December
31, 1999 and 1998, and (ii) the consolidated balance sheets at December 31, 1999
and 1998 are derived from the consolidated financial statements for CEVA
International, Inc., a Delaware corporation which merged with and into the
Company as of May 10, 1999, which have been examined by Rosenberg Rich Baker
Berman & Company, independent certified public accountants, all of which
financial statements are included elsewhere herein, are qualified by reference
to such financial statements, and should be read in conjunction with such
financial statements and the notes thereto.
The selected consolidated financial data set forth below with respect to
(i) the period ended March 31, 2000, and (ii) the period ended March 31, 1999
are derived from unaudited consolidated financial statements for the Company and
for CEVA International, Inc. ("CEVA Delaware"), a Delaware corporation,
respectively. The results of operation for the three months ended March 31,
2000, should not be regarded as indicative of the results of operations for the
year ending December 31, 2000. All amounts are in $-thousands except for any
share data. The historical number of shares outstanding has been adjusted to
take into account a 3.692488:1 stock split for CEVA-Delaware's common stock
effected in May 1999.
On May 10, 1999, the Company, then known as ORO Bueno Inc., after
divesting itself of all operations, all assets except for a cash depository in
the amount of approximately $500,000, and substantially all liabilities,
extended an offer to all holders of the common stock of CEVA Delaware to
exchange their shares into newly to be issued common stock of the Company, and
CEVA Delaware merged into the Company. The operations of the newly combined
entity are comprised solely of the operations of CEVA Delaware. Therefore, the
discussion ensuing below pertains to the operations of CEVA Delaware for the
prior fiscal periods until the date of the merger, and to the operations of the
Company thereafter.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------ ---------
(Unaudited)
Consolidated Income Statement Data: 1999 1998 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues ...........................................$ 1,892 $ 1,950 $ 185 $ 602
Cost of goods sold.................................. 1,478 1,644 224 301
----- ------ ---- ----
Gross profit........................................ 414 306 (39) 301
Operating income (loss)............................. (1,188) (773) (271) 66
Net income (loss)................................... (1,361) (666) (386) (75)
Earnings (loss) per share...........................$ (0.24) $ (0.09) $ (0.04) $ (0.01)
Shares used in computing per share data ............ 7,676,520 7,308,198 9,930,308 7,308,198
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
At December 31, At March 31,
--------------- ------------
Consolidated Balance Sheet Data: 1999 1998 2000
--------- ---------- -----------
<S> <C> <C> <C>
Working Capital.................................... $ (220) $ (1,104) $ (1,424)
Total assets....................................... 4,300 4,988 3,615
Total current liabilities.......................... 3,429 2,419 2,563
Shareholders'equity (impairment) .................. $ (1,037) $ (1,156) $ (1,470)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
CEVA International, Inc. specializes in the application of waste-to-energy
alternative fuel and environmental remediation technologies. Its primary target
market and current operations focus on Central and Eastern Europe, specifically
Hungary, Romania, and the Czech Republic. These countries not only have rapidly
growing energy needs but at the same time are burdened with a legacy of
significant problems in the areas of environmental pollution coupled with a
scarcity of technical and managerial know-how in trying to address these
problems, even though the region has started developing and implementing a
regulatory, socio-economic and judicial infrastructure on par with Western
standards that can effectively deal with the legacy of decades of centrally
controlled state owned economies. CEVA during the last several years has
succeeded in establishing a presence and creating a wide ranging network of
business contacts and working relationships which facilitates the day-to-day
management of the Company's operations and which management expects will bear
fruit in the years to come. Despite this progress, however, and although basing
its projects and operations on traditional and proven technologies, timing and
success of individual projects often depend on factors beyond the control of the
Company and the resulting uncertainties make reliable projections difficult.
Except where the processing of oil and tar contaminated soil and water
depositories results in the manufacture of alternate fuels that produce tangible
cost savings when utilized in industrial processes such as cement plants, a
general relative scarcity of public or private funding for remedial projects
addressing environmental contamination has until now limited the revenue
potential for the Company. Political and economic imperatives, however, are
dictating a gradual improvement in this area, and management expects that the
Company will be a primary beneficiary in view of its rapidly growing physical
presence and investments in the region.
Results of Operations for Three Months Ended March 31, 2000 compared to Three
Months Ended March 31, 1999
For the three months ended March 31, 2000, the Company had gross revenues
of $184,750 ($601,675 during the same period a year ago), substantially all of
which was generated by its subsidiary CEVA Hungary. A major portion of the
Hungary revenues is attributable to the Nyirbogdany alternative fuel ("AP")
project involving liquefaction technology. The decrease in revenues is
attributable to the fact that a major project involving soil remediation for a
municipality in Budapest which accounted for most of the revenues during the
first quarter 1999 did not extend into 2000.
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Gross profits for the quarter amounted to negative $38,842 (positive
$300,837 in 1999). A large portion of period costs-of-goods-sold are incurred
from level amortization expenses in connection with capitalized equipment leases
for plant and equipment used in the treatment of contaminated soils and
depositories. The effect of unused processing capacities is therefore a
significant factor influencing operating margins. In addition, margins fluctuate
from project to project depending upon local factors and individually negotiated
terms, and any given reporting period's overall results are affected by the mix
and timing of such projects. This volatility represents a major risk factor in
predicting the Company's future performance and will relatively diminish only
upon the Company achieving its revenue goals during the next two years when a
larger number of projects are in progress and in combination contribute to a
more level gross margin profile. After deducting operating expenses of $232,163
which were almost similar to those incurred during the same period a year
earlier the Company realized an operating loss of $271,005 (compared to an
operating profit of $66,300 in 1999). Non-operating expenses in form of interest
charges totaled $114,826 in connection with capital leases. The three months
period concluded with a net loss of $385,831 or $0.04 per share, compared to a
loss of $74,904 or $0.01 per share for the three months period in 1999.
Results of Operations for the Year Ended December 31, 1999 compared to the Year
Ended December 31, 1998
The fiscal year's results, in comparison to the prior year, were primarily
determined by a combination of significantly higher operating expenses that
increased by 49% from $1,078,742 to $1,602,396 and the inclusion of an
extraordinary gain of $250,000 in 1998 from cancellation of an indebtedness.
With revenues during the year remaining relatively unchanged from levels of the
prior year, gross margins increased slightly, to 20% in 1999 from approximately
16% in 1998, for gross profits totaling $414,109 ($306,069 in 1998). As
mentioned above, margins can fluctuate significantly from project to project
depending upon local factors and individually negotiated terms. In both
reporting periods, however, gross margins were depressed by relatively high
level of underutilized processing capacities. The Company currently has
installed plant and equipment capitalized in excess of $3 Million which is
amortized over periods averaging 5 years and results in relatively high fixed
expenses. If not adequately utilized through lack of orders, the fixed portion
of costs in form of amortization expenses assumes more weight.
Revenues in both 1999 and 1998 were derived almost exclusively by the
Company's Hungarian subsidiary. Operations in Romania, currently the other main
target market, were still in a start-up phase and are not expected to generate
significant income before later in the year 2000. Revenues in both years were
primarily supplied by two projects, i.e. the Nyirbogdany liquid alternative fuel
processing facility operated by the Company at a refinery owned by the Hungarian
gas and oil company MOL, and the City of Budapest District XVIII soil
remediation project for which the Company shipped from the U.S. and installed in
Hungary a Low Temperature Thermal Desorption facility. During the year, the
Company invested considerable time and effort in the further development and
exploratory negotiations in its Hungarian and Romanian markets, and the
procurement of necessary permits issued by the respective local and state
government entities. As a result of these efforts, several new projects have
advanced to a
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stage where significant revenues are expected for 2000 and beyond. These include
the production of proprietary, solid, waste-derived alternate fuels to be used
in cement plants in Hungary, and a project in Romania which will produce liquid
alternative fuel from oil refinery waste to be used in cement kilns in
cooperation with one of the largest privately-owned cement manufacturers in
Romania which has recently been purchased by a global cement company, and with
whom the Company has entered into a multi-year supply contract for alternate
fuels. The Company has entered into a joint venture agreement for long-term
business and contractual relationships with the global cement company to jointly
produce alternative fuels for the cement industry. This agreement was signed on
May 24, 2000. The resulting broadening of the revenue base is expected to
materially improve the Company's business outlook, predictability of future
performance, and cash flows.
As mentioned above, operating expenses increased sharply from 1998 to
1999. The increases were primarily in the areas of professional services and
consulting expenses, reflecting the expanded operations and build-up of
infrastructure, and significantly increased bad debts expenses. In view of
relatively unchanged gross profits the higher expenses in 1999 contributed to a
larger net loss of $1,360,638 or $0.18 per share for the year compared to a loss
of $665,522 or $0.01 per share in the preceding year.
Liquidity and Capital Resources
The Company's liquidity remains strained because the level of operations
and revenues is still not adequate to finance ongoing operations and the
required infrastructure. In addition, the projects pursued by the Company
necessitate significant investments in capital equipment that the Company
largely financed through capital lease agreements with resulting fixed payment
obligations which total in excess of $4 Million between the years 2000 to 2003.
At March 31, 2000, the working capital deficit amounted to $1,424,066 as
compared with a deficit of $2,041,629 at December 31, 1999. The relative
improvement stems from lower current portions of the maturities of capital
leases and a reduction of accrued expenses. Cash flow from operations during the
three months in 2000 totaled negative $143,129 which was partially offset by a
cash inflow of $97,365 from financing activities, primarily through the issuance
of common stock. During 1999, Mr. Herb Case, the Company's founder and majority
shareholder, loaned the Company cash advances in the amount of $200,000,
repayable either in cash or equity shares at his option.
Management expects to be able to alleviate the cash shortage in the short
term by the anticipated liquidation of approximately $1 Million tied up in the
dispute with District XVIII in Budapest as described above, to the benefit of
operations in Hungary. In the medium term, the joint venture described above is
expected to not only introduce substantial new funding of approximately $3
Million into operations in Romania and elsewhere but also create the basis for a
rapid expansion of customer base and on-going soil remediation and alternate
fuel processing activities which will accelerate cash flows from operations and
make for more efficient utilization of plant capacity.
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ITEM 3. DESCRIPTION OF PROPERTY.
Our corporate headquarters offices are located at 75-77 North Bridge Street,
Somerville, New Jersey 08876. We utilize our headquarters offices for purposes
of coordinating our financial reports generated from our U.S.-based auditors as
well as those generated from our Central and Eastern European business
operations, to coordinate communications between our United States based
technology partners and independent contractors and to serve other business
administrative tasks. Currently, we do not pay any rent to utilize these
facilities which have been provided free of charge through December 31, 2000 by
one of our directors, Joseph J.
Tomasek.
Budapest, Hungary. We and our subsidiary, CEVA Hungary, maintain offices
at H 1097 Budapest, Illatos ut 7, Hungary. We lease this office space, comprised
of approximately 200 square meters, for approximately $700 per month and have a
one-year lease running through December 31, 2001.
Prague, the Czech Republic. We and our affiliate, CEVATech, maintain
offices at V novych domcich 23/78, 102 00 Praha 10-Hostivar, Czech Republic. We
lease this office space, comprised of approximately 45 square meters, for
approximately $250 per month and have a 5-year lease running through January 1,
2005.
Campulung, Romania. We maintain a research and development laboratory,
approximately 16 square meters, and office facilities, approximately 6 square
meters, located on the grounds of S.C. CIMUS S.A. cement facility located in
Campulung, Romania. This space is provided to us pursuant to our 20-year
agreement with this cement facility to provide alternative fuel. See, "The
Company's Position in the Market, Romania", above.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our Common Stock, as of May 31, 2000, by (i) each stockholder known
by the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (ii) each director of the Company, (iii) each officer
of the Company and (iv) all directors and executive officers as a group.
