<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-9897
SOLV-EX CORPORATION
(Exact name of registrant as specified in its charter)
NEW MEXICO 85-0283729
(State of Incorporation) (IRS Employer Identification No.)
500 MARQUETTE N.W., SUITE 300
ALBUQUERQUE, NEW MEXICO 87102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (including area code): (505) 243-7701
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 4, 1996, the aggregate value of the voting stock held by
non-affiliates of the Registrant was approximately $210,000,000 based on the
average of the high ($11.875) and low ($10.50) sales prices on that date as
reported by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ").
The number of shares of the Registrant's common stock outstanding at
September 4, 1996 was 22,886,202.
No documents are incorporated herein by reference.
<PAGE>
SOLV-EX CORPORATION
PART I
Unless otherwise indicated, "the Company", "Registrant" and "Solv-Ex" are
used in this report to refer to the business of Solv-Ex Corporation and its
consolidated subsidiaries.
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS.
- -SUMMARY
Solv-Ex Corporation is a New Mexico corporation incorporated in 1980, which
has concentrated its efforts in recent years towards the improvements of its
existing, and development of new, technology to process and recover bitumen
(heavy, low specific gravity, oil) and mineral products from oil sands. The
Company's technologies, several of which are patented, have been tested at its
Albuquerque Pilot Plant and Research Center with results which the Company
believes are favorable. The technologies have not been demonstrated on a
commercial basis. The Company has received no significant revenues from
operations.
The Company's principal assets are its technology (including the Pilot
Plant and Research Center) and two oil sands leases in Canada. The Company's
executive offices are located at 500 Marquette N.W., Suite 300, Albuquerque, New
Mexico, 87102 and its telephone number at that address is (505) 243-7701.
The Company was originally organized for the purpose of developing a
process to extract bitumen from oil sands. Bitumen is a semi-solid hydrocarbon
compound which can be converted through an upgrading process into crude oil
(referred to herein as "pipelineable crude oil" or "PCO-Registered Trademark-")
which meets specifications for being transported by pipeline into fungible
markets for the oil. Through years of research and testing at its Research
Center and Pilot Plant in Albuquerque, New Mexico, the Company has developed and
continuously improved a patented process for bitumen extraction which it
believes is commercially attractive at today's oil prices, particularly in view
of stronger markets which have developed for heavier crude oils. It has also
developed a patented process to extract marketable mineral products from the
fine clays contained in oil sands or in waste tailings which exist as a result
of oil sands processed by others.
Historically, a significant part of expenses incurred by the Company to
develop its technology have been classified as research and development for
accounting purposes. Funds to perform such work have been raised through sales
of Common Stock (in public and private offerings), as well as exercise of
options, government grants and a joint venture. The Company's operations
through 1995 had resulted in operating losses and its inability to obtain
adequate funding to build an initial stage plant that would allow the Company to
commence commercial production of bitumen. This had resulted in an Independent
Auditors' Opinion indicating there was substantial doubt as to the ability of
the Company to continue as a going concern. Principally as a result of the
Company raising approximately $73,000,000 in debt and equity financing during
the fiscal year ended June 30, 1996 which has provided adequate funding to both
conduct normal operations and to begin construction of an initial stage plant
that, once completed, would allow the Company to commence commercial production
of
<PAGE>
bitumen, the Independent Auditors' Opinion for 1996 no longer has an
explanatory paragraph for uncertainties concerning the Company's ability to
continue as a going concern.
During the last four fiscal years, Solv-Ex has made significant
improvements in its extraction technologies for both bitumen and mineral
products contained in the fine clays. These improvements have resulted from
extensive pilot plant operations, together with extensive work with independent
third parties, both as to technology and projected capital and operating costs
for commercial plants using the technology. As hereinafter described, continued
progress has enabled the Company to raise funds for such work on an on-going
basis.
During the year ended June 30, 1995, the Company completed a detailed
feasibility study for development of and commercial operations on the Bitumount
Lease, one of its two oil sands leases (see "BITUMOUNT LEASE" under Item 2.
Properties). On the basis of this study, a decision was made to proceed with
development of the Bitumount Lease and raise funds required for construction of
an oil extraction and upgrading plant. During the fiscal year ending June 30,
1996, the Company raised approximately $43.8 million in equity investments from
United States and European-based investors and an additional $33 million in
convertible debt through European investors. In addition, the Company received
$500,000 from United Tri-Star Resources Limited ("UTS"), which holds a 10%
working interest in the Bitumount Lease, as an advance towards construction in
process. At June 30, 1996, the Company had recorded approximately $23,756,000
as Construction in Process towards commercial operations and believes that the
funds it has on hand (together with the 10% of costs to be paid by UTS) are
sufficient to permit it to complete a facility (the "initial stage plant") which
is expected to produce marketable bitumen at an initial rate of 100,000 barrels
per month. Construction and commissioning of the plant is expected to be
completed during the first quarter of calendar year 1997.
The Company originally planned to begin oil production at a rate of 14,000
barrels per calendar day of a pipelineable crude oil upgraded from bitumen, to
be followed by a minerals extraction plant about one year later. However, the
initial stage plant will commence operations at the lower rate and initially
will not have facilities to upgrade the bitumen to PCO-Registered Trademark-.
See "BITUMOUNT PROJECT" AND "MARKETING AND FINANCE - OIL" under this Item 1 for
a description of circumstances related to the change in plans for initial
operations, as well as information with respect to the capital which will be
required to achieve design capacity and minerals extraction capability.
The Company believes that demonstration of operating cash flow from
production and sale of bitumen, if reasonably in line with projections, should
provide a basis for obtaining the additional funds necessary to expand the
initial stage plant, to add the equipment necessary to upgrade the bitumen to
pipelineable crude oil ("PCO-Registered Trademark-") and to add the minerals
extraction facility. As described more fully below, because the Company's
bitumen extraction technology does not use solvents or other toxic reagents, the
waste resulting from the bitumen extraction process can be used as clean
backfill even though it is not processed for recovery of minerals and metals.
The Company considers completion of the initial stage plant on the
Bitumount Project as a matter of priority because the Company's oil sands lease
for this project requires installation of productive capacity by December 14,
1997 in order to extend the lease into its
-2-
<PAGE>
third term without additional action by the Company or governmental approval
(see "BITUMOUNT LEASE" under Item 2. Properties).
- -DESCRIPTION OF BUSINESS DEVELOPMENT
Much of the Company's work during the mid-1980's was performed pursuant to
a joint venture with Shell Canada Limited during 1987 and 1988, which
successfully processed approximately 1,000 tons of oil sands for bitumen
recovery using a solvent extraction process. The oil sands processed by the
venture were mined from the Athabasca region of Northern Alberta in Canada,
which is known to contain the world's largest deposits of oil sands. The
venture was terminated in 1988 due to declining oil prices at the time, but it
served to establish the technical feasibility of the Company's bitumen recovery
process. Upon termination of the venture, the Company received a bonus of
$250,000 for successful completion of the work. As hereinafter described, the
Company has greatly simplified and achieved significant improvements in its
process since termination of the Shell venture, the most notable of which has
been elimination of solvent use in bitumen extraction.
In 1988, the Company acquired the 100% working interest in its own oil
sands lease (the "Bitumount Lease") from Can-Amera Oil Sands, Inc. ("Can-
Amera"), a Canadian company organized in 1953 to develop oil sands deposits and
which had held the lease since December, 1955. In connection with this
transaction, Can-Amera will receive a royalty equal to C$.07 per barrel for oil
production from the lease. (See Item 2. Properties, under the caption
"BITUMOUNT LEASE"). The Bitumount Lease Property is known to contain
substantial quantities of surface minable bitumen-bearing material and is
currently the subject of the Company's efforts to develop its own commercial
project.
In December 1989, in a transaction independent from acquisition of the
Bitumount Lease, the Company also acquired approximately 48.5% of the
outstanding stock of Can-Amera and received an assignment of voting rights to an
additional 22.5%. During the 1993 fiscal year, certain Corporate Notes issued
by Can-Amera in 1955 were redeemed with Can-Amera Common Stock, which diluted
the Company's control to approximately 60.5%. The remaining 39.5% of the
outstanding stock of Can-Amera not controlled by the Company is held by
approximately 600 other shareholders.
As of July 1, 1994, the Company entered into an agreement with United Tri-
Star Resources Limited ("UTS"), a Canadian oil and gas company headquartered in
Toronto, Ontario, the stock of which is listed on the Toronto Stock Exchange.
As more fully described in this Item 1 under the caption "BITUMOUNT PROJECT,"
UTS provided the Company with C$3 million towards completion of a feasibility
report for development of the Bitumount Lease and certain pre-construction
activities in connection therewith. Pursuant to the agreement, UTS also
acquired an undivided 10% working interest in the Bitumount Lease and has the
option to acquire 10% of any working interest acquired by Solv-Ex (on the same
terms and conditions as Solv-Ex) in other projects for oil sands development in
the Athabasca Region using the Solv-Ex technology. The Company is in the process
of finalizing a limited partnership agreement with UTS pursuant to which UTS
will pay its 10% share of project costs (in addition to amounts paid in 1995),
$500,000 of which has already been paid by UTS pursuant to an informal
understanding pending completion of financing arrangements for the project.
(See "MARKETING AND FINANCE - OIL" and "BITUMOUNT PROJECT" under this Item 1.)
-3-
<PAGE>
In July 1995, Solv-Ex acquired a second oil sands lease (adjacent to and
much larger than the Bitumount Lease) from Petro-Canada. (See Item 2.
Properties, under the caption "FORT HILLS LEASE"). Pursuant to the above
described UTS Agreement, UTS acquired an undivided 10% working interest in the
Petro-Canada Lease by paying 10% of the acquisition cost.
During the last four fiscal years, the Company modified its Albuquerque
Pilot Plant to incorporate the latest improvements in its bitumen extraction
process and to add process equipment required for production of minerals from
the fine clays associated with oil sands, including oil sands waste tailings.
During this period, extensive pilot work was conducted on a continuing basis to
demonstrate both bitumen extraction and production of minerals from oil sands
and tailings. More than 100 tons of tailings and 300 tons of oil sands crude
ore were processed under the program, all of which were obtained from the
Athabasca region of Northern Alberta. The initial phase of the program
regarding minerals extraction was conducted with the assistance of the Alberta
Oil Sands Technology and Research Authority ("AOSTRA"), which committed to
provide $300,000 for the program pursuant to an agreement entered into in
November 1992. AOSTRA is a Crown corporation (owned by the Province of Alberta)
and can recover a maximum of three times the amount of its contribution from
certain defined future commercial operations which use the technology.
There are currently two major operations in Northern Alberta which produce
synthetic crude oil from the oil sands. These operations have generated vast
amounts of residues (or "tailings"), which are known to contain significant
quantities of various minerals and metals, primarily aluminum, titanium,
potassium and iron. However, the tailings from these operations are currently
being contained in large, deep ponds which many observers believe represent an
environmental problem. Following the joint venture with Shell, the Company
undertook a substantial research and test program for commercial recovery of
minerals and metals from the fine clays contained in both oil sands and tailings
in an effort to improve the overall economics of production operations. As a
result of such efforts, the Company has also developed patented process
technology which it believes can be used in commercial operations for recovery
of minerals and metals, either from tailings generated by others or from primary
production of bitumen from oil sands. The products will be initially extracted
as metallic sulfates, which can easily be processed into either an intermediate
mineral compound or elemental metal, depending upon the market into which such
products will be sold.
In September, 1994 the Company entered into an agreement with one of the
two major Athabasca operators, Suncor Inc. ("Suncor"). Under this agreement,
Suncor granted the Company access to its tailings for the purpose of
constructing and operating a plant adjacent to the tailings to demonstrate use
of the Company's patented technology to process tailings for recovery of mineral
and metal products. In the Spring of 1996, however, the Company decided to
undertake development of its technology for recovery of metals and minerals from
fine clays associated with oil sands from the Bitumount Lease as a more
efficient means of commercializing the technology in connection with planned oil
extraction on the lease. Following this decision and discussions with Suncor,
the agreement was terminated in August, 1996. The Company has had further
discussions with Suncor and believes that it will be allowed access to tailings
for processing when appropriate. Because the minerals extraction plant will be
located on the Bitumount Lease, however, it will be necessary to truck tailings
from the existing ponds to the completed minerals extraction plant in order to
commercially prove the technology as applicable to tailings. The minerals/metals
-4-
<PAGE>
extraction facility, when completed on the Bitumount Lease, would only process
these tailings to demonstrate the technology, however, and both a new agreement
with Suncor and a new minerals/metals plant at a location closer to the tailings
would be required for a commercial operation to process tailings.
Work is continuing at the Company's pilot plant for the purposes of (i)
testing further improvements or changes made from time to time in the Company's
processes; (ii) producing minerals in bulk quantities in connection with
marketing activities; and (iii) additional testing of the Company's patented
process and design for a new electrolytic cell to produce aluminum metal from
alumina contained in the Athabasca fine clays.
Solv-Ex has recently incorporated Solv-Ex Canada Limited in Alberta,
Canada, which is a wholly owned subsidiary expected to be the operating entity
for Canadian operations.
Duo-Ex Corporation ("Duo-Ex"), a wholly owned subsidiary of the Company and
its wholly owned subsidiary, Shale Research, Inc. ("Shale"), were incorporated
in 1981 and 1988, respectively. These subsidiaries had been involved in the
development of processes to extract hydrocarbons from oil shale. Duo-Ex and
Shale have both been inactive corporations since the fiscal year ended June 30,
1987 because these operations were transferred to the Company. Neither Duo-Ex
nor Shale has any assets, liabilities, or operations.
In 1993, the Company formed Applied Remedial Technologies, Inc. (doing
business as Applied Remediation Technologies or "ART") as another wholly owned
subsidiary which employs most of the personnel at the pilot plant.
During the fiscal year ended June 30, 1996, neither the Company nor any of
its subsidiaries has been involved in any bankruptcy, receivership, merger or
consolidation; has acquired or disposed of any material amount of assets
otherwise than in the ordinary course of business; nor experienced any material
change in its mode of conducting business.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
Not applicable inasmuch as the Company is engaged in business in a single
industry segment.
NARRATIVE DESCRIPTION OF BUSINESS.
-PROCESS DESCRIPTION AND COMMERCIAL DEVELOPMENT
The Company has developed a bitumen extraction process that combines
continuous extraction and hot water treatment of oil sands without
conventional air flotation and without use of caustic soda. Initially, the
oil sands are mined using conventional open pit methods and transported to
the plant. The oil sands are then crushed and conditioned with hot water and
steam in a manner which allows for easy removal and stockpiling of rocks and
other oversize materials using standard mechanical equipment for eventual
return to mined out areas of the pit as backfill. The remaining material
consists of water, bitumen, fine clays and coarse sand, which is fed to
conventional equipment for mechanical separation without significant
agitation. Pilot work has clearly established that under these conditions,
the "thermal shock" causes the bitumen to readily separate from the fine
clays and coarse sand, where it readily
-5-
<PAGE>
"floats" on the surface of a standard thickener tank without addition of air.
The fine clay and clean coarse sand are easily separated through
conventional hydraulic vessels which have been commonly used for many years
to make similar separations in the sand, gravel and clay industries.