Percentage (2)
Name Number of Shares (1) Beneficially Owned_
------------- --------------------- -------------------
Herbert G. Case, Jr.(3) 7,215,809 66.14%
President, Chief Executive
Officer and Director
1026 Pasareti Ut 21/c
Budapest, Hungary
44
<PAGE>
Joseph J. Tomasek 290,862 2.66%
Vice President/General
Counsel and Director
74 Linden Avenue
Verona, New Jersey 07044
Robert Van Pelt 204,612 1.87%
Secretary and Director
851 Holicong Road
New Hope, Pennsylvania 18938
James Atkins 20,000 .18%
Chief Financial Officer
1051 Budapest
Nador u. 32
Hungary
All Officers and Directors 7,731,283 70.86%
as a Group (4 persons)
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Our directors and officers are as follows:
Name
Herbert G. Case, Jr. 56 President, Chief Executive Officer,
Director
Robert Van Pelt 51 Secretary, Director
Joseph J. Tomasek 52 Vice President, Director
James Atkins 32 Chief Financial Officer
-------------
(1) Except as otherwise indicated, we believe that the beneficial owners of
Common Stock listed above, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject
to community property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of Common Stock subject to options or warrants
currently exercisable, or exercisable within 60 days, are deemed
outstanding for purposes of computing the percentage of the person or
group holding such options or warrants, but are not deemed outstanding for
purposes of computing the percentage of any other person or group.
(2) Percentages based upon a total 10,909,415 shares of common stock issued
and outstanding as of May 31, 2000.
(3) Mr. Herbert Case also owns 17 shares of the Company's redeemable preferred
stock, representing 100% of this class of Company securities issued and
outstanding. see, Item 11, "Description of Securities", below.
45
<PAGE>
Herbert G. Case, Jr., President, Chief Executive Officer and Director. Mr. Case
founded the Company in 1991. Prior to his founding the Company, Mr. Case
developed several United States based environmental services and alternative
fuel processing companies over a 20 year span. In 1992, Mr. Case sold these
companies to a consortium that included Waste Management USA and the Swiss
cement conglomerate, Holderbank. Since 1992, Mr. Case has served as a full-time
employee, without salary,of the Company in the capacity of President and Chief
Executive Officer.
Robert Van Pelt, Secretary and Director. Mr. Van Pelt has been an officer and
director of the Company since 1997. Mr. Van Pelt is the owner and founder of
Bedminster Financial Group, Ltd. of New Hope, Pennsylvania, an investment
banking and brokerage firm that is a member of the National Association of
Securities Dealers, Inc. Prior to the establishment of Bedminster Financial
Group, Ltd. in 1998, Mr. Van Pelt was previously employed as a principal officer
of several NASD licensed broker-dealers . Mr. Van Pelt holds a degree in
Business Administration from Boston College.
Joseph J. Tomasek, Vice President and Director. Mr. Tomasek has been an officer
and director of the Company since 1997. Mr. Tomasek is engaged in the private
practice of corporate finance and securities law and has managed his own firm,
the Law Offices of Joseph J. Tomasek, Esq., since 1992, representing corporate
clients in the areas of corporate and securities law. Mr. Tomasek holds a
Bachelor of Arts Degree and Juris Doctor Degree from Seton Hall University as
well as a graduate degree in European Studies from the European Studies
Institute in Strasbourg, France.
James Atkins is a UK Chartered Accountant with extensive experience in
environmental sector businesses in the EU and Central Europe. He trained with
Arthur Andersen in the UK and worked for two years with Waste Management
International PLC in the UK and Germany. In 1995 he moved to Hungary where he
worked as a manager with Deloitte & Touche's Financial Advisory Services Group
in Budapest. In 1998 he established Rochester Financial Advisory, which provides
corporate finance advisory services to environmental companies in Hungary and
Central Europe.
James has experience of privatization, capital raising, and venture capital
assignments, as well as a track record of setting up and running small and early
stage businesses. As well as environmental businesses, his sector experience
includes commercial banking and utilities.
ITEM 6. EXECUTIVE COMPENSATION.
None of the officers or directors of the Company have an employment
agreement with the Company. As well, no officer or director has received
any salary during the prior two fiscal years and through March 31, 2000
except, however, the Company has paid expenses for Mr. Herbert G. Case,
Jr. in the amounts of $73,424 during the fiscal year ended December 31,
1999 and $11,900 during the fiscal year ended December 31, 1998.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Joseph J. Tomasek, an officer and director, who serves as general counsel
for the Company was paid $63,708.69 in legal fees and expenses during
calendar year 1999 by the Company. During 1999, Mr. Herbert Case made cash
advances to the Company of $200,000, repayable in cash or equity
securities of the Company, at his option.
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ITEM 8. LEGAL PROCEEDINGS.
The Company is not involved in any legal proceedings except as follows: on
January 5, 2000, we recommenced litigation against a political subdivision
of the City of Budapest known as District XVIII in the Hungarian court
known as the Economic College of the Metropolitan Court, Budapest, 2nd
District Varsanyui u.40-44, to obtain approximately $1,000,000 U.S. for
contract payments due us.
In 1998, together with our soil remediation technology partner, Green
Globe, LLC, we entered into a contract with District XVIII to remove
contamination from approximately 32,000 tons of soil. Utilizing its low
temperature thermal desorption unit or "LTTD" unit, Green Globe, LLC
completed this soil remediation project in December, 1998. Since that
time, we have attempted to obtain the payment due to us under our District
XVIII contract through negotiations which were unsuccessful. Accordingly,
we commenced a lawsuit to collect the monies due us in January, 2000 in
the above identified Hungarian Court. At the first trial date on April 20,
2000, the Hungarian Court awarded us a judgment in the approximate amount
of $65,700 U.S. for late contract payments against District XVIII and
recognized our principal claim of approximately $1,000,000 for the
contract payments due us. Our next trial date is June 22, 2000. We intend
to vigorously prosecute our claim against District XVIII in the Hungarian
courts. See, Risk Factor, "Our Inability to Collect Contract Payments in
Hungary" above.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Although we have a trading symbol, "OROB", there is no public trading
market for our Common Shares.
Currently we have two (2) warrants outstanding to purchase 25,000 shares
of our Common Stock, at a warrant exercise price of $1.00 per share,
exercisable during a three year period. As well, we have two Convertible
Promissory Notes outstanding whose holders may convert an aggregate
$25,000 of principal debt into a maximum of 50,000 shares of our Common
Stock. These notes do not provide for the payment of any interest and are
automatically convertible into the Common Shares as aforesaid on their
respective six month anniversary dates. We have agreed to register the
Common Shares underlying the above identified warrants by filing a
registration statement under the Securities Act of 1933, as amended, on or
before March 1, 2000.
There are currently 56 holders of our Common Stock. Some of these
shareholders may have beneficially owned their shares for a period in
excess of one year and, accordingly, may under certain circumstances sell
their Company Common Shares pursuant to Rule 144.
We have never paid dividends on our outstanding securities and do not
expect to do.
47
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ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
In March, 1999, our Company sold an aggregate of 50,020 common shares to
two accredited investors and received gross subscription proceeds of
$200,000. The Company relied upon the private placement exemption from the
registration requirements of the Securities Act of 1933, as amended,
provided by Section 4(2) of this Act. Both investors signed subscription
agreements containing representations that included confirmations that
they were accredited investors, had knowledge and experience enabling them
to evaluate the risks and merits of their investment and were acquiring
restricted securities for their own respective accounts. The price of the
common shares was determined by negotiation between the parties.
On April 6, 1999, ORO Bueno, Inc., the predecessor to our Company,
completed the placement of 550,000 shares of its Common Stock to eight (8)
accredited investors in New York pursuant to a private placement offering
conducted in accordance with Rule 504 of Regulation D for the subscription
price of $1.00 per share and received $550,000 in gross proceeds from this
offering. The subscription price of $1.00 per share was arbitrarily
determined and not based upon any objective criteria of value such as book
value or an established market price.
In connection with the merger of CEVA International, Inc., a Delaware
corporation, with and into ORO Bueno, Inc., a Nevada corporation, which
occurred on May 10, 1999, CEVA International, Inc. shareholders exchanged
their Common Shares in said corporation for Common Shares of ORO Bueno,
Inc. in a transaction based upon the private offering exemption provided
by Section 4(2) of the Securities Act of 1933, as amended.
Pursuant to two private placement investments by two accredited investors,
in November, 1999, we delivered two (2) convertible promissory notes in
the aggregate principal amount of $25,000, automatically convertible into
Common Shares of our Company at the conversion rate of $.50 per share on
the six month anniversary dates of these notes; in addition, each of the
accredited investors received a warrant to purchase an aggregate 25,000
shares of our Common Stock at the exercise price of $1.00 per share,
exercisable at any time over a three year period commencing upon the
warrant issue date. These Convertible Promissory Notes and Common Stock
Purchase Warrants, the subscription prices for which were negotiated
between the parties, were placed with the accredited investors pursuant to
the private placement exemption afforded to the Company by Section 4(2) of
the Securities Act of 1933, as amended.
ITEM 11. DESCRIPTON OF SECURITIES.
CEVA International, Inc. (the "Company") is currently authorized by its
Articles of Incorporation to issue an aggregate 125,000,000 shares of
capital stock consisting of 100,000,000 shares of Common Stock $.001 Par
Value ("Common Stock") and 25,000,000 shares of preferred stock. One
hundred shares of the preferred stock have been designated Series A
Redeemable Non-dividend Preferred Stock of which 17 shares are issued and
outstanding.
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Common Stock
The holders of shares of our Common Stock are entitled to one vote per
share held on all matters submitted to a vote of shareholders of the Company. In
addition, such holders are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of the dissolution or liquidation of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of all liabilities of the Company as well as all
required prior payments with respect to any outstanding shares of Common Stock.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional unissued or treasury shares.
Redeemable Non-Preferred Stock ("Preferred Stock")
Herbert G. Case, Jr. has converted his outstanding loans to CEVA
International, Inc. in the approximate amount of $850,000 into 17 shares of
Preferred Stock. The Preferred Stock has the following rights, privileges and
designations:
(1) each share of Redeemable Non-Dividend Preferred Stock
shall have a Liquidation Value, or Stated Value of $50,000;
(2) the Redeemable Non-Dividend Preferred Stock shall have
liquidation rights superior to the Common Stock of the Company and shall be
superior to all other series or issuances of the stock of the Company;
(3) the Company shall be obligated to redeem all or part of
the Redeemable Non-Dividend Preferred Stock outstanding in the event the Company
has earned after-tax profits during any previous fiscal year in an amount equal
to or greater than One Million ($1,000,000.00) Dollars, determined in accordance
with generally accepted accounting principles, consistently applied (the "After
Tax Profit"), calculated as follows: the Company shall redeem for cash that
number of shares of Redeemable Non-Dividend Preferred Stock whose aggregate
Stated Value is equal to twenty-five (25%) percent of the After Tax Profit; for
example, in the event the Company earns $1,200,000 in After Tax Profit during a
prior fiscal year, the Company will be obligated to redeem 6 shares of the
Redeemable Non-Dividend Preferred Stock outstanding ($1,200,000 X 25% =
$300,000, divided by $50,000, the Stated Value, = 6 shares of Redeemable
Non-Dividend Preferred Stock);
(4) the Redeemable Non-Dividend Preferred Stock shall not be
entitled to receive any preference or fixed rate of dividend and shall only be
entitled to participate in any cash or stock dividend after the holders of the
shares of Common Stock of the Company have received such dividend;
(5) the Redeemable Non-Dividend Preferred Stock shall be
entitled to be paid out of the assets of the Company upon liquidation prior to
any distribution or payment to the holders of the shares of the Common Stock of
the Company;
49
<PAGE>
(6) the holders of the Redeemable Non-Dividend Preferred Stock
shall have no right to vote at or participate in any meeting of the stockholders
of the Company and shall have voting rights only in certain enumerated and
extraordinary events.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada Revised Statutes and the Company's Articles of Incorporation
and Bylaws authorize indemnification of a director, officer, employee or
agent of the Company against expenses incurred by him or her in connection
with any action, suit, or proceeding to which such person is named a party
by reason of having acted or served in such capacity, except for
liabilities arising from such person's own misconduct or negligence in
performance of duty. In addition, even a director, officer, employee or
agent of the Company who was found liable for misconduct or negligence in
the performance of duty may obtain such indemnification if, in view of all
the circumstances in the case, a court of competent jurisdiction
determines such person is fairly and reasonably entitled to
indemnification. Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers, or persons controlling
the Company pursuant to the foregoing provisions, the Company has been
informed that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Act and is therefore
unenforceable.