The Company's process as initially developed utilized a solvent to assist
in stripping the bitumen from the fine clays. However, results of extensive
pilot work performed during the last two years has established that use of
solvent is not necessary, which results in major reductions of capital and
operating costs in comparison to the earlier solvent process.
Once the bitumen is removed from the oil sands, it can be upgraded to
produce a marketable and pipelineable crude oil using one of several alternative
upgrading processes. Initially the Company plans to sell the bitumen into
established markets. Although this will result in a lower price per barrel than
would be received for an upgraded product, the cost of production without the
upgrader is also lower. Historically, it is difficult to establish a dependable
correlation between the price which could be received for bitumen (a very heavy
crude) or intermediate Canadian heavy oil as compared to the price for light,
sweet crude oils. In recent years, however, the differentials between the market
prices for heavier crudes and light, sweet crude have narrowed because of
fundamental changes in supply and demand patterns as well as the ability of
refineries to efficiently process heavier, sour crudes.
The Company believes that production and sale of bitumen from the initial
stage plant will generate positive operating cash flow. When cash flow or third
party financing allows, the Company plans to add an upgrading facility (a
commercially-available visbreaker) to the initial stage plant and accomplish
upgrading to PCO-Registered Trademark- at the plant site. In order for the
Company to do so, substantial amounts of additional funding (as hereinafter
described) will be required, and there can be no assurance that the Company will
be able to obtain the required funds. However, the Company believes that
demonstration of the bitumen extraction technology in the initial stage plant,
together with operating cash flow therefrom, will greatly facilitate
availability of additional capital required. (See "MARKETING AND FINANCE - OIL"
and "BITUMOUNT PROJECT" under this Item 1. for a more complete discussion of
these factors.)
The clay fines, which have been stripped of remaining soluble bitumen, can
then be further processed to recover contained metals or minerals using sulfuric
acid agglomeration followed by leaching and precipitation or crystallization of
minerals contained in leach solutions. Most process water will be continuously
recirculated in a closed circuit, which significantly reduces loss (and waste)
of heat and eliminates the need for conventional tailings ponds. Based upon
tests conducted at the Albuquerque pilot plant, the processed fine clays should
be environmentally suitable for stockpiling and return to the open pit as
backfill. Any water which is discharged will be of suitable environmental
quality for discharge into natural watercourses. Even without further
processing, the clay fines can be used as backfill.
-BITUMOUNT PROJECT
Solv-Ex believes that its work at the Albuquerque Pilot Plant and through
independent third party laboratories and pilot facilities has demonstrated the
Company's technology for co-production of oil and minerals from oil sands crude
ore and fine clays also associated with the oil sands. With respect to oil
production, significant technological improvements have been made and
incorporated into the materials handling, sand separation, bitumen extraction
and PCO-Registered Trademark- upgrading components of the production facility.
Completion and operation of the initial
-6-
<PAGE>
stage plant will determine the actual capabilities of the Company's bitumen
extraction process and technology, as well actual production costs achieved
through the technology.
The oil sands plant being constructed at the Bitumount Lease at the present
time is designed to recover 14,000 barrels of bitumen per calendar day using
four production modules. However, because of financial constraints which
impaired the Company's ability to complete total financing for the plant
(originally estimated at $125 million), the plant is now scheduled to begin
operations in the first quarter of calendar year 1997 at a rate of about 100,000
barrels of bitumen per month using a single production module followed shortly
thereafter by a second module which has already been ordered. See "MARKETING AND
FINANCE - OIL" under this Item 1 for a description of circumstances related to
the change in plans for initial operations.) As cash flow or additional
financing allows, the capacity of the initial stage plant will be expanded by
installing and commissioning the additional production modules to reach design
capacity. To the extent cash flow or third party financing is available, the
initial stage plant will be further expanded to add the facility to upgrade the
bitumen to pipelineable crude oil and to recover minerals and metals from the
clay fines.
Previous work by the Company has also established that the sand and fine
clays associated with the Bitumount Lease oil contain precious minerals. As
production operations proceed, a thorough assessment will be made as to the
quantities of precious metals contained in the sand and clay obtained through
initial bitumen production and whether or not they exist in sufficient
quantities to warrant commercial recovery. With respect to the precious metals,
should they be found to exist in commercially recoverable quantities, the
Company does not believe it will be necessary to conduct a complete drilling
program for the purpose of establishing a commercially minable reserve in
accordance with industry standards. Since these metals will not be the primary
focus of the initial development program, a relatively minor amount of
development drilling, coupled with pre-production and blast hole drilling in the
pit, should provide the Company with sufficient advance information in order to
plan for recovery of these metals in any areas of the oil sands deposit where
they are found to exist in commercial quantities.
As described above, the Company entered into an agreement as of July 1,
1994, with UTS pursuant to which UTS contributed C$3 million towards the cost of
completing a feasibility report for development of the Bitumount Lease and
certain pre-construction activities in connection therewith. Pursuant to the
agreement, UTS also acquired an undivided 10% working interest in the Bitumount
Lease and has the option to acquire 10% of any working interest acquired by
Solv-Ex (on the same terms and conditions as Solv-Ex) in other projects for oil
sands development in the Athabasca Region using the Solv-Ex technology,
including the project for tailings processing. At present, UTS is a co-tenant
in the Bitumount Lease. UTS has advised the Company that it is fully prepared to
fund its 10% share of project costs (some of which has already been funded by
UTS), and the Company and UTS are in the final stages of completing a limited
partnership agreement pursuant to which the balance of such contributions will
be made. The partnership, which will hold the 100% working interest in the
lease, will be owned 90% by Solv-Ex and 10% by UTS.
As a part of work performed under the UTS agreement, more than 200 tons of
newly mined oil sands from the Bitumount Lease were transported to the Company's
Albuquerque Pilot Plant for processing in order to develop additional design
data for the planned plant and to further demonstrate the process for recovery
of bitumen and co-production of minerals from the clay fines following removal
of rocks and clean sand.
-7-
<PAGE>
As previously described, the initial feasibility study prepared by the
Company and UTS relates to a plant designed to produce more than 14,000 barrels
per calendar day (approximately 5.1 million barrels per year) of a medium weight
crude oil (16.5oAPI) which, with minor blending with lighter weight diluent,
will meet specifications for pipeline transportation. However, additional
bitumen testing and research conducted in July and August, 1996 at independent
third party pilot facilities has established that a somewhat lighter marketable
oil can be produced with relatively minor additions to the visbreaker as
originally designed and it is now planned to incorporate these additions into
the upgrader when added to the plant. These additions would also increase the
yield of PCO-Registered Trademark- from bitumen to about 15,000 barrels per day.
Although the 15,000 barrel per day PCO-Registered Trademark- plant is still
the Company's objective, Solv-Ex believes that building and commissioning the
bitumen-only plant using a single production module initially will demonstrate
the extraction technology in the field and facilitate the financial ability to
expand the plant to achieve the stated goal and, perhaps, accelerate the
technical and financial ability to further expand operations. See "MARKETING
AND FINANCE - OIL" under this Item 1 for a discussion of marketing arrangements
contemplated by the Company with respect to anticipated oil production.
The estimated capital cost of the initial stage plant operating at the rate
of 100,000 barrels per month of bitumen is approximately $70 million, 90% of
which will be supplied by the Company with the remaining 10% being supplied by
UTS. At June 30, 1996, approximately $23,756,000 had been spent for construction
and related activities. After completion of the initial stage bitumen extraction
plant, the Company estimates that it will cost an additional $65 million to
reach design capacity and to add the upgrading facility and utilities necessary
to produce PCO-Registered Trademark- at the rate of 14-15,000 barrels per day.
Thereafter, the estimated amount of additional capital required to complete the
minerals extraction facility is approximately $35 million, depending upon the
slate of initial products. (See "MARKETING AND FINANCE - MINERALS" and "RESEARCH
AND DEVELOPMENT" under this Item 1.) The oil extraction plant is being
constructed in a modular form, to facilitate expansion when financing is
available. If third party financing is not available, the Company will depend
upon operating cash flow from the sale of the bitumen in order to expand the
plant and achieve production of PCO-Registered Trademark-. In addition to the
ability of the Company's extraction process to perform in line with expectations
for productive capacity, product quality and operating costs, the market price
for oil products on a world-wide basis (as well as for bitumen on a localized
basis) will also have a significant impact on operating cash flow. Accordingly,
there can be no assurance that operating cash flow will be sufficient to permit
expansion even if the process performs as expected.
The original feasibility study prepared as a part of the UTS work program,
including estimates of capital and operating costs, market analysis and product
marketing, was reviewed in a report prepared by The Pace Consultants (the "Pace
Report"), a member of the Jacobs Engineering Group. The report has been of
considerable assistance to the Company in obtaining financing during the fiscal
year ended June 30, 1996, which the Company believes allow it to construct and
commence operations of the initial bitumen extraction plant. All tests which
the Company has completed indicate that the bitumen extraction technology will
result in the production of bitumen which is marketable and which can be sold at
a profit. Since the technology has not been tested on a commercial scale, there
can be no assurance that the bitumen extraction plant will perform as
anticipated, will be completed on schedule or that it will not require
modifications to achieve anticipated performance.
-8-
<PAGE>
With respect to the Bitumount Lease, it should also be noted that under the
terms of the existing Lease, productive capacity must be installed prior to
December 15, 1997 in order to renew the Lease under existing terms. Regulations
of the Alberta Ministry of Energy also provide for lease renewal without
production but the Company does not anticipate that it will be necessary to
extend the lease under these provisions. (See Item 2. Properties, under
the caption "BITUMOUNT LEASE" regarding renewal of the Lease without installed
productive capacity).
The Company received formal approval of its plans to proceed with
construction of the bitumen extraction plant, PCO-Registered Trademark-
upgrading facility, and minerals extraction facility from the Energy and
Utilities Board, under the Alberta Ministry of Energy in December 1995. As part
of the permitting process, the Company prepared an environmental impact
assessment required under the Alberta Environmental Protection and Enhancement
Act, and conducted an extensive program of community consultation with
environmental groups and other interested parties in the Fort McMurray, Alberta,
area.
Solv-Ex management is aware of the importance which will be attached to the
operating results from the initial stage plant for bitumen extraction, including
results as to technological performance, product quality and cash operating
costs, and has based its projections upon the latest information available to
the Company.
As in the case of any new operation, particularly one in which a new or
second generation technology is involved, the degree of success will be measured
against actual operating results and will probably be affected by factors which
have not been considered by or known to the Company. However, the Company has a
very large resource base and believes that sufficient work has been performed to
justify its projections and its confidence that the bitumen and mineral
extraction processes will perform in line with expectations. While there can be
no assurance that this will be the case or that product markets will not change
in a manner which adversely affects the ability to generate operating earnings,
it is the intent of Solv-Ex to prove its technology through operation in a
manner which: (i) will facilitate obtaining additional capital required for
expansion; and (ii) expand its operations to the optimum productive capability
of its resource base to the extent permitted by available capital and markets
for its products.
The Company plans to take an aggressive approach in applying for
governmental approvals to expanded operations for both oil and minerals as soon
as it has been able to demonstrate the commercial success of each phase of its
technology. Among other things, the Company believes that this is particularly
important in the case of successful bitumen extraction and production of PCO-
Registered Trademark-, which would economically justify third party construction
of additional pipeline capacity into the area, eliminate the requirement for
initial transportation of production by truck into the market and increase the
cash flow for pipelineable oil by as much as $2 per barrel. While there can be
no assurance that the Company will be able to accomplish these objectives,
management believes that it is important to emphasize the importance of being
able to achieve success through initial operations and the impact which initial
operations, if successful, will have on the Company's ability to develop a
multi-billion barrel oil resource base with co-production of minerals and metals
on a world-class scale.
-9-
<PAGE>
-COMMERCIAL PROCESSING OF TAILINGS
The two large-scale existing extraction facilities in operation in the
Athabasca region of Alberta both use a hot water process to extract the oil
(bitumen) from the oil sands. These operations generate massive quantities of
waste known as "fine tails", which are pumped into large tailings ponds. As
discussed above under the caption "General Development of Business," the Company
previously processed more than 100 tons of such material at its Pilot Plant for
the purpose of demonstrating the technical and economic feasibility of producing
minerals therefrom. Equally as important, however, the Company also believes
that the pilot work demonstrated that its process will separate and detoxify the
emulsified water contained in the tailings (about 60-80% by weight) and that the
final clean residue following processing will be environmentally inert in terms
of water soluble minerals and thereby suitable for return to the operators' open
pit mines as clean backfill.
As hereinbefore mentioned, the test work conducted by the Company has
established that after remaining soluble bitumen has been stripped from the
tailings, contained minerals (primarily alumina, with by-product sulfates) can
be readily extracted using agglomeration with high strength sulfuric acid
followed by leaching. Once the minerals are thus in solution, recovery in
marketable form can be accomplished by a combination of proprietary and
conventional techniques using equipment which has been commercially proven in
other applications.
The Company believes that its mineral extraction technology can be of
significant value in detoxifying extensive, existing tailings ponds in the
Athabasca region at the two existing facilities. Although previously the
Company had entered into an agreement with one of the two oil sands operators in
the Athabasca region for access to the tailings to construct and operate a
demonstration plant utilizing the Company's mineral extraction technology, that
contract has been terminated. The Company's intent now is eventually to
construct a minerals extraction facility at the initial stage plant currently
under construction, and to use that facility both for extraction of minerals
from the Company's bitumen ore as well as to detoxify tailings moved to the
plant by pipeline or truck. The purpose will be to demonstrate on a commercial
scale the economic and technical feasibility of using the Company's process to
recover the metal products in marketable quantities while concurrently
detoxifying contained water and producing a final residue which is
environmentally suitable for use as backfill in mined out pits or natural
depressions. The Company has no agreement with either operator in the Athabasca
region for the supply of tailings, but the Company believes that it will be able
to obtain tailings when appropriate. The economic viability of the minerals
extraction facility is not dependent on the processing of any tailings, however.
Rather, if the minerals extraction facility is able to process and detoxify the
tailings as Pilot Plant tests indicate, it will provide a means to detoxify the
huge existing tailings ponds on a commercial and potentially economic scale.
(See "MARKETING AND FINANCE - MINERALS" and "RESEARCH AND DEVELOPMENT" under
this Item 1.)
- MARKETING AND FINANCE - OIL
On June 20, 1995, Solv-Ex entered into a letter agreement with Calgary
based Gibson Petroleum Ltd. ("Gibson") for marketing upgraded crude oil to be
produced from the Bitumount Lease. Gibson currently handles more than 300,000
barrels of oil per day through its two pipelines, nine terminals and a
transportation fleet which will move Solv-Ex production to market until new
pipeline capacity is available. Through its major terminal facilities at
-10-
<PAGE>
Edmonton and Hardisty, Gibson already markets and provides market access for
heavy crude oil to eastern Canada and the mid-western U.S. through the
InterProvincial Pipeline ("IPL") and to the west coast through the Transmountain
Pipeline.
Gibson is also the operator for an underground facility near Fort McMurray,
Alberta, which produces bitumen at a reported rate of about 2,400 barrels per
day and has the demonstrated capability to market the bitumen which will be
produced from the initial-stage plant. While the Company has not yet entered
into a separate letter agreement or definitive agreement with Gibson for the
marketing of bitumen, the Company has on-going discussions with Gibson on this
point and is confident that it will be able to enter into an agreement when
appropriate.