ITEM 13. FINANCIAL STATEMENTS.
The following financial statements are included herein:
Audited Financial Statements of CEVA International, Inc. and Subsidiary
for the Fiscal Years Ended December 31, 1999 and December 31, 1998.
Audited Financial Statements of CEVA International, Inc. and Subsidiary
for the Fiscal Years Ended December 31, 1998 (Restated) and December 31,
1997.
Unaudited Financial Statements of CEVA International, Inc. and Subsidiary
for the Three Months Ended March 31, 2000 and 1999.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 15. EXHIBITS.
(a) (i)Audited Financial Statements of CEVA International, Inc. and
Subsidiary for the Fiscal Years Ended December 31, 1999 and December
31, 1998.
(ii)Audited Financial Statements of CEVA International, Inc. and
Subsidiary for the Fiscal Years Ended December 31, 1998 (Restated) and
December 31, 1997.
50
<PAGE>
(iii)Unaudited Financial Statements of CEVA International, Inc. and
Subsidiary for the Three Months Ended March 31, 2000 and 1999.
(b) Other Exhibits
Exhibit No. Document Description
*2.1 Agreement and Plan of Merger, dated March 29, 1999
*2.2 Articles of Merger, dated April 23, 1999
*2.3 Certificate of Merger, dated April 26, 1999
*3.1 Articles of Incorporation of Oro Bueno, Inc., dated
January 30, 1994
*3.2 Certificate of Amendment of Articles of Incorporation of Oro
Bueno, Inc., dated July 10, 1997
*3.3 Amended and Restated Articles of Incorporation of Oro Bueno, Inc.,
dated April 24, 1999.
*3.4 Bylaws of CEVA International, Inc., a Nevada corporation
*10.1 Loan and Master LTTD Services Agreement with Green Globe LLC,
dated December 6, 1997
*10.2 Lease Agreement between Green Globe LLC and CEVA Hungary,
dated June 5, 1998
10.3 "The Unified Deed of Association of CEVA Hungary Ltd." dated
November 23, 1998
23.1 Consent of Independent Auditors
---------------
*Previously filed
51
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, as
amended, the Registrant caused this Amendment No. 2 to its registration
statement on Form 10-SB to be signed on its behalf by the undersigned, thereunto
duly authorized.
CEVA International, Inc.
Date: June 21, 2000 By: /s/ Herbert G. Case, Jr.
------------------------
Herbert G. Case, Jr.
Its: President and Chief Executive Officer
Acting Chief Financial Officer
Signature Title Date
--------- ----- ----
/s/ Herbert G. Case, Jr. President,
-------------------------- Chief Executive Officer June 21, 2000
Herbert G. Case, Jr. Acting Chief Financial Officer
Director
/s/ Joseph J. Tomasek Vice President and
-------------------------- Director June 21, 2000
Joseph J. Tomasek
/s/ Robert Van Pelt Treasurer and June 21, 2000
-------------------------- Director
Robert Van Pelt
52
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Financial Statements
December 31, 1999 and 1998
<PAGE>
Ceva International, Inc. and Subsidiary
Index to the Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report ...................................................... 1
Consolidated Financial Statements
Consolidated Balance Sheet ..................................................... 2
Consolidated Statements of Operations .......................................... 3
Consolidated Statements of Comprehensive Loss .................................. 4
Consolidated Statement of Stockholders' Equity (Impairment) .................... 5
Consolidated Statements of Cash Flows .......................................... 6
Notes to the Consolidated Financial Statements ................................. 7-12
Independent Auditors' Report on Additional Information ............................ 13
Consolidating Balance Sheet - December 31, 1999 ................................ 14
Consolidating Statement of Operations and Deficit - Year Ended December 31, 1999 15
Consolidating Statement of Operations and Deficit - Year Ended December 31, 1998 16
</TABLE>
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Ceva International, Inc.
We have audited the accompanying consolidated balance sheet of Ceva
International, Inc. and Subsidiary as of December 31, 1999 and the related
consolidated statements of operations, comprehensive loss, stockholders' equity
(impairment), and cash flows for the years ended December 31, 1999 and 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ceva
International, Inc. and Subsidiary as of December 31, 1999 and the results of
their operations and cash flows for the years ended December 31, 1999 and 1998
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in the Notes to
the Consolidated Financial Statements, the Company has incurred significant
operating losses and has a stockholders' impairment. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters are described in the Notes to the Consolidated
Financial Statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
May 19, 2000
1
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Balance Sheet
December 31, 1999
<TABLE>
<S> <C>
Assets
Current Assets
Cash $ 85,565
Accounts receivable (net of allowance for doubtful accounts of $314,000) 1,138,896
Prepaid expenses 5,317
-----------
Total Current Assets 1,229,778
Equipment (net of accumulated depreciation of $1,007,607) 2,882,112
Intangible assets (net of accumulated amortization of $6,310) 979
Deferred charges (net of accumulated amortization of $62,500) 187,500
-----------
Total Assets 4,300,369
===========
Liabilities and Stockholders' Impairment
Current Liabilities
Accounts payable and accrued expenses 1,350,569
Notes payable 225,000
Loans payable to stockholder 200,000
Current maturities of capital leases 1,393,196
Deferred credit 102,638
-----------
Total Current Liabilities 3,271,403
Capital leases, net of current maturities 2,065,975
-----------
Total Liabilities 5,337,378
-----------
Minority interest in subsidiary --
-----------
Stockholders' Equity
Preferred stock, non-voting, $.001 par value; 25,000,000 shares authorized;
Series A - redeemable, non-dividend, $50,000 stated value per
share, 100 shares authorized, 17 shares issued and outstanding
($850,000 redeemable preference in either cash or convertible
into common shares) 850,000
Common stock, voting, $.001 par value; 100,000,000 common shares
authorized; 9,823,165 common shares issued and outstanding 9,823
Additional paid-in capital 2,113,205
(Deficit) (4,071,991)
Accumulated other comprehensive income - foreign currency
translation adjustment 61,954
-----------
Total Stockholders' Equity (Impairment) (1,037,009)
-----------
Total Liabilities and Stockholders' Equity $ 4,300,369
===========
</TABLE>
See notes to the consolidated financial statements.
2
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998
----------- -----------
Restated
-----------
<S> <C> <C>
Revenue $ 1,892,220 $ 1,950,256
Direct Costs 1,478,111 1,644,187
----------- -----------
Gross Profit 414,109 306,069
----------- -----------
Operating Expenses
Bad debts 376,500 151,401
Professional services 254,711 30,300
Wages 217,675 391,345
Travel 151,861 179,372
Depreciation and amortization 148,378 80,007
International expenses 100,908 37,399
Officer's compensation 73,424 11,900
Other expenditures 64,937 32,829
Employee benefits 58,169 24,267
Auto expenses 40,819 37,824
Rent 30,534 7,580
Directors' fees 30,000 --
Office expenses 23,310 16,530
Telephone 16,067 39,926
Entertainment 6,996 7,537
Other taxes 4,691 7,282
Insurance 3,416 4,009
Advertising -- 395
Miscellaneous -- 18,839
----------- -----------
Total operating expenses 1,602,396 1,078,742
----------- -----------
(Loss) from operations (1,188,287) (772,673)
----------- -----------
Other income (expense)
Interest expense, net of other income (163,338) (161,457)
Minority interest in loss of consolidated subsidiary -- 29,277
----------- -----------
Total other income (expense) (163,338) (132,180)
----------- -----------
(Loss) before provision for income taxes (1,351,625) (904,853)
Provision for income taxes 9,013 10,669
----------- -----------
(Loss) before extraordinary item (1,360,638) (915,522)
Extraordinary item, cancellation of indebtedness, net of
income tax effect of $0 -- 250,000
----------- -----------
Net (Loss) $(1,360,638) $ (665,522)
=========== ===========
(Loss) per common share before extraordinary item $ (0.18) $ (0.13)
=========== ===========
(Loss) per common share $ (0.18) $ (0.09)
=========== ===========
Weighted average of common shares outstanding 7,676,520 7,308,198
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Statements of Comprehensive Loss
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998
----------- -----------
(Restated)
-----------
<S> <C> <C>
Net (loss) $(1,360,638) $ (665,522)
----------- -----------
Other comprehensive income
Foreign currency translation adjustment (net of $0 tax effect) 7,460 54,494
----------- -----------
Other comprehensive income 7,460 54,494
----------- -----------
Comprehensive (loss) $(1,353,178) (611,028)
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity (Impairment)
Period From January 1, 1998 to December 31, 1999
<TABLE>
<CAPTION>
Accumulated
other
comprehensive
Preferred Stock Common Stock income-
------------------- --------------------- Foreign
(Post Split) Additional Retained currency
Number of Number Paid in Earnings translation
Shares Amount of Shares Amount Capital (Deficit) adjustment Total
--------- -------- ------------ ------ ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 -- $ -- 7,308,198 $7,308 $1,492,692 $(2,045,831) $ -- $ (545,831)
Net (Loss), Year Ended
December 31, 1998 -- -- -- -- -- (665,522) -- (665,522)
Foreign Currency
Translation Adjustment -- -- -- -- -- -- 54,494 54,494
-- -------- --------- ------ ---------- ----------- ------- -----------
Balances, December 31, 1998 -- -- 7,308,198 7,308 1,492,692 (2,711,353) 54,494 (1,156,859)
Issuances of Common Share -- -- 374,967 375 343,307 -- -- 343,682
Issuance of Common Shares
Pursuant to a Private
Placement -- -- 550,000 550 549,450 -- -- 550,000
Costs associated with the
Private Placement -- -- -- -- (80,000) -- -- (80,000)
Acquisition of
Oro Bueno, Inc. -- -- 1,590,000 1,590 (1,590) -- -- --
Costs associated with
acquisition of
Oro Bueno, Inc. -- -- -- -- (190,654) -- -- (190,654)
Issuance of Preferred Shares
for Conversion of
Majority Shareholder's loan 17 850,000 -- -- -- -- -- 850,000
Net (Loss), Year Ended
December 31, 1999 -- -- -- -- -- (1,360,638) -- (1,360,638)
Foreign Currency
Translation Adjustment -- -- -- -- -- -- 7,460 7,460
-- -------- --------- ------ ---------- ----------- ------- -----------
Balances, December 31, 1999 17 $850,000 9,823,165 $9,823 $2,113,205 $(4,071,991) $61,954 $(1,037,009)
== ======== ========= ====== ========== =========== ------- -----------
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities (Restated)
-----------
Net (loss) $(1,360,638) $ (665,522)
Adjustments to reconcile net (loss) to net cash provided (used)
by operating activities
Depreciation and amortization 581,185 285,993
Minority interest in loss of consolidated subsidiari -- (29,277)
Decreases (increases) in assets
Accounts receivable (175,551) (664,378)
Escrow funds receivable -- 198,000
Inventory 79,407 (79,407)
Prepaid expenses 3,729 (7,548)
Due from related party 5,499 96,319
Increases (decreases) in liabilities
Accounts payable and accrued expenses (86,568) 1,014,147
Deferred credit 18,538 84,100
----------- -----------
Net cash provided (used) by operating activities (934,399) 232,427
----------- -----------
Cash flows from investing activities
Cash paid for machinery and equipment (25,771) (100,000)
----------- -----------
Net cash (used) by investing activities (25,771) (100,000)
----------- -----------
Cash flows from financing activities
Proceeds from private placement 550,000 --
Proceeds from majority stockholder's loan 200,000 --
Proceeds from borrowings 25,000 408,745
Repayment of capital lease obligations -- (359,833)
(Cash payments for) application of acquisition costs 190,654 (190,654)
----------- -----------
Net cash provided (used) by financing activities 965,654 (141,742)
----------- -----------
Effect of exchange rate changes on cash 7,460 54,494
----------- -----------
Net increase in cash 12,944 45,179
Cash at January 1 72,621 27,442
----------- -----------
Cash at December 31 $ 85,565 $ 72,621
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 200 $ 200
Cash paid for interest $ 187,948 $ 164,388
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Capitalized lease obligations incurred for purchase of equipment in 1998:
Equipment under capital lease $ 3,044,561
Deferred charge incurred 250,000
-----------
3,294,561
Obligations under capital lease incurred 3,294,561
-----------
$ --
===========
</TABLE>
In 1999, 17 shares of redeemable preferred stock were issued in exchange for
$850,000 of a shareholder's loans.