The Company anticipates that Gibson will be acting as the oil marketing arm
for the project (including bitumen) with the objective of obtaining the highest
price available at the plant gate (referred to as the "Netback Price"). This
entails handling all transportation, logistics, diluent procurement/blending and
market analysis of the best available stream into which the bitumen and the PCO-
Registered Trademark- will be delivered. Based on the information available to
the Company, projected direct operating costs (excluding interest expense,
depreciation, amortization, taxes and royalties) for the production of bitumen
from the Company's initial-stage plant are in the range of $5.50 per barrel,
with the expectation that such costs will drop below $5 per barrel by reason of
economies of scale as production is increased. When the plant reaches full
capacity with the installed PCO-Registered Trademark- upgrading facility, the
Company anticipates that the operating costs will be less than $6 per barrel of
PCO-Registered Trademark-. In this regard, the largest component of direct
operating costs is the cost of mining oil sands ore, overburden and interburden.
On the basis of construction work performed to date at the Bitumount Project,
the Company believes that these costs will be approximately $3 per barrel
produced if the extraction process performs as expected.
Under present market conditions for bitumen, if the first stage plant were
now in operation the Netback Price which the Company would receive for bitumen
would be more than $13 per barrel, which to a large degree reflects the recent
strength in the world oil market. There can be no assurance that the market for
bitumen will not weaken and many observers expect to see lower overall oil
prices in the relatively near future. However, if the first stage plant performs
as expected, the Company believes it will be able to maintain operating cash
flow even if the price of bitumen drops significantly.
At such time as the Company is able to add upgrading facilities and produce
PCO-Registered Trademark-, it is expected that the market price for the
Company's product will be more closely aligned with the market price for West
Texas Intermediate ("WTI") oil, an industry benchmark for light, sweet crude
oil. In this regard, medium weight Canadian crude oils similar to the planned
PCO-Registered Trademark- product can be expected to sell at a discount of $3-5
per barrel from the WTI price, which would yield a Netback Price equal to WTI
minus $7-10 per barrel after taking into account the cost of transportation by
truck, blending and diluent costs, terminal charges and miscellaneous marketing
expenses. During the last year, the WTI price has been within a range of
approximately $17-25 per barrel, although there can be no assurance that these
prices are indicative of future prices. The market price for bitumen cannot be
as closely correlated to the WTI price; however, the Company does not envision
that the price for bitumen would in any event be less than 50% of the WTI price.
-11-
<PAGE>
Bitumen is a very heavy oil (7-8oAPI) that can be blended for pipeline
delivery to refineries. Based on tests performed by the Company through an
independent laboratory and the Company's Pilot Plant, the Company believes that
it will be able to consistently produce bitumen which meets market
specifications.
When the PCO-Registered Trademark- upgrading facility has been installed,
the Company expects to be able to upgrade the bitumen to pipelineable crude oil
(PCO-Registered Trademark-) using a process involving a visbreaker. A
visbreaker is a piece of equipment used in refineries throughout the world to
reduce the viscosity of heavy oil through application of pressure and heat in a
vessel. The Company's visbreaker design requires more than 6,000 barrels per
day of production to feed the visbreaker during commissioning. The visbreaker
technology currently in use by other companies, with certain modifications or
additions as tested by Solv-Ex at pilot plants operated by independent third
parties, is expected to produce a uniform and stable PCO-Registered Trademark-
and can process bitumen containing more than .5% solids.
In its effort to arrange project financing, Solv-Ex and UTS retained
Charter Oak Capital (and its Canadian associate Glenpower Investments, Inc.,
collectively "Charter Oak") in May, 1995, as their placement agent to
complete project financing. Charter Oak was paid an initial placement fee of
$50,000 and, at closing of any financing arranged by it, will receive further
fees equal to 1.75% of funds raised in project debt or equity (.5% for funds
sourced by Solv-Ex or UTS) but in no event less than $1,750,000. Charter Oak
is also reimbursed on a current basis for reasonable out of pocket expenses.
The Company has paid Charter Oak no additional fees to date. At the present
time, the efforts of Charter Oak are limited in nature because the Company
believes it has sufficient funds to complete the initial stage bitumen plant
and because of the events described below. Funds raised to date by the
Company are not characterized as project financing as contemplated by the
agreement with Charter Oak.
During the fiscal year ended June 30, 1996, primarily starting in February
but continuing to date, the Company has been the subject of numerous reports in
the media which have questioned the ability of the Solv-Ex technology to perform
as projected by the Company. In addition, numerous media reports have been
issued regarding an investigation being conducted by the Securities and Exchange
Commission into trading of Solv-Ex Common Stock, as well as reported
investigations by the Federal Bureau of Investigation and a Los Angeles grand
jury into such trading activities. More recently, there has been an extensive
series of publications in Europe concerning allegedly improper investment
activities of a suspended (and now terminated) fund manager for a major
institution involved in raising capital for Solv-Ex during the period January-
April, 1996.
The management of Solv-Ex is not aware of any investigation being conducted
by governmental authorities which is targeted towards allegations of any
improper activities conducted by the Company, its officers, directors and
employees in connection with trading in its Common Stock or the transactions
pursuant to which capital was raised as previously described. The Company has
pledged its full cooperation to governmental regulatory authorities in any
investigations which are being or may be conducted into such trading activities
or transactions. Moreover, the Company does not believe that any of the media
reports questioning the viability or efficacy of the technology are based upon
any in-depth knowledge of or research into the technology, including access to
confidential or proprietary information concerning operation of the Albuquerque
pilot plant, which is only made available to persons who have executed
confidentiality agreements with the Company. (See Item 3, Legal Proceedings, for
a description of certain actions taken by Solv-Ex with respect to
-12-
<PAGE>
improper use of certain confidential information which was provided to third
parties and trading in its Common Stock.)
Solv-Ex believes that such publicity has had a significant negative impact
on its ability to complete financing for its total capital requirements,
including the efforts by Charter Oak to consummate project debt, because of: the
extreme volatility in the price of its Common Stock since January, 1996;
inferences drawn from media reports to the effect that the Company was involved
in improper activities; concerns by prospective lenders that the technology may
involve a higher degree of risk than was originally perceived; and the extensive
and wide-spread coverage of negative publicity towards the Company which has not
abated.
Solv-Ex further believes that questions regarding the ability of the
technology to perform and achieve positive operating cash flow will be addressed
and answered through operation of the initial stage oil (bitumen) facility.
Similarly, although not within the same degree of control by the Company, Solv-
Ex intends to vigorously pursue the litigation it has initiated (and cooperate
fully with regulatory authorities) in an effort to ascertain the full extent of
the motives and methods underlying the negative publicity and its impact in the
marketplace.
-MARKETING AND FINANCE - MINERALS AND ALUMINUM
The discussion set forth under this caption with respect to marketing is
applicable to the Company's plans to produce minerals through processing of
tailings or through co-production of minerals from the fine clays contained in
its own oil sands leases. As noted above, the Company anticipates that it will
first co-produce minerals from the fine clays contained in its own oil sands
leases. The Company does not currently have any agreement with any other entity
to process any tailings.
Work performed by the Company at its Albuquerque Research Center and Pilot
Plant has resulted in production of alumina which meets specifications for
metallurgical grade alumina (the feed in aluminum smelters to produce aluminum
metal) using a sulfuric acid leach process to recover the alumina from the fine
clays and achieve or exceed required product specifications through established
crystallization and calcining processes. Evaluation of the Company's process by
both independent consultants and sources within the alumina/aluminum industry
has confirmed the ability to achieve these results within projected operating
costs. However, the Company presently believes that there are opportunities to
market intermediate products produced in its process which are economically more
attractive than producing alumina for third party smelters and does not
presently intend to market alumina to smelters.
The Company has also designed and tested an electrolytic cell which will be
used for the production of aluminum metal from the alumina expected to be
produced in the minerals extraction facility. Based on the initial tests of the
electrolytic cell, it appears that it will permit the production of aluminum in
a manner that consumes less electrical power and with lower capital costs than
conventional aluminum smelters. See also "RESEARCH AND DEVELOPMENT", below.
The Company has received a United States Patent on the new technology used in
the electrolytic cell, as well as a patent for the process which produces the
unique grade of alumina used in the Solv-Ex electrolytic cell. In this regard,
the alumina
-13-
<PAGE>
is by this particular process is extremely fine and significantly more
soluble in a molten bath of electrolyte than alumina produced conventionally.
See "PATENTS", below.
Testing to date on the unique grade of alumina also indicates that it may
be suitable for the catalyst market, which represents a very high value added
product in comparison to metallurgical grade alumina. See also "RESEARCH AND
DEVELOPMENT", below.
An important step in the Company's sulfuric acid leach process is the
ability to solubilize minerals in the leach solutions ("leach liquors") in the
form of metallic sulfates. These sulfates, primarily aluminum sulfate and the
double salt of potassium-aluminum sulfate, are easily recovered through
crystallization and represent intermediate products in the overall process to
produce metallurgical grade alumina. The Company's process is not limited to
the fine clays recovered through bitumen extraction and has also been
successfully tested on the fine clays contained in oil sands overburden and
interburden (between "pay zones" of oil sands horizons. Accordingly, production
of minerals and metals can be expanded considerably beyond the scope of initial
bitumen or expanded production of PCO-Registered Trademark- when the processes
have been commercially proven in the field.
Testing and product research has been very encouraging towards being able
to sell these intermediate products into established markets for industrial
minerals. Work to date indicates that certain of these products appear to be
attractive as a replacement or substitute for higher priced products currently
being used. Although the ultimate objective of the Company is large-scale
production of metallurgical alumina as hereinafter discussed, the Company's
initial strategy is to penetrate established markets for the intermediate
products in order to develop operating cash flow during the period in which
markets are fully developed for metallurgical grade alumina and other potential
products. Although market penetration cannot be assured for the intermediate
products, negotiations are being conducted with both end users and existing
suppliers of such products, and the Company is optimistic that satisfactory
marketing arrangements can be concluded before production begins. See also
"RESEARCH AND DEVELOPMENT", below for a discussion of a synthetic mineral which
Solv-Ex has produced at the pilot plant and which appears to have physical
characteristics rendering it highly suitable for use as a filler in the paper,
paint and plastics industries.
The Company is also investigating potential markets for the leached clays
(otherwise a final residue or waste), which with minor additional treatment has
physical properties which appear to qualify the material as another marketable
"synthetic mineral" having a variety of potential uses.
Solv-Ex has worked with ITC Corporation, Baltimore, Maryland, and other
industry experts with the objective of expanding the scope of minerals to be
marketed beyond metallurgical grade alumina, particularly in the area of
industrial and synthetic minerals. ITC is a privately owned specialty and
industrial mineral technical sales and export distribution company with a
presence in Asia, North America, Europe and Latin America. However, the
Company's recent research and marketing efforts have been directed towards
minerals not covered by its arrangements with ITC and the future marketing
relationship will be relative to certain non-metallurgical grades of alumina,
titanium dioxide, clay-derived minerals and ferrous sulfate and will be
contingent upon the ability of the Company to produce such products. ITC will
not be engaged to market the Company's any metallurgical grade or catalytic
alumina produced.
-14-
<PAGE>
Penetration of industrial mineral markets cannot be assured and the Company
recognizes that market penetration is universally regarded as difficult for a
new producer, irrespective of product quality. Oftentimes, attempted market
entry encounters significant price reductions by existing producers in an effort
to maintain market share. Nevertheless, the Company is encouraged by test
results and marketing discussions to date and, assuming product quality is
established, believes that its ability to produce industrial minerals as low-
cost by-products should greatly enhance its competitive position as a producer
and marketer.
As discussed above, the Company believes it has the capability to become
a producer of metallurgical alumina in an industry which has utilized the basic
Bayer process to produce alumina for more than 100 years. Although sale of
industrial minerals can provide revenue enhancement and operating cash flow for
the initial plant to process tailings, markets for some of these products are
limited in comparison to the quantities which would be generated by large-scale
tailings processing or expanded operations on the Company's oil sands leases.
Accordingly, the Company plans to phase-in production of alumina at its initial
plant in order to (i) establish product characteristics and quality on a
consistent basis for the alumina catalyst market and (ii) focus upon production
of low cost aluminum metal from such alumina using the Company's new
electrolytic reduction cell. See "RESEARCH AND DEVELOPMENT", below for a
discussion of the new electrolytic cell.
The primary reasons why intermediate products and alumina can be produced
inexpensively from fine clays associated with the Athabasca oil sands include:
(i) no additional cost is incurred in mining the material; (ii) the fine clays
are recovered in the proper particle size for processing without the need for
costly crushing and grinding; and (iii) testing has established that the fine
clays are very amenable to sulfuric acid leach without any pre-treatment unlike
fine clays common to many other geographical regions.
The projected operating costs per ton of alumina using the Company's
process is substantially below the cost of any known producer using the
conventional Bayer process to produce alumina from bauxite and is well below the
lowest quoted market price for alumina in recent years. Although the Company's
initial work produced alumina quite similar to Bayer-produced alumina, the work
performed to produce the intermediate synthetic products also resulted in a
somewhat different alumina which is very fine, highly porous, highly soluble in
molten electrolyte at low temperature (750 DEG C) and ideally suited for use in
the new Solv-Ex electrolytic cell. Although Solv-Ex can still produce the more
conventional alumina, the Company believes that a better strategy now is to
concentrate on its own requirements for alumina to produce aluminum metal and
alumina catalysts and, if it is later deemed appropriate when the Solv-Ex
technology has been commercially proven, adapt to requirements of conventional
smelters or work with industry to adapt conventional smelters to the unique
Solv-Ex alumina.
-RESEARCH AND DEVELOPMENT
The Company has an on-going research program with respect to determining
the full range of potential products which can be produced from the Athabasca
fine clays using its technology. Much of this work is conducted in conjunction
with end users of various products or entities which specialize in marketing
various potential products other than metallurgical grade (or "smelter grade")
alumina. The objective of this program is to optimize the product revenue
stream which can be derived from minerals production, recognizing that
metallurgical grade alumina provides the economic foundation for minerals
production because
-15-
<PAGE>
of the potential magnitude of minerals production and relatively limited
markets for other products which may be produced. Among the ongoing research
are the following:
The use of an electrolytic cell to produce aluminum metal from
metallurgical grade alumina produced through the minerals extraction
process. Currently the Company is testing various cells and electrodes
which appear to produce aluminum on a pilot process more efficiently, at
lower temperatures, than the traditional Hall-Herault cell used in the
aluminum industry. The Company has tested a prototype cell and believes
that the use of temperatures as much as 200 degrees. Celsius lower than
the conventional method will permit the use of non-consumable anodes as
compared to the graphite anodes which are consumed in the Hall-Herault
cell's operations. In addition to the lower temperatures, the use of non-
consumable anodes will also result in a significant cost savings. Although
considerably more work must be performed to confirm total feasibility of
the process, the results of testing to date have been very encouraging and
the Company has in fact produced aluminum metal in tests of the cell at the
Company's Albuquerque Research Center and Pilot Plant.
The Company is also testing means of producing a potassium-based synthetic
mineral which can be used as a pigment and filler in the paper, paint, and
plastic industries. This mineral appears to have physical characteristics,
such as brightness, similar to titanium dioxide that is currently being
used. The Company refers to this product as "TiO2-S-Registered
Trademark-." Although initial indications are favorable, further research
and market analysis needs to be accomplished on this product. In this
regard, a commercial pilot test of the product for use as a filler is
scheduled to be performed at an industry-recognized facility in the near
future in order to confirm bench-scale work already performed
successfully.
Other research and development is ongoing on other aspects of the minerals
extraction process as well. There can, however, be no assurance that the
research and development efforts, even if successful, will result in
commercially-viable processes.
-SOURCE AND AVAILABILITY OF RAW MATERIALS
The Company believes that its oil sands leases represent a major resource
base that can provide a source of raw materials for its process technology for
many years into the future. Successful exploitation of the Company's technology
on the Bitumount Lease could also create the opportunity for acquisition of
other oil sands leases in the immediate vicinity (in addition to the Fort Hills
Lease acquired from Petro-Canada).
In this regard, the oil sands deposits located in the Athabasca region of
Northern Alberta in Canada are among the largest in the world, and are also
known to contain significant quantities of various minerals. Mining operations
in the region have been conducted for oil alone for more than 25 years. To
date, however, there have been no significant operations to extract the mineral
values contained in the fine clays because commercially viable technology had
not been developed to do so. As a result, the fine clays produced in existing
facilities in the Athabasca region and elsewhere are stored in huge tailings
ponds which are considered to be "hazardous materials" under Canadian law.
Similar oil sands deposits containing significant minerals values are located in
located in a number of countries throughout the world including the Soviet
Union, Colombia, Venezuela, Madagascar, Brazil and Jordan.
-16-
<PAGE>
If the Company is able to demonstrate its ability to process tailings in
a manner which results in an environmentally acceptable product and in a
manner that is technically and financially successful, the available quantity
of tailings now existing and which will be generated in the future could
provide a source of feed for a large-scale processing plant or plants for
many years into the future. However, there can be no assurance that the
Company will be able to enter into such agreements as may be required with
existing oil sands operators for a large-scale plant to process tailings,
irrespective of the Company's technical and economic success in demonstrating
the ability to process clays contained in its lease or in tailings obtained
from other producers of oil sands.
Oil sands mining operations have been conducted on a limited scale in the
United States for such uses as asphalt road materials. The oil sands deposits
found in the United States, none of which have been significantly delineated,
are predominantly located in Utah, Alabama, California, Texas and Kentucky.
Domestic deposits of oil sands tend to contain less bitumen per ton than their
Athabasca counterparts and are not as attractive for commercial development.
-PATENTS
Solv-Ex (including its wholly owned subsidiaries) has been granted numerous
process patents in the United States, Canada and other countries covering its
bitumen and minerals extraction technologies, both for oil sands and oil shale.
The Company also has several patent applications pending for both its bitumen
and minerals extraction technologies for oil sands, and routinely files
applications for new patents to update its patent protection as improvements in
technology or new discoveries are made.
The Company's basic bitumen extraction process is covered by a Canadian
patent which does not expire until January 7, 2009. On December 15, 1994, an
additional patent application was filed in the United States with respect to
improvements which have been made in the bitumen extraction process, and the
Company has also filed for patent protection in Canada. There is no assurance
that this patent will be granted in the United States or in Canada, but the
Company does not believe that failure to issue the patent would have a material
effect on its operations or competitive position.
The Company's basic minerals extraction process for oil sands and fine
clays contained therein is also covered by two United States patents which
expire on June 23, 2009 and February 7, 2012, respectively. Applications are
pending for Canadian patents on the same process which, if issued, would expire
17 years following date of issuance. There can be no assurance that the
Canadian patents will be issued, although other patents obtained by the Company
in the U.S. have been granted in Canada in cases where application has been
made. In the event the Canadian patents are not granted, there would be no
impact on the ability of the Company to extract minerals from its own leases.
If such patents are not issued in Canada, it could result in other persons using
the Company's proprietary technology. However, Company believes its competitive
position is protected through secrecy agreements entered into with both of the
oil sands operators which are producing crude oil and which have large supplies
of such tailings.
In 1996, the Company received a United States patent for its new aluminum
reduction cell. This patent expires in March 2013. The Company has also
applied for, but has not yet received, a Canadian patent on this cell.
-17-
<PAGE>
The process patents are owned exclusively by Solv-Ex and are not subject to
any retained rights or royalties by any third parties. In the case of the
patents, the Company may consider licensing its technology or other arrangements
whereby the technology could be used for development of other leases in the
Athabasca Region, but has not at present determined the basis upon which any
such arrangements would be made. In this regard, it should be noted that
process patents are oftentimes complicated and may not always adequately protect
the patent holder's exclusive right to use from competitors using very similar
technology. However, the Company does require that confidentiality agreements
be executed by persons or entities given access by the Company to its
proprietary information in order to further protect its competitive position and
the value of its patents.
The Company plans to register trademarks with the United States Patent,
Trademark and Copyright office for PCO-Registered Trademark- (the Company's
trademark for pipelineable crude oil) and TiO2-S-Registered Trademark- (the
Company's tradename for a substitute filler and pigment for titanium dioxide in
the paper, paint and plastics industries).
-SEASONAL NATURE OF BUSINESS
The businesses of the Company and its subsidiaries are not considered
seasonal; however, access to certain properties may be limited at times due to
adverse weather conditions.
-WORKING CAPITAL PRACTICES
The Company and its subsidiaries, as development stage companies, have
established no practices relating to working capital items.
-DEPENDENCE UPON SINGLE CUSTOMER
With respect to anticipated production of oil from the Bitumount Lease, the
Company believes that alternative marketing arrangements to those made or
contemplated with Gibson Petroleum would be available and that it will not
necessarily be dependent upon a single customer for sale of its oil. (See
"MARKETING AND FINANCE - OIL" under this Item 1 for a discussion of such
marketing arrangements.) Similarly, the Company does not believe that it will
be dependent upon a single customer for sale of its mineral products.
-BACKLOGS
Not applicable.
-RENEGOTIATION OF PROFITS
Not applicable. However, see "-BITUMOUNT LEASE" under ITEM 2. PROPERTIES,
for a discussion of the manner in which the royalty rate will be established in
the event this property is placed into production.
-COMPETITIVE CONDITIONS
A number of companies are in various stages of developing bitumen
extraction processes for Athabasca oil sands and can be expected to have far
greater financial,
-18-
<PAGE>
personnel, technical, and marketing resources than the Company. Other than
maintaining a general familiarity with the types of processes these companies
are pursuing, the Company does not attempt to monitor the status of each of
these companies' projects. The Company does not believe, however, that any
of such other technologies involve co-production of minerals.
Large-scale extraction of bitumen for production of pipelineable crude oil
(PCO-Registered Trademark-) is currently being conducted by two entities in the
Athabasca region of Alberta, Canada near the Company's Bitumount Lease. While
these organizations have far greater financial, personnel, technical and
marketing resources than the Company, the Company believes its technology for
oil production, particularly when combined with co-production of minerals,
offers significant advantages over current operations including:
(i) in contrast to existing operations, the Solv-Ex process for bitumen
extraction does not thoroughly mix the bitumen and fine clays, which
must then be processed using caustic soda, naphtha solvent and
costly separation equipment; accordingly, there is no requirement
for conventional tailings containment ponds and subsequent
detoxification of tailings, which eliminates environmental risk and
reduces reclamation costs;
(ii) the Solv-Ex process does not involve use of chemical reagents which
affect quality of process water, thereby allowing total
recirculation of process water without total loss of heat;
(iii) the mineral-bearing fine clays, which account for an average of
approximately 15% of the weight of the oil sands, become a revenue
producing asset as opposed to an item of cost in terms of mining,
transportation to the plant and final disposal; and
(iv) gaseous sulfur emissions generated by burning fuel or in the oil
upgrading process are an asset used to produce sulfuric acid for
mineral production as opposed to requiring capital and operating
costs for emissions control.
With respect to the oil and various metal products which the Company
expects to produce, the Company will be competing against entities having much
greater financial, technical personnel and marketing resources than the Company.
In the case of expected oil production from the Bitumount Lease, the initial
product will be bitumen, a much heavier crude than the light sweet crude (or
other more refined products) produced by current open pit operations in
Athabasca and can be expected to sell at a significant discount from these
products. Moreover, these operations have captive pipelines for transportation
of product to market, whereas the Company's product will most likely be
transported to market by truck at a much higher transportation cost until
additional pipeline capacity is constructed into the area, of which there can be
no assurance. The Company believes, however, that these product market
disadvantages are offset by the following factors, irrespective of the separate
advantages which will be derived from co-production of minerals:
(i) lower operating, environmental and reclamation costs as described
above;
(ii) elimination of major capital expenditures associated with further
upgrading of oil to produce a light sweet crude or other more
refined products;
-19-
<PAGE>
(iii) increased consumption of heavier crudes by refineries which have
installed equipment capable of handling such heavier crudes, which
has resulted in a significant narrowing of the historical price
differential between light and heavy crudes. (See "MARKETING AND
FINANCE - OIL" for a discussion of these factors.)
To the knowledge of the Company, large-scale extraction of bitumen for use
as a crude oil substitute has not occurred in the United States, although
research and testing undoubtedly is conducted from time to time with respect to
known domestic deposits. The Company believes its technology, which has been
tested on domestic deposits for bitumen extraction, will prove to be superior
because its patented mineral extraction process should also be applicable to
fine clays in these deposits, which are similar to the Athabasca deposits,
thereby creating commercial opportunities at lower oil prices. As hereinbefore
noted, however, domestic oil sands deposits generally contain significantly less
bitumen per ton than the Athabasca deposits and will require higher oil prices
before commercial operations become attractive.
With respect to industrial mineral markets, the Company will also be
competing against larger, established producers with far greater financial
resources than the Company, and market penetration cannot be assured until such
time, if any, as the Company is able to enter into sales agreements with
consumers for its products. The Company also recognizes that market penetration
is universally regarded as difficult for a new producer, irrespective of product
quality and price. Oftentimes, attempted market entry encounters significant
price reductions by existing producers in an effort to maintain market share.
Nevertheless, the Company is encouraged by test results and marketing
discussions to date and, assuming product quality is established, believes that
its ability to produce industrial minerals as low-cost by-products should
greatly enhance its competitive position as a producer and marketer.
If Solv-Ex is successful in its plans to commercially produce aluminum from
the alumina in the fine clays associated with the Athabasca oil sands using its
unique grade of alumina and new electrolytic cell, the Company will also be
competing in an international market for sale of its product against established
producers of aluminum having far greater resources than the Company. However,
the Company also believes that it will have a significant cost advantage over
conventional production of aluminum if the cell is placed into commercial
operation and performs as expected. In this regard, technological breakthroughs
have been rare in the history of the aluminum industry and there can be no
assurance that the cell can perform at commercial scale on the same basis as
laboratory testing.
-RESEARCH AND DEVELOPMENT EXPENDITURES
Costs and expenses incurred by the Company in recent years for research and
development activities were approximately:
For Fiscal Year Ended Amount
--------------------- ----------
1996 $4,412,248
1995 $2,117,564
1994 $1,431,431
Costs and expenses incurred by the Company for research and development
activities sponsored by others was none in the fiscal year ended June 30, 1996,
$2,032,956 in fiscal 1995, and none in fiscal 1994.
-20-
<PAGE>
-COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
The Company's Albuquerque Research Center and Pilot Plant is subject to
governmental regulations regarding environmental quality and other matters.
The Company believes that it is in substantial compliance with all applicable
governmental regulations relating to the Pilot Plant's operation. During
fiscal 1996, the Company responded to a request for information from the U.S.
Environmental Protection Agency ("EPA") concerning materials which were
generated by prior operations and which were stored in barrels for several
years at the pilot plant. The matter has been finally resolved in a manner
which does not have a material effect on the Company.
Mining of oil sands deposits, processing tailings and operation of any
commercial scale plant in Canada, insofar as it may involve discharges into the
air and water, disturbances of the land surface, any effect on wildlife or other
environmental impacts, will be subject to regulation under the Alberta
Environmental Protection and Enhancement Act and by the provincial agencies
which have jurisdiction over environmental matters thereunder, and comparable
Federal and local agencies, statutes, ordinances, and regulations in Canada as
well as comparable regulating authorities, laws, and regulations in other
countries. To the extent the Company processes tailing from any other operator
in the Athabasca region, the Company will be required to comply with regulatory
requirements for disposal of materials.
Compliance with these statutory and contractual requirements may
necessitate capital outlays not previously anticipated by the Company. However,
with respect to the plant which the Company expects to construct and operate in
Canada as described herein (See "COMMERCIAL PROCESSING OF TAILINGS" and "-
BITUMOUNT PROJECT"), the Company believes it has adequately anticipated the cost
of compliance with such environmental matters in preparing its estimates of
capital and operating costs.
The Company is presently unable to estimate what additional capital
expenditures will be incurred for environmental control for its projects from
time to time, and such requirements are always subject to change in a manner
which could have a material adverse impact on the Company's current and
anticipated operations. However, in developing its extraction technology, the
Company has spent considerable sums to meet or exceed present and anticipated
environmental regulations in Canada and the United States. By designing the
technology to these standards, the Company believes it has the technology to
convert what would have been environmentally unacceptable waste to potentially
marketable products. This could make the technology more economically efficient
and therefore more competitive than technologies currently in use.
-NUMBER OF EMPLOYEES
As of September 1, 1996, the Company (including its subsidiaries) employed
approximately 54 persons on a full-time basis. Of these employees, 18 are
administrative employees at the Company's Albuquerque offices; 20 are employed
at the Company's Albuquerque Research Center and Pilot Plant; and 16 are
involved in the plant construction, engineering and lease development activities
in the Athabasca region of Alberta, Canada.
In addition, the Company uses other independent contractors from time to
time as required, primarily for construction activities in Canada and third
party testing or consulting
-21-
<PAGE>
with respect to its technology. At present, approximately 200 persons are
employed by contractors of the Company in connection with construction
activities in Canada.
-FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
The Company, as a development stage company, had no operating revenues from
foreign or domestic operations and no significant geographic sales for the past
three years. However, the Company did record $300,000 in contract revenue
during 1993 from its program with AOSTRA, an agency of the Government of Alberta
in Canada as described above, and initial commercial operations are expected to
occur in Canada, from which its products could be marketed internationally (see
"COMMERCIAL PROCESSING OF TAILINGS"). The Company does not believe at present
that Canadian operations will entail a material degree of political risk.
ITEM 2. PROPERTIES.
-BITUMOUNT LEASE
The Company's Bitumount Lease (Alberta Bituminous Oil Sands Lease Number
7276120T05, the "Bitumount Lease") is located on 5,874 acres approximately 300
miles north of Edmonton in Alberta, Canada. The Bitumount Lease was originally
issued on December 15, 1955, and was renewed on December 15, 1976, for an
additional term of 21 years. Annual rental is $C1.00 per acre. As hereinbefore
described, UTS holds an undivided 10% working interest in the Bitumount Lease.