See notes to the consolidated financial statements.
6
<PAGE>
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Nature of Organization
On May 10, 1999, Ceva International, Inc. (the "Company" or "Ceva") merged
with Oro Bueno, Inc. ("Oro"), a Nevada corporation , whereby each issued
and outstanding share of the Company's common stock was exchanged for one
similar share of Oro totaling 7,683,165 shares. Prior to the merger, each
company effected a forward stock split of their respective common shares
(Oro: 1.9790223 to 1 and Ceva 3.692488 to 1). Oro changed its name upon
completion of the merger to Ceva International, Inc. The shareholders of
Ceva retained an approximate 79% controlling interest in the new Company.
The transaction is considered a recapitalization of Ceva for accounting
purposes and all financial information regarding operations will be that
of Ceva. In anticipation of the merger, Oro engaged in a private placement
in early 1999, pursuant to the exemption from the registration
requirements of the Securities Act of 1933, as amended (the "1933 Act")
provided by Rule 504 of Regulation D promulgated under the 1933 Act,
raising gross proceeds of $550,000. Fees incurred and associated with the
merger regarding legal, underwriting, promotion, accounting and auditing
as well as other various expenses have been offset against Additional
Paid-in Capital.
Ceva International, Inc., a New Jersey corporation, was organized in 1991
to develop an Eastern European market presence in the waste technology
management business. In that connection, the Company organized Ceva
Hungary, a Hungarian corporation, which is 50% owned by Ceva
International, Inc. with the remaining 50% thereof owned by Hungarian
stockholders active in its business development and accounted for as a
minority interest. The Company's intentions are to create alternative fuel
sources from industrial waste for use in the cement and other industries.
(see "SUBSEQUENT EVENTS")
Going Concern Uncertainty
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern.
The Company has incurred significant operating losses which have resulted
in a stockholders' impairment. This raises substantial doubt of the
Company's ability to continue as a going concern. Management's plans are
to negotiate a joint venture with a major global industrial company, which
will provide working capital and contracts for the company's development.
Additionally, management is looking to hire a Chief Financial Officer to
strengthen the management team and enhance its financial control systems.
Finally, the Company has recapitalized the majority stockholder's loan to
stockholders' equity and is in discussions with a number of financial
institutions with a view to increase the company's capital.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the company and its 50% owned subsidiary. Intercompany transactions and
balances have been eliminated in consolidation.
Depreciation and Amortization
The cost of equipment is depreciated for financial reporting purposes on a
straight-line basis over the useful lives of the assets which is 3 to 7
years. Repairs and maintenance which do not extend the useful lives of the
related assets are expensed as incurred. Deferred charges in connection
with LTTD contracts and intangibles are being amortized over 5 years.
Income Taxes
The Company is taxed as a "C" Corporation for federal purposes and
deferred taxes are recognized for operating losses that are anticipated to
offset future federal income taxes.
The basic corporation income tax rate applicable to Ceva Hungary is 18%
(1998:18%). In addition, a supplementary tax of up to 35% (1998:35%) is
payable on dividends from post-1994 profits. The actual rate of
supplementary tax depends on the residence of the recipient shareholder
and the terms of the applicable tax treaty between Hungary and the
relevant foreign country. A rate of 35% (1998:35%) applies to Hungarian
shareholders.
7
<PAGE>
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - (Continued)
Revenue Recognition
Revenue is recognized in accordance with contracts as services are
rendered.
Earnings (Loss) per Common Share
In accordance with Financial Accounting Standards Board No. 128 "Earnings
Per Share", basic earnings (loss) per common share amounts are computed by
dividing the net (loss) by the weighted average number of shares
outstanding. Common stock equivalents have not been included in this
computation since the effect would be anti-dilutive.
Securities Issued for Services
The Company accounts for common stock and common stock purchase warrants
issued for services by reference to the fair market value of the Company's
stock on the date of stock issuance or warrant grant in accordance with
Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation. (FASB 123)" Compensation/consultant expense is
recorded for the fair market value of the stock and warrants issued.
Foreign Currency Translation
For Ceva Hungary whose functional currency is the Hungarian Florint,
balance sheet accounts are translated into U.S. dollars at exchange rates
in effect at the end of the year and income statement accounts are
translated at average exchange rates for the year. Translation gains and
losses are included as a separate component of stockholders' equity
(impairment).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION OF BUSINESS AND CREDIT RISK
At times throughout the year the Company may maintain certain bank
accounts in excess of the FDIC and Hungarian limits.
The Company conducts its business primarily in the Eastern European
nations.
The Company has contracts with a small number of customers; the loss of
one of the major ones would have a near-term severe impact on the Company.
EQUIPMENT
Equipment at cost, less accumulated depreciation consists of the following
at December 31, 1999:
Equipment under capital lease $3,044,561
Field and office equipment 845,158
----------
Subtotal 3,889,719
Less accumulated depreciation 1,007,607
----------
Total $2,882,112
==========
Depreciation expense amounted to $531,185 and $273,493 for years ended
December 31, 1999 and 1998, respectively.
8
<PAGE>
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
PROFIT SHARING ARRANGEMENT/DEFERRED CHARGE
The Company has entered into an agreement to share profits with a vendor
on its Low Temperature Thermal Desorption (LTTD) contracts. The vendor
also has the exclusive right to provide equipment and services that might
be required under any LTTD contracts. This contract, implemented in 1997,
has a term of ten years or may be terminated by mutual consent of the
parties. In 1998, the vendor provided for only $250,000 of an agreed upon
$500,000 advance in which the entire $500,000 was included as part of the
lease obligation to be repaid (see "CAPITAL LEASES"). The remaining
$250,000 was recorded as a deferred charge as an accommodation to the
vendor's profit sharing arrangement and exclusive right to provide
equipment and services and will amortize over the repayment terms of the 5
year lease. Amortization expense totaled $50,000 and $12,500 during the
years ended December 31, 1999 and 1998, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31, 1999:
Trade accounts payable $ 778,692
Interest 310,130
Sales and payroll taxes 111,747
Salaries 75,000
Directors' fees 30,000
Consulting fees 25,000
Professional fees 20,000
----------
Total $1,350,569
==========
NOTES PAYABLE
Notes payable are comprised of the following at December 31, 1999:
Unsecured
Note payable interest only at 12% per annum due in
full on December 31, 1999. Interest rate increases
to 24% per annum should balance not be settled by
December 31, 1999. The due date of the note has been
extended to June 30, 2000. The note is guaranteed by
the principal stockholder. $ 200,000
Two non-interest bearing notes due April 30, 2000 are
payable either in cash or convertible into common
shares of the company at .50(cent)per share. A
non-detachable warrant has been issued to each note
holder entitling the holder to purchase 15,000
common shares of the company at $1 per share
expiring November 2, 2002. The notes were
subsequently converted into common shares. 25,000
----------
Total - current maturities $ 225,000
==========
RELATED PARTY TRANSACTIONS
Loan Payable to Stockholder
The majority stockholder has advanced working capital to the Company. The
advance of $200,000 at December 31, 1999, is unsecured, and due April 30,
2000. The repayment may be made either in cash plus interest at 10% per
annum or convertible into common shares at a conversion rate of .25(cent)
per share with a 10% dividend rate at the option of the holder.
Additionally, 50,000 common shares have been issued to the majority
stockholder as compensation for the loan provided to the company. The loan
was subsequently converted into common shares.
9
<PAGE>
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
RELATED PARTY TRANSACTIONS, Continued
Professional, International and Directors' Fees
Fees were incurred to individuals who are shareholders of the Company and
amounted to $312,306 and $59,675 during years ended December 31, 1999 and
1998, respectively.
Included in accounts payable and accrued expenses are balances totaling
$213,687 at December 31, 1999 that pertain to the shareholders that
provided services above.
CAPITAL LEASES
The Company leases certain equipment under capital leases expiring in
various years through 2003. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset at the inception of the lease. The
assets are amortized over the lower of their related lease terms or their
estimated productive lives. Amortization of assets under capital leases is
included in depreciation expense in 1999 and 1998.
Properties under capital leases are as follows at December 31, 1999:
Equipment under capital lease $3,044,561
Less accumulated amortization 774,246
----------
Total $2,270,315
==========
The following is a schedule of minimum lease payments due under capital
leases as of December 31, 1999:
Year Ending December 31,
2000 $1,823,231
2001 1,298,773
2002 612,180
2003 459,136
----------
Total net minimum capital lease payments 4,193,320
Less amounts representing interest 734,149
----------
Present value of net minimum capital lease payments 3,459,171
Less current maturities of capital lease obligations 1,393,196
----------
Obligations under capital leases, excluding current
maturities $2,065,975
==========
Interest rates on capitalized leases are 10% and are imputed based on the
lower of the Company's incremental borrowing rate at the inception of each
lease or the lessor's implicit rate of return.
DEFERRED CREDIT
Ceva Hungary sold equipment which was then leased back to them in a
sales-leaseback transaction. Total profits from the sale amounted to
$102,638 at December 31, 1999 and will be recognized over the term of the
lease.
INCOME TAXES
Deferred taxes are recognized for temporary differences relating to
federal net operating losses. A valuation allowance was included because
the federal net operating loss carry forwards may expire unused. The
valuation allowance on the tax benefit of net operating loss carry
forwards decreased by $20,000 in the year ended December 31, 1999 and
increased $71,270 in the year ended December 31, 1998.
10
<PAGE>
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
INCOME TAXES, Continued
The major components of the Company's current and long-term deferred tax assets
are as follows:
December 31,
1999
------------
Tax benefit of net operating loss carry forwards $ 225,000
Less: valuation allowance (225,000)
----------
Net tax benefit of net operating loss carry forwards $ --
==========
Income tax expense is comprised of the following:
Year Ended December 31,
-------------------------
1999 1998
----------- ----------
Current Provision $ 9,013 $ 10,669
Deferred Benefit -- --
----------- ----------
Total $ 9,013 $ 10,669
=========== ==========
At December 31, 1999, the Company has approximately $800,000 of federal
net operating loss carryforwards available for income tax purposes which
expire on December 31, 2019.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of the Company's financial instruments (all of which
are held for non-trading purposes) are as follows:
December 31, 1999
-------------------------
Carrying
Amount Fair Value
----------- ----------
Cash and short-term investments $ 85,565 85,565
Accounts receivable 1,138,896 1,138,896
Accounts payable and accrued expenses 1,350,569 1,350,569
Long-term debt 3,459,171 3,459,171
Loan payable to stockholder 200,000 200,000
The carrying amount approximates fair value for cash and short-term
instruments. For accounts receivable fair values are estimates based on
relevant market conditions. The fair value of accounts payable and accrued
expenses, long-term debt and loan payable to stockholder is based on
current rates at which the Company could borrow funds with similar
remaining maturities.