The Bitumount Lease provides for successive 21 year renewal terms if the
property is in production at the end of the preceding term. Under the lease
terms, construction and operation of a plant having a minimum processing
capacity of 10,000 tons per day of bituminous sands or 10,000 barrels of bitumen
per day by December 14, 1997 will satisfy the requirements for renewal. As a
practical matter, the Company does not anticipate any difficulty in proceeding
with third term renewal. Moreover, government regulations allow for third term
renewal without production on terms which the Company could easily meet in any
event, and recent proposed regulations offer the probability that requirements
for third term renewal will be further liberalized in an effort to encourage
additional oil sands development. The Company does not believe there is a
material risk that the lease will be terminated at the expiration of the second
term and will take such action as may be necessary or advisable to extend the
lease.
The production royalty is established by the Alberta Provincial government
and expected to be 1% of gross revenues until invested capital (including
imputed interest and including capital which may be spent for plant expansion)
is recovered, at which time the royalty is expected to be based upon a
percentage of net operating revenues. The Company has held several discussions
with the government regarding computation of royalty for an operation co-
producing minerals and metals with the oil and it has not yet been determined
how this will affect computation of royalties. In any event, payment of
royalties to the government is not expected to have a significant impact on
operation of the initial stage oil plant and, depending upon the ability of the
Company to expand initial operations, may not have a significant impact until
commercial operations have been fully established at ultimate rates of
production.
-22-
<PAGE>
The Bitumount Lease has been extensively core drilled. The results of such
drilling, together with the results of other drilling which has been performed
on adjacent property and made available to the Company, have been analyzed by
the Company and its independent consultants. It is estimated that the Bitumount
Lease contains oil sands with in-place bitumen reserves of approximately 1.4
billion barrels. The fine clays in the oil sands are also known to contain
alumina, titanium, potassium and iron in approximately the same quantities as in
the fine clays contained in the tailings which have been processed by the
Company (See "COMMERCIAL PROCESSING OF TAILINGS"). Gold and silver are also
known to be contained in the oil sands on the Bitumount Lease although
additional drilling or actual processing of the oil sands will be required to
determine whether such metals are present in sufficient quantities to warrant
extraction, although it would be relatively easy to modify plant design to
accommodate additional equipment for recovery of precious metals. The
overburden and interburden in the oil sands, which is also regarded as waste in
conventional operations, are also known to contain recoverable alumina.
Since Solv-Ex received its permits from the Alberta government in December
1995, it has completed site clearing (approximately 1,000 acres) and road
construction (approximately 17 kilometers) activities for the proposed plant on
the Bitumount Lease. Detailed engineering work for the plant construction has
been completed, foundation work and the primary erection of the mine maintenance
building have been substantially completed, and a 450 person camp has been
purchased and moved to the site to house construction employees. Progress is
continuing on the foundation work for the oil and minerals extraction buildings
(the "initial stage plant"). All structural work on the mine maintenance
building and the initial stage plant is scheduled for completion by the end of
October, which will permit the balance of construction, the installation of the
log washers for bitumen extraction, and other construction necessary to complete
the initial stage plant to be completed during the fall and winter seasons. The
scheduled completion and start-up date for the initial stage plant is during the
first quarter of calendar year 1997.
Solv-Ex and its contractors have also engaged in extensive earth-moving
activities on the Bitumount Lease as a part of both construction in process for
the initial stage plant and overburden removal in preparation for oil sands
mining. Based on the work to date, it appears that the cost of mining the
overburden and ore, and transportation of the ore to the initial stage plant,
will be approximately $3.00 per barrel of bitumen to be produced (exclusive of
capital depreciation costs), which is in line with projections. Because the cost
of mining (including overburden removal) is the largest component of projected
operating costs for bitumen or PCO-Registered Trademark- production, this
experience to date significantly reduces one element of risk associated with the
new operation.
Although the initial mine planning was accomplished for operations on the
Bitumount Lease at a production rate of 14,000 barrels of oil per day, many
adjustments have been made to reduce the cost of that plant (previously
estimated to be approximately $125 million) to enable the Company to construct
the initial stage plant and commence bitumen extraction and production with the
funds it has available. As a result, the Company will not include the PCO-
Registered Trademark- upgrading facility in the initial stage plant since the
visbreaker design requires a production capacity of more than 6,000 barrels per
day. Furthermore, the original design contemplated four extraction modules and
two crushers necessary to achieve full production at 14,000 barrels per day;
because of the reduced size of the initial stage plant, production will begin
with a single extraction module and a single crusher. The original design also
contemplated the construction of a co-generation facility at which Solv-Ex would
supply its
-23-
<PAGE>
own electricity and steam for the operations. The modified plan for the
initial stage plant contemplates using power provided by the local utility,
and using leased boilers to provide necessary steam. If the operation of the
initial stage plant proves to be successful as the Company anticipates, it is
easily expandable to achieve or exceed the original goals of 14,000 barrels
per day production and the installation of the minerals extraction facility,
based on the availability of cash flow or third party financing.
-FORT HILLS LEASE
The Company's Fort Hills Lease (Alberta Bituminous Oil Sands Lease Number
7281020T52, the "Fort Hills Lease") covers approximately 50,000 acres, which is
contiguous to the Bitumount Lease. As hereinbefore described, UTS holds an
undivided 10% working interest (as a co-tenant) in the Lease. The terms of the
Fort Hills Lease are the same as for the Bitumount Lease, except that the second
term does not expire until February 18, 2002 and the production requirement to
extend the lease beyond the second term is 25,000 barrels per day.
The Fort Hills Lease was acquired in July, 1995 from Petro-Canada, which
had previously performed extensive core drilling (84 holes) and evaluation work
with respect to the property. As hereinbefore noted, the Fort Hills Lease is
contiguous to the Bitumount Lease and the oil sands reserves on the southeast
quadrant of the Bitumount Lease extend across the lease boundary into the Fort
Hills Lease. At least one other area of the Fort Hills Lease to the north is
also known to contain a major deposit of surface minable oil sands.
Petro-Canada has delivered all of its data concerning this lease to Solv-
Ex, together with remaining core samples which have been held in storage. The
Company has not had sufficient time to review all of this information and
determine its own independent estimate of in-place reserves or the amount of oil
sands which may ultimately be recoverable through surface mining, either for
production of oil alone or with co-production of minerals. However, on the
basis of work performed to date and consultation with personnel who performed
much of the work for the prior owner, the Company believes that the resource
base for bitumen in the Fort Hills Lease is at least three times as large as the
resource base for the Bitumount Lease.
The Company has also been advised that certain areas of the Fort Hills
Lease are considered sensitive by at least one environmental group in terms of
future oil sands development. Although the Company believes that such concerns
may relate to conventional oil sands development, which raises questions that
are not applicable to the Solv-Ex process, the Company has not yet determined
what, if any, impact such concerns may have on its ability to develop the Fort
Hills. However, the Company expects that development of the Fort Hills Lease,
either independently or in conjunction with operations on the Bitumount Lease,
will be on a much larger scale than the planned operation for the Bitumount
Lease and that issuance of permits will entail public hearings and a much more
extensive permitting process.
-THE RESEARCH CENTER AND PILOT PLANT
The Company's Research Center and Pilot Plant is located on 1.5 acres of
land owned by the Company in Albuquerque, New Mexico. It consists of three
separate buildings containing a total of approximately 8,800 square feet. These
buildings contain (i) the pilot plant; (ii) office space, analytical laboratory
and maintenance shop; and (iii) electrical and mechanical equipment. Various
storage tanks, which enable the Company to segregate and
-24-
<PAGE>
store reagents, tailings feedstock and process water for re-use, are located
outside the pilot plant building in secure areas which meet environmental
requirements for storage of such materials.
The laboratory is fully equipped with analytical instruments which provide
a broad range of in-house assay capability. The Company periodically uses
independent laboratories to perform check analyses of its own work and for
performance of certain complicated analyses required for alumina, such as x-ray
diffraction and x-ray fluorescence spectrometry.
In its present configuration, the plant has the capacity to process more
than 48 tons of oil sands per day, from which up to 30 barrels of bitumen per
day can be produced, depending on the grade of oil sands processed. The
quantity of bitumen recoverable from oil sands depends on its bitumen content,
which typically ranges from 4 to 12 percent. The minerals extraction facility
is capable of processing up to about 12 tons of fine clays per day, although
this can be varied depending upon the equipment being used to conduct test runs.
-OTHER PROPERTIES
The Company's headquarters are located in Albuquerque, New Mexico and
occupy approximately 5,400 square feet of leased office space. The Company also
has an interest in another oil sands lease in the State of Utah, which is not at
present considered to be a material asset. In 1996 the Company acquired, from
an unaffiliated party, a 50 acre site at Ruth Lake (about mid-way between Fort
McMurray, Alberta and the Bitumount Lease) to use as a staging area for the
Bitumount Lease construction activities and for possible use as a future
plant to process tailings.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor any of its subsidiaries nor any of their properties
are involved in any legal proceedings considered material to the Company's
operations except as follows.
The Company's stock price and trading volumes have fluctuated widely
recently. The Company has historically generated operating losses and has been
dependent on capital infusion from affiliates and third party investors to
provide capital necessary for continuing operations. Historically, however, the
price of the Company's common stock traded in a range of $1.00 to $6.00 until
January 1995 when the stock price started increasing. In mid 1995 the stock
price started to increase dramatically until it reached more than $30 per share
in February 1996. It generally traded in the high $20's and mid-$30's in
February and March 1996 until late March when, as the result of certain
television and press news broadcasts, the price of the stock tumbled to $7.375.
The dramatic fluctuations and negative press following shortly after a capital
infusion of more than $70,000,000 as discussed above, led the Company to believe
that the downward pressure on the Company's stock price was primarily
attributable to market manipulation by persons not affiliated with the Company.
As a result, in August 1996, the Company filed an action in the United States
District Court for the Southern District of New York against several parties for
breach of confidentiality agreements, fraud, and other improper actions relating
to what Solv-Ex has alleged is part of a campaign on the part of short sellers
to drive down the price of Solv-Ex shares. The defendants in that include Parker
Quillen, Quilcap Corporation, Martin Zweig, Zweig Advisors, Inc., and Weir-Jones
Engineering Consultants Ltd.. This litigation is in the beginning stages and
has not been answered by the defendants.
-25-
<PAGE>
The Company is also aware that the Securities and Exchange Commission is
investigating public trading in the Company's common stock. Finally, the
Company is also aware that a federal Grand Jury in Los Angeles, California is
examining persons believed to have a connection with the trading of Solv-Ex
common stock. The Company has delivered several boxes of documents in response
to a request by the Securities and Exchange Commission; the Company has not been
contacted in connection with the federal Grand Jury investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal market in which the Company's common stock is traded
is the Nasdaq Small-Cap Market.
The table below states the quarterly high and low sales prices for the
Company's common stock as reported by the National Association of Securities
Dealers Automated Quotation System ("Nasdaq"). The quotations reflect inter-
dealer prices, without retail mark-up, mark-down, or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
SALES PRICES
---------------------------
LOW HIGH
-------- --------
<S> <C> <C>
QUARTER ENDED
September 30, 1994 $1.938 $4.875
December 31, 1994 3.00 4.938
March 31, 1995 3.375 4.875
June 30, 1995 3.625 9.25
September 30, 1995 6.50 8.875
December 31, 1995 7.438 16.75
March 31, 1996 6.25 38.00
June 30, 1996 10.125 28.625
</TABLE>
SHAREHOLDERS
The number of holders of record of the Company's common stock as of
September 18, 1996 was approximately 825 according to American Securities
Transfer, Inc., the Company's transfer agent. This number does not include an
unknown number of persons who hold their shares in street name.
DIVIDENDS
The Company has never paid a dividend with respect to its common stock and
does not intend to pay a dividend in the foreseeable future.
-26-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $642,531 89,950 $ 16,749 $ 312,862 $ 10,990
Net (loss) (6,202,177) (1,079,600) (2,439,471) (2,249,607) (758,434)
(Loss) per
common share (.27) (.05) (.13) (.13) (.05)
Total assets 80,166,838 5,376,843 4,319,619 4,101,648 2,382,021
Long-term
obligations 33,057,000 66,500 77,634 89,940 1,434,545
Total liabilities 37,649,972 702,136 271,410 396,415 1,640,458
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE COMPANY'S FINANCIAL STATEMENTS AND NOTES
THERETO. INFORMATION DISCUSSED HEREIN, AS WELL AS IN OTHER ITEMS OF THIS ANNUAL
REPORT ON FORM 10-K, MAY INCLUDE FORWARD-LOOKING STATEMENTS REGARDING FUTURE
EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY, AND ARE SUBJECT TO A
NUMBER OF RISKS AND OTHER FACTORS WHICH COULD CAUSE THE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD LOOKING STATEMENTS. AMONG SUCH
FACTORS ARE: GENERAL BUSINESS AND ECONOMIC CONDITIONS; CUSTOMER ACCEPTANCE AND
DEMAND FOR THE COMPANY'S ANTICIPATED PRODUCTS, INCLUDING THE ABILITY TO PRODUCE
BITUMEN IN THE INITIAL STAGE PLANT IN A MANNER WHICH CONSISTENTLY MEETS MARKET
SPECIFICATIONS; THE COMPANY'S OVERALL ABILITY TO DESIGN, CONSTRUCT AND OPERATE
THE INITIAL STAGE PLANT ON A TIMELY BASIS AND THE ABILITY OF THE PLANT TO
PERFORM IN ACCORDANCE WITH EXPECTATIONS; AND OTHER RISK FACTORS LISTED FROM TIME
TO TIME IN DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE
COMMISSION.
RESULTS OF OPERATIONS
The Company incurred a net loss of $6,202,177 for the fiscal year ended
June 30, 1996 as compared to net losses of $1,079,600 and $2,439,471 for the
years ended June 30, 1995 and 1994, respectively. The 1996 net loss is
significantly greater than losses in previous years because of the greater
corporate activities undertaken in fiscal 1996, including the financing
activities through FIBA Nordic Securities (UK) Ltd., the permitting activities
with the Alberta government (which resulted in the December 1995 permit
issuances), and the construction activities made possible because of the
financing provided through FIBA. In addition, the Company doubled its research
and development expenditures in fiscal 1996. Although the 1995 net loss is less
than the losses incurred in 1994 and 1993, the Company's level of research and
development was significantly greater in 1995 and the smaller loss was
attributable to the fact that $2,032,956 of research and development was funded
by United Tri-Star Resources Ltd. ("UTS"). In 1994, no funds were received
from others for the performance of such work. The loss in all three years
reflects the cost of the Company's pilot work undertaken during the periods for
the purpose of developing and demonstrating the Company's technology for both
bitumen and minerals extraction from oil sands crude ore or oil sands tailings.
-27-
<PAGE>
The Company's expenditures for research and development were $4,412,248,
$2,117,564, and $1,431,431 for the fiscal years ended June 30, 1996, 1995, and
1994, respectively. These costs were incurred primarily for the development of
the Company's processes for extraction of bitumen and minerals from oil sands
and oil sands tailings. In 1996 these costs were also associated with the
development of the electrolytic cell for the production of aluminum metal as
well as research and development associated with the production of other
compounds from the minerals extraction process, such as TiO2-S-Registered
Trademark-. The significant increase in 1996 and 1995 over the prior years
reflects an increased level of activity in connection with work performed by the
Company under its agreement with UTS for development of the Bitumount Lease.