MAJOR CUSTOMERS
For the years ended December 31, 1999 and 1998, the Company had three and
two major customers, respectively, sales to which represented
approximately 90% ($1,686,774) and 75% ($1,470,510), respectively, of the
Company's revenues. The Company had accounts receivable balances due from
these customers of $850,249 at December 31, 1999. The loss of these
customers would have a materially adverse effect on the Company.
11
<PAGE>
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
MAJOR CUSTOMERS, Continued
The following indicates the revenues from each of the major customers:
Year Ended December 31,
-------------------------
1999 1998
----------- ----------
Major Customer #1 $ 778,410 $ 428,843
Major Customer #2 829,850 1,041,667
Major Customer #3 78,514 --
----------- ----------
Total $ 1,686,774 $1,470,510
=========== ==========
EXTRAORDINARY ITEM
The Company was relieved from an obligation of $250,000 in 1998 due to the
insolvency of the supplier of the related equipment. A discharge was
granted to the Company which resulted in the recognition as an
extraordinary item (net of $0 income tax effect).
SUBSEQUENT EVENT
In April 2000, the Company acquired an additional 5% ownership interest
from a minority shareholder in Ceva Hungary bringing the ownership
interest of the Company in its Ceva Hungary Subsidiary up to 55%.
RESTATEMENT
The 1998 consolidated statement of operations and deficit has been
restated due to the reversal of a previously booked receivable determined
to be uncollectible ($208,000). In addition, the minority interest in the
loss of the consolidated subsidiary ($49,213) has been reduced so that the
adjustment to the minority interest in subsidiary on the balance sheet
becomes $0. This is a change from the previously reported negative balance
of $49,213.
12
<PAGE>
Independent Auditors' Report on Additional Information
To the Board of Directors and Stockholders of
Ceva International, Inc.
Our report on our audits of the consolidated balance sheet of Ceva
International, Inc. and Subsidiary as of December 31, 1999 and consolidated
statements of operations, comprehensive loss, stockholders' equity (impairment),
and cash flows for the years ended December 31, 1999 and 1998, appears on page
1. Our audits were made for the purpose of forming an opinion on the above
referenced consolidated financial statements taken as a whole. The additional
information on the following pages is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the above referenced consolidated financial statements and, in our opinion,
is fairly stated in all material respects.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
May 19, 2000
13
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidating Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash $ 75,322 $ 10,243 $ -- $ 85,565
Accounts receivable (net of allowance for doubtful
accounts of $314,000 for Ceva Hungary) 288,647 850,249 -- 1,138,896
Due from Ceva International, Inc. -- 78,968 (78,968) --
Prepaid expenses 5,317 -- -- 5,317
----------- ----------- --------- -----------
Total Current Assets 369,286 939,460 (78,968) 1,229,778
Equipment (net of accumulated depreciation) 237,889 2,644,223 -- 2,882,112
Investment in Ceva Hungary 53,833 -- (53,833) --
Intangible assets (net of accumulated amortization) -- 979 -- 979
Deferred charges (net of accumulated amortization) 187,500 -- -- 187,500
----------- ----------- --------- -----------
Total Assets 848,508 3,584,662 (132,801) 4,300,369
=========== =========== ========= ===========
Liabilities and Stockholders' Equity
Current Liabilities
Due to Ceva Hungary 78,968 -- 78,968 --
Accounts payable and accrued expenses 547,990 802,579 -- 1,350,569
Notes payable 225,000 -- -- 225,000
Loans payable to stockholder 200,000 -- 200,000
Current maturities of capital leases -- 1,393,196 -- 1,393,196
Deferred credit -- 102,638 -- 102,638
----------- ----------- --------- -----------
Total Current Liabilities 1,051,958 2,298,413 78,968 3,429,339
Capital leases, net of current maturities -- 2,065,975 -- 2,065,975
----------- ----------- --------- -----------
Total Liabilities 1,051,958 4,364,388 78,968 5,495,314
----------- ----------- --------- -----------
Minority interest in subsidiary -- -- -- --
----------- ----------- --------- -----------
Stockholders' Equity
Preferred stock 850,000 -- -- 850,000
Common stock 9,823 100,000 100,000 9,823
Additional paid-in capital 2,113,205 -- -- 2,113,205
(Deficit) (3,176,478) (941,680) (46,167) (4,071,991)
Accumulated other comprehensive income -
foreign currency translation adjustment -- 61,954 -- 61,954
----------- ----------- --------- -----------
Total Stockholders' Equity (Impairment) (203,450) (779,726) 53,833 (1,037,009)
----------- ----------- --------- -----------
Total Liabilities and Stockholders' Equity $ 848,508 $ 3,584,662 $ 132,801 $ 4,300,369
=========== =========== ========= ===========
</TABLE>
14
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidating Statement of Operations and Deficit
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ 205,446 $ 1,686,774 $ -- $ 1,892,220
Direct Costs -- 1,478,111 -- 1,478,111
----------- ----------- --------- -----------
Gross Profit 205,446 208,663 -- 414,109
----------- ----------- --------- -----------
Operating Expense
Bad debts 62,500 314,000 -- 376,500
Professional services 254,711 -- -- 254,711
Wages 53,435 164,240 -- 217,675
Travel 151,861 -- -- 151,861
Depreciation and amortization 136,735 11,643 -- 148,378
International expenses 100,908 -- -- 100,908
Officer's compensation 73,424 -- -- 73,424
Other expenditures 15,189 49,748 -- 64,937
Employee benefits 26,262 31,907 -- 58,169
Auto expenses 40,819 -- -- 40,819
Rent 17,948 12,586 -- 30,534
Directors' fees 30,000 -- -- 30,000
Office expenses 23,310 -- -- 23,310
Telephone 16,067 -- -- 16,067
Entertainment 6,996 -- -- 6,996
Other taxes 4,691 -- -- 4,691
Insurance 3,416 -- -- 3,416
Management services -- 100,000 (100,000) --
----------- ----------- --------- -----------
Total operating expense 1,018,272 684,124 (100,000) 1,602,396
----------- ----------- --------- -----------
(Loss) from operations (812,826) (475,461) 100,000 (1,188,287)
----------- ----------- --------- -----------
Other income (expense)
Interest expense net of other income (95,747) (67,591) -- (163,338)
Management fee income 100,000 -- 100,000 --
----------- ----------- --------- -----------
Total other income (expense) 4,253 (67,591) 100,000 (163,338)
----------- ----------- --------- -----------
Income (loss) before provision for income taxes (808,573) (543,052) -- (1,351,625)
Provision for income taxes -- 9,013 -- 9,013
----------- ----------- --------- -----------
Net income (loss) (808,573) (552,065) -- (1,360,638)
Retained earnings (deficit), beginning of year (2,367,905) (389,615) 46,167 (2,711,353)
----------- ----------- --------- -----------
Retained earnings (deficit), end of year $(3,176,478) $ (941,680) $ 46,167 $(4,071,991)
=========== =========== ========= ===========
</TABLE>
15
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidating Statement of Operations and Deficit
Year Ended December 31, 1998
(Restated)
<TABLE>
<CAPTION>
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ 140,433 $ 1,809,823 $ -- $ 1,950,256
Direct Costs -- 1,644,187 -- 1,644,187
----------- ----------- ----------- -----------
Gross Profit 140,433 165,636 -- 306,069
----------- ----------- ----------- -----------
Operating Expense
Professional services 30,300 -- -- 30,300
Wages 95,192 296,153 -- 391,345
Travel 179,372 -- -- 179,372
Depreciation and amortization 69,004 11,003 -- 80,007
International expenses 37,399 -- -- 37,399
Officer's compensation 11,900 -- -- 11,900
Other expenditures 4,944 27,885 -- 32,829
Bad debts 151,401 -- -- 151,401
Employee benefits 24,267 -- -- 24,267
Auto expenses 37,824 -- -- 37,824
Rent -- 7,580 -- 7,580
Office expenses 16,530 -- -- 16,530
Telephone 39,926 -- -- 39,926
Entertainment 7,537 -- -- 7,537
Other taxes 7,282 -- -- 7,282
Insurance 4,009 -- -- 4,009
Advertising 395 -- -- 395
Miscellaneous -- 18,839 -- 18,839
Management services -- 100,000 (100,000) --
----------- ----------- ----------- -----------
Total operating expense 717,282 461,460 (100,000) 1,078,742
----------- ----------- ----------- -----------
(Loss) from operations (576,849) (295,824) (100,000) (772,673)
----------- ----------- ----------- -----------
Other income (expense)
Interest expense (116,261) (63,727) -- (179,988)
Management fee income 100,000 -- 100,000 --
Interest and other income 13,292 5,239 -- 18,531
Minority interest in loss of
consolidated subsidiary -- -- 29,277 29,277
----------- ----------- ----------- -----------
Total other income (expense) (2,969) (58,488) 129,277 (132,180)
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (579,818) (354,312) 29,277 (904,853)
Provision for income taxes -- 10,669 -- 10,669
----------- ----------- ----------- -----------
Income (loss) before extraordinary item (579,818) (364,981) 29,277 (915,522)
Extraordinary item, cancellation of
indebtedness, net of income tax effect of $0 250,000 -- -- 250,000
----------- ----------- ----------- -----------
Net income (loss) (329,818) (364,981) 29,277 (665,522)
Retained earnings (deficit), beginning of year (2,038,087) (24,634) 16,890 (2,045,831)
----------- ----------- ----------- -----------
Retained earnings (deficit), end of year $(2,367,905) $ (389,615) $ 46,167 $(2,711,353)
=========== =========== =========== ===========
</TABLE>
16
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Financial Statements
December 31, 1998 (Restated) and 1997
<PAGE>
Ceva International, Inc. and Subsidiary
Index to the Consolidated Financial Statements
December 31, 1998 (Restated) and 1997
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report ...................................................... 1
Consolidated Financial Statements
Consolidated Balance Sheets .................................................... 2
Consolidated Statements of Operations and Deficit .............................. 3
Consolidated Statements of Comprehensive Loss .................................. 4
Consolidated Statements of Cash Flows .......................................... 5
Notes to the Consolidated Financial Statements ................................. 6-11
Independent Auditors' Report on Additional Information ............................ 12
Consolidating Balance Sheet - December 31, 1998 ................................ 13
Consolidating Statement of Operations and Deficit - Year Ended December 31, 1998 14
Consolidating Balance Sheet - December 31, 1997 ................................ 15
Consolidating Statement of Operations and Deficit - Year Ended December 31, 1997 16
</TABLE>
<PAGE>
Independent Auditors' Report
To the Board of Directors and Stockholders of
Ceva International, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Ceva
International, Inc. as of December 31, 1998 and 1997 and the related
consolidated statements of operations and deficit, comprehensive loss and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ceva
International, Inc. and Subsidiary as of December 31, 1998 and 1997 and the
results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in the Notes to
the Consolidated Financial Statements, the Company has incurred operating losses
for a number of years and has a stockholders' impairment. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters are also described in the Notes to the
Consolidated Financial Statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
July 28, 1999, except for "SUBSEQUENT EVENTS" and "RESTATEMENT" notes to the
consolidated financial statements which are dated May 19, 2000
1
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Assets (Restated)
Current Assets
Cash $ 72,621 $ 27,442
Accounts receivable (net of allowance for doubtful accounts of $0
and $109,061, respectively) 963,345 298,967
Escrow funds receivable -- 198,000
Inventory 79,407 --
Prepaid expenses 9,046 1,498
Prepaid acquisition costs 190,654 --
----------- -----------
Total Current Assets 1,315,073 525,907
Due from related party 5,499 101,818
Property and equipment (net of accumulated depreciation) 3,421,864 209,359
Intangible assets (net of accumulated amortization) 2,894 5,195
Deferred charges (net of accumulated amortization) 237,500 --
Deferred income taxes 5,000 5,000
----------- -----------
Total Assets 4,987,830 847,279
=========== ===========