During the fiscal year ended June 30, 1996, the Company raised in excess of
$43,800,000 from sales of its Common Stock, and an additional $33,000,000 of
debt maturing in April 1999. This debt (obtained through FIBA) bears interest at
12% per annum, and is convertible into common stock at $32.50 per share.
Interest is to be paid quarterly through maturity, although the first year's
interest was paid in advance. During the year ended June 30, 1995, the Company
raised $1,598,654 through sales of Common Stock. As a result of these capital
financing activities, the Company believes it has adequate funds to complete the
construction of the initial stage plant, as described above, and to commence
commercial production of bitumen at the rate of 100,000 barrels per month during
the first quarter of calendar year 1997. (See "LIQUIDITY AND CAPITAL RESOURCES"
below under this Item 7). In this regard, it should be noted that the Company
has never generated significant revenues from operations and cannot expect any
significant revenue from operations until operations commence at the initial
stage plant.
The general and administrative expense for the years ended June 30, 1996,
1995, and 1994 were $2,432,460, $1,084,942, and $1,024,789 respectively. The
increases in 1996 from 1995 and 1994 reflects the increased level of operations
of the Company during the 1996 fiscal year, associated with its capital raising
activities, permitting and plant design activities, and the commencement of
construction activities, normal salary increases, and additional personnel
employed at the Company's headquarters and in Canada. Included in the general
and administrative expense are non-cash compensatory expenses for the stock
options and private placements to directors and employees of $185,815 in 1996,
$107,444 in 1995, and $111,352 in 1994.
Revenues were generated primarily from interest earned on cash balances.
The interest income for the years ended June 30, 1996, 1995, and 1994, was
$642,531, $88,793, and $16,714, respectively. The increase in interest income
during 1996 over 1995, and 1995 over 1994 is the result of the greater cash
balances during those years as compared to the preceding year.
The Company does not believe inflation has had a material impact on its
business or operations during the past three years.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires
that long lived assets and certain identifiable intangibles to be held and used
by the Company be reviewed for
-28-
<PAGE>
impairment whenever events indicate that the carrying amount of an asset may
not be recoverable. The effective date of SFAS No. 121 is for fiscal years
beginning after December 15, 1995. The Company does not believe that SFAS
No. 121 will have an impact on its financial statements.
In October 1995, the FASB issued Financial Accounting Standard No. 123
("FAS 123"), "Accounting for Stock Based Compensation." Under the provisions of
FAS 123, companies may elect to account for stock-based compensation plans using
a fair-value-based method or may continue measuring compensation expense for
those plans using the intrinsic-value-based method. Companies electing to
continue using the intrinsic-value-based method must provide pro forma
disclosures of net income and earning per share as if the fair-value-based
method had been applied. The Company intends to continue to account for stock-
based compensation using the intrinsic-value-based method and, as such, FAS 123
will not have an impact on the Company's results of operations or financial
position. FAS 123 becomes effective in fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its liquidity needs for the years ended June 30, 1996,
1995, and 1994 primarily from the proceeds of the sale of common stock and, in
1996, debt financing. The Company received approximately $43,800,000,
$1,600,000, and $2,500,000 during 1996, 1995, and 1994, respectively, from the
sale of Common Stock, and $33,000,000 in fiscal 1996 from long-term debt.
The net working capital at June 30, 1996 was $47,501,245 compared to
$369,289 and at June 30, 1995, and $1,513,908 at June 30, 1994. The significant
increase in working capital from 1995 to 1996 was due to the more than
$76,000,000 of debt and equity financing obtained by Solv-Ex during fiscal 1996,
less the expenditures of those proceeds made for plant design and construction
and the development of the Bitumount Lease. The net decrease in working capital
from 1994 to 1995 was primarily the result of a reduced cash position at year
end resulting from a higher rate of expenditures in connection with the
Company's permitting activities, research and development expenditures and plans
for development of the Bitumount Lease.
Because of its inability to generate significant revenue and obtain
financing for a commercial plant during the fiscal year ended June 30, 1995 (see
captions "COMMERCIAL PROCESSING OF TAILINGS" and the "BITUMOUNT PROJECT"), the
Company's ability to continue as a going concern was not assured and the
Company's independent auditors had issued their opinion on the Company's
consolidated financial statements for the year ended June 30, 1995 on this
basis. However, as a result of significant capital raised by the Company during
the fiscal year ended June 30, 1996, which allows the Company to conduct normal
operations and to construct the Company's initial stage plant for commercial
production of bitumen from oil sands in Alberta, Canada, the Independent
Auditors' Opinion for 1996 no longer has an explanatory paragraph for
uncertainties concerning the Company's ability to continue as a going concern.
As hereinbefore described, the Company believes the on-going work at its
pilot plant has been successful, and that the feasibility report for development
of the Bitumount Lease is positive and clearly justifies project financing
obtained by the Company. The Company believes that its working capital at June
30, 1996, together with the anticipated contribution
-29-
<PAGE>
from its 10% partner, UTS, is sufficient to complete the construction of the
initial stage plant. The Company is optimistic that the initial stage plant
will be operational during the first quarter of calendar year 1997. Based on
information available to the Company as of September 1, 1996, the Company
believes that completion and start up costs for the plant will be
approximately $70,000,000, including approximately $23,756,000 expended
through June 30, 1996, some of which has been expensed in accordance with
generally accepted accounting principles. If the Company and UTS require
additional financing to complete the initial stage plant, there can be no
assurance that the Company will be able to obtain any necessary funding on
reasonable terms. Although the Company believes any such funding could be
obtained, if necessary, the Company is also cognizant of the impact caused by
events occurring in the fiscal year ended June 30, 1996 which the Company
believes impaired to complete its total funding requirements for the
Bitumount Project. See "MARKETING AND FINANCE - OIL" under Item 1 above for a
description of these events. There can be no assurance that similar events
will not occur in the future, which could have a negative impact on the
ability to obtain any such additional financing. The Company has, however,
been successful historically in meeting its cash requirements through sale of
Common Stock, joint ventures and other sources of funding and believes that
it will be able to continue to do so in the future through these sources as
well as operating cash flow which it expects to derive from the initial stage
bitumen plant.
The continuing construction and anticipated operation of the initial stage
plant can be expected to increase the management and staff requirements of the
Company, which will be magnified in the event both project financings are
completed. The Company's plans include expansion of the initial stage plant to
approximately 14,000 barrels per calendar day, including addition of the
upgrading facility and a complete utilities plant at an estimated capital cost
of approximately $65 million. In addition, the Company plans to complete
installation of the minerals extraction plant at an estimated cost to completion
of approximately $30 million, although this estimate could change based upon the
slate of initial products.
While the Company plans to undertake expansion of the initial stage oil
plant and complete the minerals extraction plant during 1997, its ability to do
so will depend upon availability of additional capital and, to a large extent,
upon successful operation of the initial stage plant. While management believes
that the initial stage plant will operate successfully based upon pilot plant
operations and other evaluations performed to date, there can be no assurance
that it will, in fact, operated as anticipated without additions or
modifications. In any event, there can be no assurance that the necessary
financing will be available when needed on reasonable terms. To the extent
plant expansion and further construction is undertaken, or to the extent
additional plants may be constructed, these requirements will be further
increased.
-30-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and schedules of the Company and its
subsidiaries follow. The presentation of supplementary data is not applicable
to the Company.
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets - June 30, 1996 and 1995
Consolidated Statements of Operations - Years ended June 30, 1996, 1995 and
1994 and cumulative from July 2, 1980 (inception)
Consolidated Statements of Stockholders' Equity - For the period from July 2,
1980 (inception) through June 30, 1996
Consolidated Statements of Cash Flows - Years ended June 30, 1996, 1995, and
1994 and cumulative from July 2, 1980 (inception)
Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are inapplicable or the
information required is included in the financial statements or related notes
and therefore have been omitted.
-31-
<PAGE>
KPMG Peat Marwick
6565 Americas Parkway, NE #700
Post Office Box 3939
Albuquerque, NM 87190
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Solv-Ex Corporation:
We have audited the accompanying consolidated balance sheets of Solv-Ex
Corporation and subsidiaries (development stage enterprises) as of June 30,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1996 and cumulative from July 2, 1980 (inception).
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 audit 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Solv-Ex
Corporation and subsidiaries (development stage enterprises) at June 30, 1996
and 1995, and the results of their operations and their cash flows for each
of the years in the three-year period ended June 30, 1996 and cumulative from
July 2, 1980 (inception), in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
September 10, 1996
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS 1996 1995
------------ ------------
Current assets:
Cash and cash equivalents $ 43,902,567 $ 854,719
Accounts receivable 2,154,135 30,000
Deferred financing costs 1,067,285 69,954
Notes receivable - stockholder 1,534,950 -
Prepaid expenses 3,390,920 3,093
Other 44,358 47,159
------------ ------------
Total current assets 52,094,215 1,004,925
------------ ------------
Property, plant and equipment, at cost:
Mineral lease 1,976,432 1,741,983
Pilot plant land 167,768 167,768
Buildings 2,774,171 329,419
Heavy Equipment 5,001,753 -
Field and laboratory equipment 2,124,058 1,105,144
Furniture, fixtures and leasehold improvements 398,143 284,187
Construction in process 14,362,025 1,237,924
------------ ------------
26,804,350 4,866,425
Less accumulated depreciation and amortization 1,078,871 834,377
------------ ------------
Net property, plant and equipment 25,725,479 4,032,048
------------ ------------
Patents, at cost, net of accumulated amortization
of $47,109 in 1996, and $42,087 in 1995 364,081 337,270
Deferred financing costs 1,613,353 -
Other assets, at cost 369,710 2,600
------------ ------------
$ 80,166,838 $ 5,376,843
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
Current liabilities:
Accounts payable and accrued expenses $ 4,468,605 $ 526,709
Deferred compensation 99,000 99,000
Current installments of long-term debt 25,367 9,927
------------ ------------
Total current liabilities 4,592,972 635,636
------------ ------------
Long-term debt, excluding current installments 33,057,000 66,500
------------ ------------
Total liabilities 37,649,972 702,136
------------ ------------
Stockholders' equity:
Common stock, $.01 par value
Authorized 30,000,000 shares; issued and
outstanding 22,846,649 shares in 1996, and
20,277,440 in 1995 228,466 202,774
Additional paid-in capital 67,556,328 23,549,871
Unearned compensation - (12,187)
Deficit accumulated during development stage (25,267,928) (19,065,751)
------------ ------------
Total stockholders' equity 42,516,866 4,674,707
------------ ------------
Commitments and contingencies
(notes 2, 4 and 5)
$ 80,166,838 $ 5,376,843
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
-31-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
AND CUMULATIVE FROM JULY 2, 1980 (INCEPTION)
<TABLE>
YEARS ENDED JUNE 30 CUMULATIVE
----------------------------------------- FROM JULY 2, 1980
1996 1995 1994 (INCEPTION)
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Contract fees $ - $ - $ - $ 5,278,637
Interest 642,531 88,793 16,714 2,342,563
Gain on sale of equipment - 1,157 35 15,078
State grant - - - 407,760
----------- ----------- ----------- ------------
642,531 89,950 16,749 8,044,038
----------- ----------- ----------- ------------
Expenses:
Research and development 4,412,248 2,117,564 1,431,431 19,387,570
Research and development
funded by others - (2,032,956) - (2,032,956)
General and administrative 2,432,460 1,084,942 1,024,789 14,623,819
Write-off of mineral lease - - - 1,447,453
----------- ----------- ----------- ------------
6,844,708 1,169,550 2,456,220 33,425,886
----------- ----------- ----------- ------------
Minority interest in loss
of subsidiary - - - 113,920
----------- ----------- ----------- ------------
Net (loss) $(6,202,177) $(1,079,600) $(2,439,471) $(25,267,928)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Weighted average number of
common shares outstanding 22,749,079 19,950,701 18,665,018 14,423,596
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
(Loss) per common share $ (0.27) $ (0.05) $ (0.13) $ (1.75)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial staements.