Liabilities and Stockholders' Impairment
Current Liabilities
Accounts payable and accrued expenses 1,442,137 427,990
Current maturities of long-term debt 200,000 11,733
Current maturities of capital leases 693,239 --
Deferred credit 84,100 --
----------- -----------
Total Current Liabilities 2,419,476 439,723
Long-term debt, net of current maturities -- 238,267
Capital leases, net of current maturities 2,630,625 --
Loans payable to stockholder 1,094,588 685,843
----------- -----------
Total Liabilities 6,144,689 1,363,833
----------- -----------
Minority interest in subsidiary -- 29,277
----------- -----------
Stockholders' Equity
Preferred stock, non-voting, $.001 par value;
25,000,000 shares authorized; Series A -
redeemable, non-dividend, $50,000 stated value per
share, 100 shares authorized, no shares issued and
outstanding (Redeemable preference in either cash
or convertible into common shares) -- --
Common stock, $.01 par value; 20,000,000 common shares
authorized; 2,000,000 common shares issued and
outstanding 20,000 20,000
Additional paid-in capital 1,480,000 1,480,000
(Deficit) (2,711,353) (2,045,831)
Accumulated other comprehensive income - foreign currency
translation adjustment 54,494 --
----------- -----------
Total Stockholders' Equity (Impairment) (1,156,859) (545,831)
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,987,830 $ 847,279
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
2
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Statements of Operations and Deficit
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
----------- -----------
(Restated)
<S> <C> <C>
Revenue $ 1,950,256 $ 1,003,388
Direct Costs 1,644,187 495,915
----------- -----------
Gross Profit 306,069 507,473
----------- -----------
Operating Expenses
Wages 391,345 12,095
Travel 179,372 65,577
Bad debts 151,401 185,906
Depreciation and amortization 80,007 11,167
Auto expenses 37,824 35,760
Telephone 39,926 30,332
International expenses 37,399 114,044
Other expenditures 32,829 7,395
Professional services 30,300 143,757
Miscellaneous 18,839 110,095
Employee benefits 24,267 12,072
Office expenses 16,530 9,118
Officer's compensation 11,900 11,900
Rent 7,580 6,241
Entertainment 7,537 8,676
Other taxes 7,282 7,315
Insurance 4,009 3,593
Advertising 395 1,422
----------- -----------
Total operating expenses 1,078,742 776,465
----------- -----------
(Loss) from operations (772,673) (268,992)
----------- -----------
Other income (expense)
Interest expense (179,988) (39,515)
Interest and other income 18,531 --
Minority interest in loss of consolidated subsidiary 29,277 16,890
----------- -----------
Total other income (expense) (132,180) (22,625)
----------- -----------
(Loss) before provision for income taxes (904,853) (291,617)
Provision for income taxes 10,669 200
----------- -----------
(Loss) before extraordinary item (915,522) (291,817)
Extraordinary item, cancellation of indebtedness, net of income tax
effect of $0 250,000 --
----------- -----------
Net (loss) (665,522) (291,817)
(Deficit), beginning of year (2,045,831) (1,754,014)
----------- -----------
(Deficit), end of year $(2,711,353) $(2,045,831)
=========== ===========
(Loss) per common share before extraordinary item $ (0.46) $ (0.15)
=========== ===========
(Loss) per common share $ (0.33) $ (0.15)
=========== ===========
Weighted average of common shares outstanding (restated for 1997) 2,000,000 2,000,000
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Statements of Comprehensive Loss
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
----------- -----------
(Restated)
<S> <C> <C>
Net (loss) $ (665,522) $ (291,817)
----------- -----------
Other comprehensive income
Foreign currency translation adjustment (net of $0 tax effect) 54,494 --
----------- -----------
Other comprehensive income 54,494 --
----------- -----------
Comprehensive loss $ (611,028) (291,817)
=========== ===========
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1998 1997
----------- ---------
(Restated)
<S> <C> <C>
Cash Flows From Operating Activities
Net (loss) $ (665,522) $(291,817)
Adjustments to reconcile net (loss) to net cash provided (used) by
operating activities
Depreciation and amortization 285,993 11,167
Minority interest in loss of consolidated subsidiaries (29,277) (16,890)
Decreases (increases) in assets
Accounts receivable (664,378) 179,211
Escrow funds receivable 198,000 (198,000)
Inventory (79,407) --
Prepaid expenses (7,548) 7,817
Due from related party 96,319 9,420
Increases (decreases) in liabilities
Accounts payable and accrued expenses 1,014,147 (203,758)
Deferred credit 84,100 --
----------- ---------
Net cash provided (used) by operating activities 232,427 (502,850)
----------- ---------
Cash flows from investing activities
Cash paid for machinery and equipment (100,000) (209,580)
Purchase of intangible assets -- (5,195)
----------- ---------
Net cash (used) by investing activities (100,000) (209,580)
----------- ---------
Cash flows from financing activities
Proceeds from stockholders' investment -- 546,170
Repayment of stockholders' loans -- (81,941)
Proceeds from borrowings 408,745 250,000
Repayment of capital lease obligations (411,653) --
Cash payments for acquisition costs (190,654) --
----------- ---------
Net cash provided (used) by financing activities (193,562) 714,229
----------- ---------
Effect of exchange rate changes on cash 106,314 --
----------- ---------
Net increase (decrease) in cash 45,179 (23,918)
Cash at January 1 27,442 51,360
----------- ---------
Cash at December 31 $ 72,621 $ 27,442
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 200 $ 200
Cash paid for interest $ 164,388 $ 41,013
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
In 1997, the Company's bank credit line of $265,400 was exchanged for
a stockholder's personal bank loan which is included in loans
payable to stockholders
Capitalized lease obligations incurred for purchase of equipment in 1998:
Equipment under capital lease $ 3,044,561
Deferred charge incurred 250,000
-----------
3,294,561
Obligations under capital lease incurred 3,294,561
-----------
$ --
===========
</TABLE>
See notes to the consolidated financial statements
5
<PAGE>
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Nature of Organization Ceva International, Inc., a New Jersey corporation,
was organized in 1991 to develop an Eastern European market presence in
the waste technology management business. In that connection, the Company
organized Ceva Hungary, a Hungarian corporation, which is 50% owned by
Ceva International, Inc. with the remaining 50% thereof owned by Hungarian
stockholders active in its business development. The Company's intentions
are to create alternative fuel sources from industrial waste for use in
the cement and other industries.
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern.
The Company has incurred large operating losses which have resulted in a
stockholders impairment. Additional funds are needed to finance the
equipment required for signed and proposed contracts to increase the level
of business to cover the Company's operating expenses and create profits.
Management has retained an investment banking firm which has assisted in
merging the Company with a public "shell" Company and has raised $750,000
in private placements for working capital operating purposes. Additional
capital raising efforts are also currently being held (see "SUBSEQUENT
EVENTS"). In addition, the stockholder's loan has been recapitalized to
stockholders' equity. Moreover, the Company has instituted controls to
avoid future large bad debt losses.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the company and its 50% owned subsidiary. Intercompany transactions and
balances have been eliminated in consolidation.
Inventory
Inventories are valued at the lower of cost (determined on a first-in
first-out basis) or market.
Depreciation and Amortization
The cost of property and equipment is depreciated for financial reporting
purposes on a straight-line basis over the useful lives of the assets
which is 3 to 7 years. Repairs and maintenance which do not extend the
useful lives of the related assets are expensed as incurred. Deferred
charges in connection with LTTD contracts are being amortized over 10
years.
Income Taxes
The Company is taxed as a "C" Corporation for federal and state purposes
and deferred taxes are recognized for operating losses that are
anticipated to offset future federal and state income taxes.
The basic corporation income tax rate applicable to Ceva Hungary is 18%
(1998:18%). In addition, a supplementary tax of up to 35% (1997:35%) is
payable on dividends from post-1994 profits. The actual rate of
supplementary tax depends on the residence of the recipient shareholder
and the terms of the applicable tax treaty between Hungary and the
relevant foreign country. A rate of up to 35% (1997:27%) applies to
Hungarian shareholders.
Revenue Recognition
Revenue is recognized in accordance with contracts as services are
rendered.
Foreign Currency Translation
For Ceva Hungary whose functional currency is the Hungarian Florint,
balance sheet accounts are translated into U.S. dollars at exchange rates
in effect at the end of the year and income statement accounts are
translated at average exchange rates for the year. Translation gains and
losses are included as a separate component of stockholder's equity
(impairment).
Securities Issued for Services
The Company accounts for common stock and common stock purchase warrants
issued for services by reference to the fair market value of the Company's
stock on the date of stock issuance or warrant grant in accordance with
Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation. (FASB 123)" Compensation/consultant expense is
recorded for the fair market value of the stock and warrants issued.
6
<PAGE>
Ceva International, Inc.
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassification
Certain amounts in 1997 have been reclassified to conform to the current
year (1998) presentation.
CONCENTRATION OF BUSINESS AND CREDIT RISK
At times throughout the year the Company may maintain certain bank
accounts in excess of the FDIC and Hungarian limits.
The Company conducts its business primarily in the Eastern European
nations.
The Company has contracts with a small number of customers; the loss of
one of the major ones would have a near-term severe impact on the Company.
One customer, a municipality in Hungary, has not recognized billings by
the Company. The matter is being litigated and management believes that
recovery will be made in full.
EQUIPMENT
Equipment at cost, less accumulated depreciation consists of the
following:
December 31,
---------------------
1998 1997
---------- --------
Equipment under capital lease $3,044,561 $187,285
Field and office equipment 676,756 54,888
---------- --------
Subtotal 3,721,317 242,173
Less accumulated depreciation 299,453 32,814
---------- --------
Total $3,421,864 $209,359
========== ========
DUE FROM RELATED PARTY
Due from related party represents advances to a corporation controlled by
the same interests as the Company which are without a fixed maturity date
and bear no interest.
DEFERRED CREDIT
Ceva Hungary sold equipment which was then leased back to them in a
sale-leaseback transaction. Total profits from the sale amounted to
$84,100 and $0 at December 31, 1998 and 1997, respectively, and will be
recognized over the term of the lease.
LOAN PAYABLE-STOCKHOLDER
A stockholder has advanced working capital to the Company. The advances of
$1,094,588 and $967,549 at December 31, 1998 and 1997, respectively, are
unsecured, with interest at 9.5% per annum effective January 1, 1998, and
with no definitive repayment terms. The loan was reclassified into
stockholders' equity pursuant to the subsequent merger of the Company into
the public "shell" Company. (see "SUBSEQUENT EVENTS")
7
<PAGE>
Ceva International, Inc.
Notes to the Consolidated Financial Statements
LONG-TERM DEBT
Long-term debt is comprised of the following:
December 31,
-------------------
1998 1997
Notes Payable --------- --------
Note payable to individual with interest at
12%, payable monthly at $5,741 per month
beginning June 1, 1998. This note is
personally guaranteed by a stockholder.
This note was reclassified into a capital
lease agreement in 1998. $ -- $250,000
Unsecured
Note payable interest only at 12% per annum
due in full on December 31, 1999.