-32-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON DEFICIT
STOCK ACCUMULATED
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP- UNEARNED DURING
PER -------------------- PAID-IN STOCK TIONS COMPEN- DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE SATION STAGE TOTAL
------ ---------- -------- ---------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issued to officers/directors:
For costs related to patent,
July 2, 1980 $0.010 2,700,000 $ 27,000 $ -- $ -- $ -- $ -- $ -- $ 27,000
For cash, September 1, 1980 0.010 1,500,000 15,000 -- -- -- -- -- 15,000
For services, September
1, 1980 0.010 750,000 7,500 -- -- -- -- -- 7,500
Sold to nonaffiliated parties
for cash:
September 10, 1980 0.010 100,000 1,000 -- -- -- -- -- 1,000
September 15, 1980 0.125 200,000 2,000 23,000 -- -- -- -- 25,000
October 10 and
December 31, 1980 0.250 1,520,000 15,200 364,800 -- -- -- -- 380,000
Subscribed, net of offering
costs and commissions -- -- -- 3,392,736 40,000 -- -- -- 3,432,736
Common stock warrants -- -- -- 400 -- -- -- -- 400
Net (loss) -- -- -- -- -- -- -- (72,058) (72,058)
---------- -------- ---------- ---------- -------- -------- --------- ----------
Balance at June 30, 1981 6,770,000 67,700 3,780,936 40,000 -- -- (72,058) 3,816,578
---------- -------- ---------- ---------- -------- -------- --------- ----------
Sold for cash in public
offering, July 17, 1981 1.000 4,000,000 40,000 -- (40,000) -- -- -- --
Issued to officers/directors,
November 2, 1981:
For costs related to patent 0.010 200,000 2,000 -- -- -- -- -- 2,000
For cash 0.010 200,000 2,000 -- -- -- -- -- 2,000
Sold to non
affiliated parties
for cash, December 22, 1981 1.000 225,000 2,250 222,750 -- -- -- -- 225,000
Increase in additional paid-in
capital for stock options -- -- -- 161,875 -- -- -- -- 161,875
Issued for mineral leases,
February 2, 1982 1.875 150,000 1,500 279,500 -- -- -- -- 281,000
Subscribed -- -- -- 26,625 250 (22,000) -- -- 4,875
Net (loss) -- -- -- -- -- -- -- (499,100) (499,100)
---------- -------- ---------- ---------- -------- -------- --------- ----------
Balance at June 30, 1982 11,545,000 115,450 4,471,686 250 (22,000) -- (571,158) 3,994,228
---------- -------- ---------- ---------- -------- -------- --------- ----------
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
-33-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON DEFICIT
STOCK ACCUMULATED
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP- UNEARNED DURING
PER -------------------- PAID-IN STOCK TIONS COMPEN- DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE SATION STAGE TOTAL
------ ---------- -------- ---------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase in additional paid-in
capital for stock warrants -- -- -- 468,000 -- -- -- -- 468,000
Increase in additional paid-in
capital for stock options
and subscriptions -- -- -- 247,600 -- -- -- -- 247,600
Collection on stock
subscription receivable -- -- -- -- -- 12,000 -- -- 12,000
Net (loss) -- -- -- -- -- -- -- (1,646,475) (1,646,475)
----------- -------- ---------- ---------- -------- -------- ----------- -----------
Balance at June 30, 1983 11,545,000 115,450 5,187,286 250 (10,000) -- (2,217,633) 3,075,353
----------- -------- ---------- ---------- -------- -------- ----------- -----------
Sold for cash in private
placements net of
placement costs,
July 7 and July 18, 1983 4.250 1,000,000 10,000 3,966,680 -- -- -- -- 3,976,680
Increase in additional paid-in
capital for stock options -- -- -- 20,525 -- -- -- -- 20,525
Stock subscription receivable:
Collection -- -- -- 10,000 -- -- -- -- 10,000
Issuance of stock,
March 21, 1984 1.000 25,000 250 -- (250) -- -- -- --
Net (loss) -- -- -- -- -- -- -- (3,823,647) (3,823,647)
----------- -------- ---------- ---------- -------- -------- ----------- -----------
Balance at June 30, 1984 -- 12,570,000 125,700 9,174,491 -- -- -- (6,041,280) 3,258,911
----------- -------- ---------- ---------- -------- -------- ----------- -----------
Net (loss) -- -- -- -- -- -- -- (1,786,696) (1,786,696)
----------- -------- ---------- ---------- -------- -------- ----------- -----------
Balance at June 30, 1985 -- 12,570,000 125,700 9,174,491 -- -- -- (7,827,976) 1,472,215
----------- -------- ---------- ---------- -------- -------- ----------- -----------
Stock options exercised:
September 9, 1985 through
June 3, 1986 1.380 22,103 221 30,281 -- -- -- -- 30,502
October 25, 1985 and
May 8, 1986 1.047 10,000 100 10,368 -- -- -- -- 10,468
February 4, 1986 0.750 20,000 200 14,800 -- -- -- -- 15,000
February 5 through
April 30, 1986 1.200 450,000 4,500 535,500 -- -- -- -- 540,000
February 10 and
May 29, 1986 1.219 23,897 239 28,886 -- -- -- -- 29,125
Net (loss) -- -- -- -- -- -- -- (947,636) (947,636)
----------- -------- ---------- ---------- -------- -------- ----------- -----------
Balance at June 30, 1986 13,096,000 130,960 9,794,326 -- -- -- (8,775,612) 1,149,674
----------- -------- ---------- ---------- -------- -------- ----------- -----------
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
-34-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON DEFICIT
STOCK ACCUMULATED
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP- UNEARNED DURING
PER -------------------- PAID-IN STOCK TIONS COMPEN- DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE SATION STAGE TOTAL
----- ---------- ------- ---------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock warrant
exercised:
April 13, 1987 1.500 2,172 22 3,236 - - - - 3,258
Stock options exercised:
April 14 through
June 2, 1987 1.000 14,000 140 13,860 - - - - 14,000
May 11, 1987 1.047 5,000 50 5,184 - - - - 5,234
Net (loss) - - - - - - - (86,296) (86,296)
---------- ------- ---------- ------- ------- ------- ---------- ---------
Balance at June 30, 1987 13,117,172 131,172 9,816,606 - - - (8,861,908) 1,085,870
---------- ------- ---------- ------- ------- ------- ---------- ---------
Stock options exercised:
July 1 through August
31, 1987 1.000 36,000 360 35,640 - - - - 36,000
July 23 through
September 30, 1987 2.000 30,000 300 59,700 - - - - 60,000
July 29 through August
26, 1987 1.625 8,000 80 12,920 - - - - 13,000
May 20, 1988 1.062 20,000 200 21,050 - - - - 21,250
Sold for cash in private
placement net of placement
costs, August 10, 1987
through September 22, 1987 1.875 715,000 7,150 1,203,763 - - - - 1,210,913
Acquisition and retirement
of treasury stock,
September 16, 1987 2.125 (5,000) (50) (10,575) - - - - (10,625)
Sold to directors for cash,
April 25 and 26, 1988 1.125 27,778 278 30,972 - - - - 31,250
Net (loss) - - - - - - - (556,490) (556,490)
---------- ------- ---------- ------- ------- ------- ---------- ---------
Balance at June 30, 1988 13,948,950 139,490 11,170,076 - - - (9,418,398) 1,891,168
---------- ------- ---------- ------- ------- ------- ---------- ---------
(continued)
</TABLE>
-35-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON DEFICIT
STOCK ACCUMULATED
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP- UNEARNED DURING
PER -------------------- PAID-IN STOCK TIONS COMPEN- DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE SATION STAGE TOTAL
----- ---------- ------- ---------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock options exercised:
September 2, 1988 through
June 8, 1989 1.000 54,478 545 53,933 - - - - 54,478
September 6, 1988 through
June 28, 1989 1.047 25,522 255 26,464 - - - - 26,719
September 13, 1988 through
May 3, 1989 1.625 36,500 365 58,948 - - - - 59,313
October 7, 1988 through
May 8, 1989 2.125 20,000 200 42,300 - - - - 42,500
December 29, 1988 through
March 29, 1989 2.312 13,757 137 31,676 - - - - 31,813
January 9 through June
30, 1989 1.219 75,000 750 90,655 - - - - 91,405
January 17 through
January 23, 1989 1.438 91,208 912 135,825 - - - - 136,737
March 10, 1989 1.656 10,000 100 16,462 - - - - 16,562
June 2 through June
8, 1989 1.078 15,000 150 16,022 - - - - 16,172
Sold to director for cash,
September 3, 1988 1.750 20,000 200 34,800 - - - - 35,000
Net (loss) - - - - - - - 1,035,074) (1,035,074)
---------- ------- ---------- ------- ------- ------- ----------- ----------
Balance at June 30, 1989 14,310,415 143,104 11,677,161 - - - (10,453,472) 1,366,793
---------- ------- ---------- ------- ------- ------- ----------- ----------
Stock options exercised:
July 10, 1989 through
September 8, 1989 1.078 77,753 778 83,050 - - - - 83,828
July 21, 1989 through
October 6, 1989 1.047 55,000 550 57,028 - - - - 57,578
July 25, 1989 through
October 4, 1989 1.219 148,076 1,480 178,986 - - - - 180,466
September 11 through
September 20, 1989 1.234 81,012 810 99,190 - - - - 100,000
October 6, 1989 2.156 10,000 100 21,463 - - - - 21,563
October 6, 1989 0.813 10,000 100 8,025 - - - - 8,125
October 18, 1989 1.984 10,000 100 19,743 - - - - 19,843
May 11, 1990 through
May 25, 1990 1.844 20,760 208 38,069 - - - - 38,277
May 18, 1990 1.656 15,000 150 24,694 - - - - 24,844
May 18, 1990 1.625 10,000 100 16,150 - - - - 16,250
Stock issued in connection
with acquisition of
controlling interest in
Can-Amera Oil Sands, Inc.,
December 18, 1989 1.630 75,000 750 121,500 - - - - 122,250
Sold to director for cash,
June 7, 1990 0.500 50,000 500 24,500 - - - - 25,000
(continued)
</TABLE>
-36-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON
STOCK
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP-
PER -------------------- PAID-IN STOCK TIONS
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE
----- ------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Increase in additional paid-in capital for stock
options - - - 87,350 - -
Increase in additional paid-in capital for Directors
Compensation-Stock Purchase - - - 428,000 - -
Net (loss) - - - - - -
---------- ---------- ---------- ------- ---------
Balance at June 30, 1990 - 14,873,016 148,730 12,884,909 - -
---------- ---------- ---------- ------- ---------
Sold to director for cash, July 27, 1990 0.500 100,000 1,000 49,000 - -
Stock options exercised:
August 16, 1990 through August 20, 1990 1.500 20,000 200 29,800 - -
September 13, 1990 1.625 5,500 55 8,882 - -
May 1, 1991 1.500 10,000 100 14,900 - -
May 2, 1991 0.750 30,000 300 22,200 - -
May 2, 1991 1.000 25,000 250 24,750 - -
June 4, 1991 1.156 10,000 100 11,463 - -
Issued to individuals as compensation for services,
November 8, 1990 1.250 1,000 10 1,240 - -
Sold to director for cash, March 12, 1991 1.156 21,620 216 24,784 - -
Sold to director for cash, April 29, 1991 0.500 100,000 1,000 49,000 - -
Increase in additional paid-in capital for
Director Compensation-Stock Purchase - - - - 78,125 -
Net (loss) - - - - - -
---------- ---------- ---------- ------- ---------
Balance at June 30, 1991 - 15,196,136 151,961 13,199,053 - -
---------- ---------- ---------- ------- ---------
</TABLE>
<TABLE>
DEFICIT
ACCUMULATED
UNNEARNED DURING
COMPEN- DEVELOPMENT
SATION STAGE TOTAL
--------- ----------- ----------
<S> <C> <C> <C>
Increase in additional paid-in capital for stock
options - - 87,350
Increase in additional paid-in capital for Directors
Compensation-Stock Purchase - - 428,000
Net (loss) - (1,384,785) (1,384,785)
--------- ------------ ----------
Balance at June 30, 1990 - (11,838,257) 1,195,382
--------- ------------ ----------
Sold to director for cash, July 27, 1990 - - 50,000
Stock options exercised:
August 16, 1990 through August 20, 1990 - - 30,000
September 13, 1990 - - 8,937
May 1, 1991 - - 15,000
May 2, 1991 - - 22,500
May 2, 1991 - - 25,000
June 4, 1991 - - 11,563
Issued to individuals as compensation for services
November 8, 1990 - - 1,250
Sold to director for cash, March 12, 1991 - - 25,000
Sold to director for cash, April 29, 1991 - - 50,000
Increase in additional paid-in capital for
Director Compensation-Stock Purchase - - 78,125
Net (loss) - (700,382) (700,382)
--------- ----------- ----------
Balance at June 30, 1991 - (12,538,639) 812,375
--------- ----------- ----------
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
-37-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON
STOCK
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP-
PER ------------------- PAID-IN STOCK TIONS
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE
----- ------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stock options exercised:
July 19, 1991 1.500 7,000 70 10,430 - -
July 22, 1991 1.063 12,000 120 12,630 - -
July 31, 1991 1.500 8,000 80 11,920 - -
October 17, 1991 through November 7, 1991 1.380 35,000 350 47,950 - -
December 3, 1991 1.500 7,211 72 10,745 - -
January 15, 1992 through April 13, 1992 1.438 35,000 350 49,962 - -
February 26, 1992 1.840 19,500 195 35,685 - -
March 2, 1992 1.500 10,000 100 14,900 - -
March 31, 1992 1.690 15,000 150 25,163 - -
June 10, 1992 1.500 12,000 120 17,880 - -
Sold to director for cash, August 23, 1991 0.500 100,000 1,000 49,000 - -
Increases in additional paid-in capital for
Directors Compensation-Stock Purchase - - - 87,500 - -
Issued to individuals as compensation for services
January 16, 1992 1.380 28,985 290 39,710 - -
Issued to individuals for deferred and other
compensation 1.250 217,000 2,170 269,080 - -
Net (loss) - - - - - -
---------- ---------- ---------- ------- ---------
Balance at June 30, 1992 15,702,832 157,028 13,881,608 - -
---------- ---------- ---------- ------- ---------
---------- ---------- ---------- ------- ---------
</TABLE>
<TABLE>
DEFICIT
ACCUMULATED
UNNEARNED DURING
COMPEN- DEVELOPMENT
SATION STAGE TOTAL
--------- ----------- -------
<S> <C> <C> <C>
Stock options exercised:
July 19, 1991 - - 10,500
July 22, 1991 - - 12,750
July 31, 1991 - - 12,000
October 17, 1991 through November 7, 1991 - - 48,300
December 3, 1991 - - 10,817
January 15, 1992 through April 13, 1992 - - 50,312
February 26, 1992 - - 35,880
March 2, 1992 - - 15,000
March 31, 1992 - - 25,313
June 10, 1992 - - 18,000
Sold to director for cash, August 23, 1991 - - 50,000
Increases in additional paid-in capital for
Directors Compensation-Stock Purchase - - 87,500
Issued to individuals as compensation for services
January 16, 1992 - - 40,000
Issued to individuals for deferred and other
compensation - - 271,250
Net (loss) - (758,434) (758,434)
--------- ------------ ---------
Balance at June 30, 1992 - (13,297,073) 741,563
--------- ------------ ---------
--------- ------------ ---------
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
-38-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON
STOCK
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP-
PER --------------------- PAID-IN STOCK TIONS
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE
--------- ----------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sold for cash in private placements, net of offering
costs and commissions:
July 7, 1992 through September 9, 1992 0.750 600,001 6,000 444,000 - -
October 30, 1992 through December 1, 1992 0.750 466,665 4,667 345,333 - -
December 31, 1992 1.341 157,500 1,575 209,705 - -
January 15, 1993 1.418 25,600 256 36,032 - -
February 28, 1993 1.358 120,000 1,200 161,813 - -
March 1, 1993 1.358 132,000 1,320 177,970 - -
April 6, 1993 2.500 100,000 1,000 222,750 - -
May 31, 1993 3.750 278,777 2,788 1,035,477 - -
June 30, 1993 3.750 28,000 280 104,720 - -
June 30, 1993 3.500 100,000 1,000 349,000 - -
Issued to individuals as compensation for services
and expenses, October 9, 1992 1.250 30,065 301 37,280 - -
Issued as compensation to an officer,
October 9, 1992 1.313 50,000 500 65,125 - -
Redemption of consolidated subsidiary,
Can-Amera Oil Sands, Inc., long-term debt with
Can-Amera Oil Sands, Inc. common stock - - - 1,447,980 - -
Stock options exercised:
December 9, 1992 1.188 10,000 100 11,775 - -
December 22, 1992 1.500 10,000 100 14,900 - -
January 15, 1993 1.500 10,000 100 14,900 - -
March 19, 1993 1.000 25,000 250 24,750 - -
March 19, 1993 1.188 17,211 172 20,266 - -
April 14, 1993 1.000 10,000 100 9,900 - -
June 30, 1993 1.500 13,000 130 19,370 - -
June 30, 1993 2.600 5,000 50 12,950 - -
Sold to directors for cash,
August 6, 1992 through October 16, 1992 0.500 600,000 6,000 294,000 - -
</TABLE>
<TABLE>
DEFICIT
ACCUMULATED
UNEARNED DURING
COMPEN- DEVELOPMENT
SATION STAGE TOTAL
-------- ------------ ---------
<S> <C> <C> <C>
Sold for cash in private placements, net of offering