Interest rate shall increase to 24% per
annum should balance not be settled by
December 31, 1999. The note is guaranteed
by the principal stockholder. 200,000 -
Less current maturities 200,000 11,733
-------- --------
Long-term debt, net of current maturities $ -- $238,267
======== ========
CAPITAL LEASES
The Company leases certain equipment under capital leases expiring in
various years through 2003. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset at the inception of the lease. The
assets are amortized over the lower of their related lease terms or their
estimated productive lives. Amortization of assets under capital leases is
included in depreciation expense in 1998 and 1997.
Properties under capital leases are as follows:
December 31,
---------------------
1998 1997
---------- --------
Equipment under capital lease $3,044,561 $ --
Less accumulated amortization 216,989 --
---------- --------
Total $2,827,572 $ --
========== ========
The following is a schedule of minimum lease payments due under capital
leases as of December 31, 1998.
Year Ending December 31,
1999 $1,158,661
2000 1,110,652
2001 1,062,643
2002 612,180
2003 464,608
----------
Total net minimum capital lease payments 4,408,744
Less amounts representing interest 1,084,880
----------
Present value of net minimum capital lease payments 3,323,864
Less current maturities of capital lease obligations 693,239
----------
Obligations under capital leases, excluding current maturities $2,630,625
==========
Interest rates on capitalized leases are 10% and are imputed based on the
lower of the Company's incremental borrowing rate at the inception of each
lease or the lessor's implicit rate of return.
8
<PAGE>
Ceva International, Inc.
Notes to the Consolidated Financial Statements
INCOME TAXES
Deferred taxes are recognized for temporary differences between the basis
of assets and liabilities for financial statement and state income tax
purposes. The differences relate primarily to federal and state net
operating losses. A valuation allowance was included because the state net
operating loss carry forwards may expire unused. The valuation allowance
on the tax benefit of net operating loss carry forwards increased $71,270
and $23,903 in the years ended December 31, 1998 and December 31, 1997.
The major components of the Company's current and long-term deferred tax
assets are as follows:
December 31,
--------------------
1998 1997
-------- --------
Tax benefit of net operating loss carry forwards $250,000 $178,730
Less: valuation allowance 245,000 173,730
--------- --------
Net tax benefit of net operating loss carry forwards 5,000 5,000
Current portion -- --
--------- --------
Long-term deferred tax asset $ 5,000 $ 5,000
========= ========
Income tax expense is comprised of the following:
December 31,
---------------
1998 1997
------- ----
Current Provision $10,669 $200
Deferred Benefit -- --
------- ----
Total $10,669 $200
======= ====
At December 31, 1998, the Company had $326,049 of federal net operating
loss carryforwards available for income tax purposes which expire on
December 31, 2018.
At December 31, 1998, the Company had State net operating losses carry
forwards available for income tax purposes as follows:
Expiration December 31,
1999 $ 453,821
2000 402,733
2001 269,597
2002 221,646
2003 282,349
2004 274,727
2005 326,049
----------
Total $2,230,922
==========
CONTINGENCIES
A suit was instituted against the Company by a vendor which the Company is
vigorously defending. The amount of the suit was accrued in a prior year
and is recorded as an accounts payable in these consolidated financial
statements.
9
<PAGE>
Ceva International, Inc.
Notes to the Consolidated Financial Statements
PROFIT SHARING ARRANGEMENT/DEFERRED CHARGE
The Company has entered into an agreement to share profits with a vendor
on its Low Temperature Thermal Desorption (LTTD) contracts. The vendor
also has the exclusive right to provide equipment and services that might
be required under any LTTD contracts. This contract, implemented in 1997,
has a term of ten years or may be terminated by mutual consent of the
parties. In 1998, the vendor provided for only $250,000 of an agreed upon
$500,000 advance in which the entire $500,000 was included as part of the
lease obligation to be repaid (see "CAPITAL LEASES"). The remaining
$250,000 was recorded as a deferred charge as an accommodation to the
vendor's profit sharing arrangement and exclusive right to provide
equipment and services and will amortize over the repayment terms of the 5
year lease. Amortization expense totaled $12,500 and $0 and during the
years ended December 31, 1998 and 1997, respectively.
EARNINGS PER SHARE
In accordance with Financial Accounting Standards Board No. 128 "Earnings
Per Share". Basic earnings per share amounts are computed based on the
weighted average number of shares actually outstanding, after restating
the number of shares outstanding in 1997 to be equal to 1998 outstanding
shares. The number of shares used in the computations were 2,000,000 in
1998 and 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of the Company's financial instruments (all of which
are held for nontrading purposes) are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997
----------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 72,621 $ 72,621 $ 27,442 $ 27,442
Accounts receivable 1,171,345 1,171,345 298,967 298,967
Accounts payable and accrued expenses 1,442,137 1,442,137 427,990 472,990
Long-term debt 2,630,625 2,630,625 238,267 238,627
Loan payable to stockholder 1,094,588 1,094,588 685,843 685,843
</TABLE>
The carrying amount approximates fair value for cash and short-term
instruments. For accounts receivable fair values are estimates based on
relevant market conditions. The fair value of accounts payable and accrued
expenses, long-term debt and loan payable to stockholder is based on
current rates at which the Company could borrow funds with similar
remaining maturities.
EXTRAORDINARY ITEM
The Company was relieved from an obligation of $250,000 in 1998 due to the
insolvency of the supplier of the related equipment. A discharge was
granted to the Company which resulted in the recognition as an
extraordinary item (net of $0 income tax effect).
10
<PAGE>
Ceva International, Inc.
Notes to the Consolidated Financial Statements
MAJOR CUSTOMERS
For the years ended December 31, 1998 and 1997, the Company has three and
two major customers, respectively, sales to which represented
approximately 75% ($1,470,510) and 90% ($898,502), respectively, of the
Company's revenues. The loss of these customers would have a materially
adverse effect on the Company.
The following indicates the revenues from each of the major customers:
Year Ended December 31,
-----------------------
1998 1997
---------- --------
Major Customer #1 $ 428,843 $616,420
Major Customer #2 1,041,667 --
Major Customer #3 - 173,021
Major Customer #4 - 109,061
---------- --------
Total $1,470,510 $898,502
========== ========
SUBSEQUENT EVENTS
On May 10, 1999, Ceva International, Inc. (the "Company" or "Ceva") merged
with a Nevada corporation whereby each issued and outstanding share of the
Company's common and preferred stock was exchanged for one similar share
of the Nevada corporation. Stock splits for both companies took place
prior to the exchange. The surviving Nevada corporation changed its name
upon completion of the merger to Ceva International, Inc. The shareholders
of Ceva retained an approximate 79% controlling interest in the new
Company. The transaction is considered a recapitalization of Ceva for
accounting purposes and all financial information regarding operations
will be that of Ceva. In anticipation of the merger, the Nevada
corporation engaged in a private placement in early 1999, pursuant to the
exemption from the registration requirements of the Securities Act of
1933, as amended (the "1933 Act") provided by Rule 504 of Regulation D
promulgated under the 1933 Act, raising gross proceeds of $550,000. Fees
incurred in 1998 and associated with the merger regarding legal,
underwriting, promotion, accounting and auditing as well as other various
expenses have been capitalized as prepaid acquisition costs on the balance
sheet. These costs will be offset in 1999 against Additional Paid-in
Capital.
In April 2000, the Company acquired an additional 5% ownership interest
from a minority shareholder in Ceva Hungary bringing the ownership
interest of the Company in its Ceva Hungary Subsidiary up to 55%.
Two non-interest bearing notes totaling $25,000 and due April 30, 2000
were issued in November 1999 and are payable either in cash or convertible
into common shares of the Company at .50(cent) per share. A non-detachable
warrant has been issued to each note holder entitling the holder to
purchase 15,000 common shares of the Company at $1 per share expiring
November 2, 2002. The notes were converted to common shares.
RESTATEMENT
The 1998 consolidated statement of operations and deficit has been
restated due to the reversal of a previously booked receivable determined
to be uncollectible ($208,000). In addition, the minority interest in loss
of consolidated subsidiary ($49,213) has been reduced so that the
adjustment to the minority interest in subsidiary on the balance sheet
becomes $0. This is a change from the previously reported negative balance
of $49,213.
11
<PAGE>
Independent Auditors' Report on Additional Information
To the Board of Directors and Stockholders of
Ceva International, Inc. and Subsidiary
Our report on our audits of the consolidated balance sheets of Ceva
International, Inc. and Subsidiary as of December 31, 1998 and 1997 and
consolidated statements of operations and deficit, comprehensive loss and cash
flows for the years then ended, appears on page 1. Our audits were made for the
purpose of forming an opinion on the above referenced consolidated financial
statements taken as a whole. The additional information on the following pages
is presented for purposes of additional analysis and is not a required part of
the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the above referenced consolidated
financial statements and, in our opinion, is fairly stated in all material
respects.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
July 28, 1999, except for "SUBSEQUENT EVENTS" and "RESTATEMENT" notes to the
consolidated financial statements which are dated May 19, 2000
12
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidating Balance Sheet
(Restated)
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash $ 11,379 $ 61,242 $ -- $ 72,621
Accounts receivable (net of allowance for doubtful accounts of $0) 207,923 755,422 -- 963,345
Inventory -- 79,407 -- 79,407
Due from Ceva International Inc. -- 166,839 (166,839) --
Prepaid expenses -- 9,046 -- 9,046
Prepaid acquisition costs 190,654 -- -- 190,654
----------- ----------- --------- -----------
Total Current Assets 409,956 1,071,956 (166,839) 1,315,073
Due from related party 5,499 -- -- 5,499
Property and equipment (net of accumulated depreciation) 298,850 3,123,014 -- 3,421,864
Investment in Ceva Hungary 53,833 -- (53,833) --
Deferred charges (net of accumulated amortization) 237,500 -- -- 237,500
Intangible assets (net of accumulated amortization) -- 2,894 -- 2,894
Deferred income taxes 5,000 -- -- 5,000
----------- ----------- --------- -----------
Total Assets 1,010,638 4,197,864 (220,672) 4,987,830
=========== =========== ========= ===========
Liabilities and Stockholders' Equity
Current Liabilities
Due to Ceva Hungary 166,839 -- 166,839 --
Accounts payable and accrued expenses 417,115 1,025,022 -- 1,442,137
Current maturities of long-term debt 200,000 -- -- 200,000
Current maturities of capital leases -- 693,239 -- 693,239
Deferred credit -- 84,100 -- 84,100
----------- ----------- --------- -----------
Total Current Liabilities 783,954 1,802,361 166,839 2,419,476
Capital leases, net of current maturities -- 2,630,625 -- 2,630,625
Loans payable to stockholder 1,094,588 -- -- 1,094,588
----------- ----------- --------- -----------
Total Liabilities 1,878,542 4,432,986 166,839 6,144,689
----------- ----------- --------- -----------
Minority interest in subsidiary -- -- -- --
----------- ----------- --------- -----------
Stockholder's Equity
Common stock, $.01 par value; 20,000,000 common shares 20,000 100,000 100,000 20,000
authorized; 2,000,000 common shares issued and outstanding
Additional paid-in capital 1,480,000 -- -- 1,480,000
(Deficit) (2,367,904) (389,616) (46,167) (2,711,353)
Accumulated other comprehensive income - Foreign currency
translation adjustment -- 54,494 -- 54,494
----------- ----------- --------- -----------
Total Stockholders' Equity (Impairment) (867,904) (235,122) 53,833 (1,156,859)
----------- ----------- --------- -----------
Total Liabilities and Stockholders' Equity $ 1,010,638 $ 4,197,864 $ 220,672 $ 4,987,830
=========== =========== ========= ===========
</TABLE>
13
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidating Statement of Operations and Deficit
Year Ended December 31, 1998
(Restated)
<TABLE>
<CAPTION>
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ 140,433 $ 1,809,823 $ -- $ 1,950,256
Direct Costs -- 1,644,187 -- 1,644,187
----------- ----------- --------- -----------
Gross Profit 140,433 165,636 -- 306,069
----------- ----------- --------- -----------
Operating Expense
Wages 95,192 296,153 -- 391,345
Travel 179,372 -- -- 179,372
Bad debts 151,401 -- -- 151,401
Depreciation and amortization 69,004 11,003 -- 80,007
Auto expenses 37,824 -- -- 37,824
Telephone 39,926 -- -- 39,926
International expenses 37,399 -- -- 37,399
Other expenditures 4,944 27,885 -- 32,829
Professional services 30,300 -- -- 30,300
Miscellaneous -- 18,839 -- 18,839
Employee benefits 24,267 -- -- 24,267
Office expenses 16,530 -- -- 16,530
Officer's compensation 11,900 -- -- 11,900
Rent -- 7,580 -- 7,580
Entertainment 7,537 -- -- 7,537
Other taxes 7,282 -- -- 7,282
Insurance 4,009 -- -- 4,009
Advertising 395 -- -- 395
Management services -- 100,000 (100,000) --
----------- ----------- ---------- -----------
Total operating expense 717,282 461,460 (100,000) 1,078,742
----------- ----------- --------- -----------
(Loss) from operations (576,849) (295,824) 100,000 (772,673)
----------- ----------- --------- -----------
Other income (expense)
Interest expense (116,261) (63,727) -- (179,988)
Management fee income 100,000 -- 100,000 --
Interest and other income 13,292 5,239 -- 18,531
Minority interest in loss of
consolidated subsidiary -- -- 29,277 29,277
----------- ----------- --------- -----------
Total other income (expense) (2,969) (58,488) 129,277 (132,180)
----------- ----------- --------- -----------
Income (loss) before provision for income taxes (579,818) (354,312) 229,277 (904,853)
Provision for income taxes -- 10,669 -- 10,669
----------- ----------- --------- -----------
Income (loss) before extraordinary item (579,818) (364,981) 229,277 (915,522)
Extraordinary item, cancellation of
indebtedness, net of income tax effect of $0 250,000 -- -- 250,000
----------- ----------- --------- -----------
Net income (loss) (329,818) (364,981) 229,277 (665,522)
Retained earnings (deficit), beginning of year (2,038,087) (24,634) 16,890 (2,045,831)
----------- ----------- --------- -----------
Retained earnings (deficit), end of year $(2,367,905) $ (389,615) $ 246,167 $(2,711,353)
=========== =========== ========= ===========
</TABLE>
14
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidating Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
Ceva DR (CR) Consolidated
International Ceva Hungary Elimination Totals
------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash $ (10,261) $ 37,703 $ -- $ 27,442
Accounts receivable (net of allowance for
doubtful accounts of $109,061) 173,021 125,946 -- 298,967
Escrow funds receivable 198,000 -- -- 198,000
Due from Ceva Hungary 63,705 -- (63,705) --
Deposit 52,000 -- (52,000) --
Prepaid expenses -- 1,498 -- 1,498
----------- ----------- ---------- -----------
Total Current Assets 476,465 165,147 (115,705) 525,907
Due from related party 101,818 -- -- 101,818
Property and equipment (net of accumulated depreciation) 5,354 204,005 -- 209,359
Investment in Ceva Hungary 53,833 -- (53,833) --
Intangible assets (net of accumulated amortization) -- 5,195 -- 5,195
Deferred income taxes 5,000 -- -- 5,000
----------- ----------- ---------- -----------
Total Assets 642,470 374,347 (169,538) 847,279
=========== =========== ========== ===========
Liabilities and Stockholders' Equity
Current Liabilities
Due to Ceva International, Inc. -- 63,705 63,705 --
Accounts payable and accrued expenses 276,656 151,334 -- 427,990
Current maturities of long-term debt 11,733 -- -- 11,733
----------- ----------- ---------- -----------
Total Current Liabilities 288,389 215,039 63,705 439,723
Due to Ceva International, Inc. -- 52,000 52,000 --
Long term debt, net of current maturities 238,267 -- -- 238,267
Loans payable to stockholder 653,901 31,942 -- 685,843
----------- ----------- ---------- -----------
Total Liabilities 1,180,557 298,981 115,705 1,363,833
----------- ----------- ---------- -----------
Minority interest in subsidiary -- -- (29,277) 29,277
----------- ----------- ---------- -----------
Stockholders' Equity
Common stock, $.01 par value; 20,000,000 common shares
authorized; 2,000,000 common shares issued and outstanding 20,000 100,000 100,000 20,000
Additional paid-in capital 1,480,000 -- -- 1,480,000
(Deficit) (2,038,087) (24,634) (16,890) (2,045,831)
----------- ----------- ---------- -----------
Total Stockholders' Equity (Impairment) (538,087) 75,366 83,110 (545,831)
----------- ----------- ---------- -----------
Total Liabilities and Stockholders' Equity $ 642,470 $ 374,347 $ 169,538 $ 847,279
=========== =========== ========== ===========
</TABLE>
15
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidating Statement of Operations and Deficit
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
------------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue $ 386,968 $ 616,420 $ -- $ 1,003,388
Direct Costs 35,000 460,915 -- 495,915
----------- --------- ------- -----------
Gross Profit 351,968 155,505 -- 507,473
----------- --------- ------- -----------
Operating Expense
Bad debts 185,906 -- -- 185,906
International expenses 114,044 -- -- 114,044
Professional services 94,174 49,583 -- 143,757
Travel 65,577 -- -- 65,577
Auto expenses 35,760 -- -- 35,760
Telephone 30,332 -- -- 30,332
Employee benefits 12,072 -- -- 12,072
Officer's compensation 11,900 -- -- 11,900
Office expenses 9,118 -- -- 9,118
Entertainment 8,676 -- -- 8,676
Rent 6,241 -- -- 6,241
Miscellaneous 5,378 104,717 -- 110,095
Insurance 3,593 -- -- 3,593
Depreciation 2,812 8,355 -- 11,167
Advertising 1,422 -- -- 1,422
Wages -- 12,095 -- 12,095
Other expenditures -- 7,395 -- 7,395
Other taxes -- 7,315 -- 7,315
----------- --------- ------- -----------
Total operating expense 587,005 189,460 -- 776,465
----------- --------- ------- -----------
(Loss) from operations (235,037) (33,955) -- (268,992)
----------- --------- ------- -----------
Other income (expense)
Interest expense net of other income (39,690) 175 -- (39,515)
Minority interest in loss of
consolidated subsidiary -- -- 16,890 16,890
----------- --------- ------- -----------
Total other income (expense) (39,690) 175 16,890 (22,625)
----------- --------- ------- -----------
Income (loss) before provision for income taxes (274,727) (33,780) 16,890 (291,617)
Provision for income taxes (200) -- -- (200)
----------- --------- ------- -----------
Net income (loss) (274,927) (33,780) 16,890 (291,817)
Retained earnings (deficit), beginning of year (1,763,160) 9,146 -- (1,754,014)
----------- --------- ------- -----------
Retained earnings (deficit), end of year $(2,038,087) $ (24,634) $16,890 $(2,045,831)
=========== ========= ======= ===========
</TABLE>
16
<PAGE>
Ceva International, Inc. and Subsidiary
Financial Statements
March 31, 2000
<PAGE>
Ceva International, Inc. and Subsidiary
Index to the Consolidated Condensed Financial Statements
March 31, 2000
Page
Independent Accountants' Report ........................................ 1
Financial Statements
Consolidated Condensed Balance Sheet.................................. 2
Consolidated Condensed Statements of Operations....................... 3
Consolidated Condensed Statements of Cash Flows....................... 4
Notes to the Consolidated Condensed Financial Statements.............. 5
<PAGE>
To the Stockholders and Board of Directors of
Ceva International, Inc.
We have reviewed the accompanying consolidated condensed balance sheet of Ceva
International, Inc. and Subsidiary as of March 31, 2000, and the related
statements of operations and cash flows for the three month periods ended March
31, 2000 and 1999. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquires of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
/s/ Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
May 24, 2000
1
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Condensed Balance Sheet
March 31, 2000
(Unaudited)
<TABLE>
<S> <C>
Assets
Current Assets
Cash $ 21,904
Accounts receivable (net of allowance for doubtful accounts of $0) 1,028,633
Prepaid expenses 88,617
----------
Total Current Assets 1,139,154
Property and equipment (net of accumulated depreciation) 2,282,395
Intangible assets (net of accumulated amortization) 18,876
Deferred charges (net of accumulated amortization) 175,000
----------
Total Assets 3,615,425
==========
Liabilities and Stockholders' Impairment
Current Liabilities
Accounts payable and accrued expenses 1,008,623
Notes payable 280,000
Loans payable to stockholders 218,889
Current maturities of capital leases 978,998
Deferred credit 76,712
-----------
Total Current Liabilities 2,563,222
Capital leases, net of current maturities 2,522,538
-----------
Total Liabilities 5,085,760
-----------
Minority interest in subsidiary --
-----------
Stockholders' Equity
Preferred stock, non-voting, $.001 par value; 25,000,000 shares authorized;
Series A - redeemable, non-dividend, $50,000 stated value per
share, 100 shares authorized, 17 shares issued and outstanding
($850,000 redeemable preference in either cash or convertible
into common shares) 850,000
Common stock, voting, $.001 par value; 100,000,000 common shares
authorized; 10,229,415 common shares issued and outstanding 10,229
Additional paid-in capital 2,303,424
(Deficit) (4,695,942)
Accumulated other comprehensive income - foreign currency
translation adjustment 61,954
-----------
Total Stockholders' Equity (Impairment) (1,470,335)
-----------
Total Liabilities and Stockholders' Equity $ 3,615,425
===========
</TABLE>
See notes to the consolidated condensed financial statements.
2
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Condensed Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenue $ 184,750 $ 601,675
Direct Costs 223,592 300,838
----------- -----------
Gross Profit (38,842) 300,837
----------- -----------
Operating Expenses 232,163 234,537
----------- -----------
Income (loss) from operations (271,005) 66,300
----------- -----------
Other income (expense)
Interest expense, net of other income (114,826) (31,222)
Minority interest in loss of consolidated subsidiary -- (109,982)
----------- -----------
Total other income (expense) (114,826) (141,204)
----------- -----------
(Loss) before provision for income taxes (385,831) (74,904)
Provision for income taxes -- --
----------- -----------
Net (Loss) $ (385,831) $ (74,904)
=========== ===========
(Loss) per common share $ (0.04) $ (0.01)
=========== ===========
Weighted average of common shares outstanding 9,930,308 7,308,198
=========== ===========
</TABLE>
See notes to the consolidated condensed financial statements.
3
<PAGE>
Ceva International, Inc. and Subsidiary
Consolidated Condensed Statements of Cash Flows
Three Months Ended
March 31,
--------------------------
2000 1999
(Unaudited) (Unaudited)
----------- -----------
Cash Flows From Operating Activities $(143,129) $119,810
Cash Flows From Investing Activities (17,897) (95,025)
Cash Flows From Financing Activities 97,365 140,435
--------- --------
Net Increase (Decrease) in Cash (63,661) 165,220
Cash at Beginning of Period 85,565 72,621
--------- --------
Cash at End of Period $ 21,904 $237,841
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ -- $ --
========= ========
Cash paid for interest $ 115,252 $ 49,477
========= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Accrued expenses converted into common shares $ 190,625 $ --
========= ========
See notes to the consolidated condensed financial statements.
4
<PAGE>
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Condensed Financial Statements
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Item 310 of
Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
three months ended March 31, 2000 and 1999 are not necessarily indicative
of the results that may be expected for the years ended December 31, 2000
and 1999. The unaudited condensed financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1999.
5