costs and commissions:
July 7, 1992 through September 9, 1992 - - 450,000
October 30, 1992 through December 1, 1992 - - 350,000
December 31, 1992 - - 211,280
January 15, 1993 - - 36,288
February 28, 1993 - - 163,013
March 1, 1993 - - 179,290
April 6, 1993 - - 223,750
May 31, 1993 - - 1,038,265
June 30, 1993 - - 105,000
June 30, 1993 - - 350,000
Issued to individuals as compensation for services
and expenses, October 9, 1992 - - 37,581
Issued as compensation to an officer,
October 9, 1992 (24,608) - 41,017
Redemption of consolidated subsidiary,
Can-Amera Oil Sands, Inc., long-term debt with
Can-Amera Oil Sands, Inc. common stock - - 1,447,980
Stock options exercised:
December 9, 1992 - - 11,875
December 22, 1992 - - 15,000
January 15, 1993 - - 15,000
March 19, 1993 - - 25,000
March 19, 1993 - - 20,438
April 14, 1993 - - 10,000
June 30, 1993 - - 19,500
June 30, 1993 - - 13,000
Sold to directors for cash,
August 6, 1992 through October 16, 1992 - - 300,000
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
-39-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON
STOCK
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP-
PER --------------------- PAID-IN STOCK TIONS
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE
--------- ----------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Increase in additional paid-in capital for
Directors Compensation-Stock Purchase - - - 150,000 - -
Net (loss) - - - - - -
---------- ------- ---------- --------- ---------
Balance at June 30, 1993 18,491,651 184,917 19,091,604 - -
---------- ------- ---------- --------- ---------
Offering costs and commissions - - - (74,662) - -
Earned compensation - - - - - -
Sold for cash in private placements, net of offering
costs and commissions:
December 27, 1993 3.000 168,000 1,680 474,600 - -
March 8, 1994 3.249 100,000 1,000 299,982 - -
May 4, 1994 2.720 60,000 600 161,784 - -
May 16, 1994 2.820 75,000 750 209,692 - -
June 3, 1994 2.750 350,000 3,500 954,187 - -
June 16, 1994 2.410 196,000 1,960 468,038 - -
Issued to individuals as compensation for
services and expenses:
September 23, 1993 5.200 25,000 250 129,750 - -
March 1, 1994 5.200 10,000 100 51,900 - -
June 28, 1994 2.688 7,800 78 20,885 - -
June 28, 1994 5.000/5.700 22,200 222 119,298 - -
June 28, 1994 0.750 10,000 100 7,400 - -
June 28, 1994 1.500 5,000 50 7,450 - -
Stock options exercised:
December 14, 1994 1.500 8,334 83 12,418 - -
Net (loss) - - - - - -
---------- ------- ---------- --------- ---------
Balance June 30, 1994 19,528,985 195,290 21,934,326 - -
---------- ------- ---------- --------- ---------
</TABLE>
<TABLE>
DEFICIT
ACCUMULATED
UNEARNED DURING
COMPEN- DEVELOPMENT
SATION STAGE TOTAL
-------- ------------ ---------
<S> <C> <C> <C>
Increase in additional paid-in capital for
Directors Compensation-Stock Purchase - - 150,000
Net (loss) - (2,249,607) (2,249,607)
------- ----------- ----------
Balance at June 30, 1993 (24,608) (15,546,680) 3,705,233
------- ----------- ----------
Offering costs and commissions - - (74,662)
Earned compensation 24,608 - 24,608
Sold for cash in private placements, net of offering
costs and commissions:
December 27, 1993 - - 476,280
March 8, 1994 - - 300,982
May 4, 1994 - - 162,384
May 16, 1994 - - 210,442
June 3, 1994 - - 957,687
June 16, 1994 - - 469,998
Issued to individuals as compensation for
services and expenses:
September 23, 1993 (52,000) - 78,000
March 1, 1994 (43,256) - 8,744
June 28, 1994 - - 20,963
June 28, 1994 - - 119,520
June 28, 1994 - - 7,500
June 28, 1994 - - 7,500
Stock options exercised:
December 14, 1994 - - 12,501
Net (loss) - (2,439,471) (2,439,471)
------- ----------- ----------
Balance June 30, 1994 (95,256) (17,986,151) 4,048,209
------- ----------- ----------
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
-40-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON DEFICIT
STOCK ACCUMULATED
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP- UNEARNED DURING
PER -------------------- PAID-IN STOCK TIONS COMPEN- DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE SATION STAGE TOTAL
----------- ---------- -------- ----------- ---------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earned compensation - - - - - - 95,256 - 95,256
Issued to individual
as compensation
July 1, 1994 2.440 10,000 100 24,275 - - (12,187) - 12,188
Sold for cash in
private placements,
net of offering
costs and commissions
December 7, 1994 2.318 668,300 6,683 1,542,670 - - - - 1,549,353
Stock options
exercised:
October 11, 1994 1.840 20,000 200 36,600 - - - - 36,800
November 10, 1994 1.500 8,334 83 12,418 - - - - 12,501
Stock options
exercised with
stock 1.840/1.500 41,821 418 (418) - - - - -
Net (loss) - - - - - - - (1,079,600) (1,079,600)
---------- -------- ----------- ------ ----- -------- ------------ -----------
Balance at June
30, 1995 20,277,440 202,774 23,549,871 - - (12,187) (19,065,751) 4,674,707
---------- -------- ----------- ------ ----- -------- ------------ -----------
Earned compensation - - - - - - 12,187 - 12,187
Issued to individual
as compensation
July 1, 1995 through
November 30, 1995 7.44-11.00 10,200 102 39,652 - - - - 39,754
December 1, 1995
through June 30,
1996 6.25-38.00 13,000 130 133,744 - - - - 133,874
Issued to GFL Advantage
per private placement
agreement 17.270 30,000 300 (300) -
Sold for cash in
private placements,
net of offering costs
and commissions
July 21, 1995 5.696 100,000 1,000 568,625 - - - - 569,625
August 1, 1995 5.688 500,000 5,000 2,839,115 - - - - 2,844,115
January 23, 1996 15.00-19.00 543,860 5,439 8,994,561 - - - - 9,000,000
March 8, 1996 28.365 1,081,967 10,820 30,679,180 - - - - 30,690,000
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
-41-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 2, 1980 (INCEPTION)
THROUGH JUNE 30, 1996
<TABLE>
COMMON DEFICIT
STOCK ACCUMULATED
PRICE COMMON STOCK ADDITIONAL COMMON SUBSCRIP- UNEARNED DURING
PER -------------------- PAID-IN STOCK TIONS COMPEN- DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL SUBSCRIBED RECEIVABLE SATION STAGE TOTAL
----------- ---------- -------- ----------- ---------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock options
exercised:
September 7, 1995 2.600 6,000 60 15,540 - - - - 15,600
October 5, 1995 1.500 10,000 100 14,900 - - - - 15,000
October 24, 1995 2.600 5,000 50 12,950 - - - - 13,000
December 12, 1995 1.500 8,332 83 12,415 - - - - 12,498
February 28, 1996 2.56-5.75 37,500 375 162,424 - - - - 162,799
March 1, 1996 1.38-2.56 12,500 125 17,715 - - - - 17,840
March 5, 1996 2.56-5.75 18,000 180 93,750 - - - - 93,930
March 8, 1996 2.56-5.75 44,000 440 200,185 - - - - 200,625
March 12, 1996 2.560 2,500 25 6,375 - - - - 6,400
March 26, 1996 2.560 10,000 100 25,500 - - - - 25,600
March 27, 1996 2.560 2,500 25 6,375 - - - - 6,400
April 3, 1996 2.560 500 5 1,275 - - - - 1,280
April 18, 1996 1.500 19,400 194 28,906 - - - - 29,100
April 24, 1996 2.560 500 5 1,275 - - - - 1,280
April 30, 1996 1.50-4.91 41,080 411 (411) - - - - -
May 22, 1996 2.560 1,000 10 2,550 - - - - 2,560
May 24, 1996 2.560 1,500 15 3,825 - - - - 3,840
June 10, 1996 1.500 50,000 500 74,500 - - - - 75,000
Warrants exercised:
December 3, 1995 3.625 10,237 102 37,007 - - - - 37,109
June 11, 1996 3.625 9,633 96 34,823 - - - - 34,920
Net (loss) - - - - - - - (6,202,177) (6,202,177)
---------- -------- ----------- ------ ----- -------- ------------ -----------
Balance at
June 30, 1996 22,846,649 $228,466 $67,556,328 $ - $ - $ - $(25,267,928) $42,516,866
---------- -------- ----------- ------ ----- -------- ------------ -----------
---------- -------- ----------- ------ ----- -------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
-42-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
AND CUMULATIVE FROM JULY 2, 1980 (INCEPTION)
<TABLE>
YEARS ENDED JUNE 30 CUMULATIVE
--------------------------------------- FROM JULY 2, 1980
1996 1995 1994 (INCEPTION)
------------ ----------- ---------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,202,177) $(1,079,600) (2,439,471) (25,267,928)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 249,516 152,935 71,172 1,369,577
Write-off of mineral lease and other - 58,088 - 1,505,541
Gain on sale of equipment - (1,157) (35) (15,078)
Issuance of stock, warrants, and
options for services performed 185,815 107,444 266,835 2,416,417
Minority interest in loss of subsidiary - - - (113,920)
Changes in certain assets
and liabilities:
Receivables and other assets (7,044,111) 94,298 (9,803) (7,122,971)
Accounts payable and accrued expenses 3,941,896 443,140 (146,798) 4,459,385
Accrued deferred interest - - - 167,260
Deferred compensation - - 33,000 370,250
------------ ----------- ---------- ------------
Net cash used by operating activities 8,869,061 (224,852) (2,225,100) (22,231,467)
------------ ----------- ---------- ------------
Cash flows from investing activities:
Proceeds from short-term investments - - - 2,296,745
Additions to property, plant and equipment (21,937,924) (1,767,815) (163,220) (27,119,747)
Proceeds from sale of equipment - 1,157 35 15,078
Expenditures for short-term investments - - - (2,100,000)
Cash acquired in excess of payment for
the purchase of a majority interest in
Can-Amera Oil Sands, Inc. - - - 97,976
Expenditures for patents (31,833) (145,076) (14,851) (405,886)
Expenditures for other (367,110) (27) - (256,569)
------------ ----------- ---------- ------------
Net cash provided by (used for)
investing activities (22,336,867) (1,911,761) (178,036) (27,472,403)
------------ ----------- ---------- ------------
Cash flows from financing activities:
Proceeds from issuance of short and
long-term debt 34,187,093 - - 34,515,282
Proceeds from issuance of common stock 43,858,521 1,598,654 2,515,612 63,227,522
Principal payments on short and
long-term debt (1,181,154) (12,414) (11,207) (1,416,016)
Payment of costs associated with
proposed financing (2,610,684) (48,064) (79,978) (2,738,726)
Other - - 18,375
------------ ----------- ---------- ------------
Net cash provided by financing
activities 74,253,776 1,538,176 2,424,427 93,606,437
------------ ----------- ---------- ------------
Change in cash and cash equivalents $ 43,047,848 (598,437) 21,291 43,902,567
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
(continued)
</TABLE>
-43-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
AND CUMULATIVE FROM JULY 2, 1980 (INCEPTION)
<TABLE>
YEARS ENDED JUNE 30 CUMULATIVE
--------------------------------------- FROM JULY 2, 1980
1996 1995 1994 (INCEPTION)
------------ ----------- ---------- -----------------
<S> <C> <C> <C> <C>
Change in cash and cash equivalents,
forwarded $ 43,047,848 (598,437) 21,291 43,902,567
Cash and cash equivalents at beginning
of period 854,719 1,453,156 1,431,865 -
------------ ----------- ---------- ------------
Cash and cash equivalents at end of period $ 43,902,567 $ 854,719 1,453,156 43,902,567
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
Supplemental disclosure of cash
flow information:
Interest paid (net of amounts capitalized) $ 4,011,450 $ 8,799 8,558 4,221,176
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
Noncash investing and financing activities:
Issuance of stock for minerals lease $ - $ - - 281,000
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
Acquisition of controlling interest in
Can-Amera Oil Sands, Inc. for cash of
$150,000 and 75,000 shares of common
stock valued at $122,250. In conjunction
with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired $ - $ - - 1,659,211
Cash and stock paid for capital stock $ - $ - - (272,250)
Minority interest $ - $ - - (113,920)
------------ ----------- ---------- ------------
Liabilities assumed $ - $ - - 1,273,041
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
Issuance of stock for deferred compensation $ - $ - - 271,250
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
Issuance of subsidiary stock for redemption
of Can-Amera notes $ - $ - - 1,447,980
------------ ----------- ---------- ------------
------------ ----------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
-44-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
June 30, 1996, 1995, and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) OPERATIONS AND ORGANIZATION
Since its inception on July 2, 1980, Solv-Ex Corporation (the Company)
has devoted its resources primarily to the development of a process
for the extraction of bitumen, a semi-solid hydrocarbon compound
which can be converted into synthetic crude oil, from oil sands. In
recent years, it has advanced the patented processes to include
recovery of metals and minerals from the fine clays contained in the
oil sands, either from (i) waste tailings generated by others from
primary production of bitumen from oil sands or (ii) from fine clays
associated with the oil sands which can be recovered in connection
with the Company's production of bitumen from oil sands on its own
leases.
The Company is currently developing and constructing an initial stage
oil extraction plant on one of the two oil sands leases which it
owns in northern Alberta.
In May 1996, Solv-Ex incorporated Solv-Ex Canada Limited in Alberta,
Canada, as a wholly owned subsidiary expected to be the operating
entity for Canadian operations.
In addition, the Company's wholly owned subsidiary, Duo-Ex Corporation
(Duo-Ex), and Duo-Ex's wholly owned subsidiary, Shale Research, Inc.
(Shale), were engaged in the research and development of a process
to extract oil from oil shale. The two companies are currently
inactive.
The Company formed a wholly-owned subsidiary, Applied Remedial
Technology, Inc., in January, 1993 to operate its pilot plant and to
pursue commercial applications of its process toward environmental
clean up, primarily in the field of hydrocarbon
contamination.
The Company has a controlling interest in Can-Amera Oil Sands, Inc.,
("Can-Amera") a Canadian company. Historically, Can-Amera was
principally involved in the exploration and development of oil sands
deposits in Canada and now holds a royalty of C$.07 per barrel in
production which may be obtained from the oil sands lease which the
Company acquired from Can-Amera.
Although the Company in prior years has generated revenues from a
contract for the use of its pilot plant
-47-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(a) OPERATIONS AND ORGANIZATION (CONTINUED)
and engineering services and from Government subcontracts, the
Company has not, as of June 30, 1996, generated revenues from the
sale or the operation of its principal product, the oil sand
extraction process. Therefore, the accompanying consolidated
financial statements have been presented as those of development
stage enterprises in accordance with Financial Accounting Standards
Board STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 7.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, and all of its subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
(c) MINERAL EXPLORATION AND DEVELOPMENT COSTS
Costs incurred to explore mineral properties are charged to operations
in the year incurred. Costs incurred to develop mineral leases for
mining are capitalized. In the event the capitalized costs are
determined by management not to be economically recoverable, such
costs are charged to operations in the period in which that
determination is made.
(d) CONSTRUCTION IN PROCESS
Construction in process consists of preliminary engineering, detailed
engineering, preparation of permit applications and an Environmental
Impact Assessment and other direct costs associated with
construction of an initial commercial-scale plant in Canada.
(e) DEPRECIATION AND AMORTIZATION
Pilot plant building, field and laboratory equipment, and furniture
and fixtures are depreciated using the straight-line method over
the estimated useful lives of the assets, approximately three to
fifteen years.
Amortization of leasehold improvements is computed using the
straight-line method over the terms of the lease or estimated useful
lives of the assets, whichever is shorter, approximately three to
fifteen years.
-48-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) DEPRECIATION AND AMORTIZATION (CONTINUED)
The Company's policy is to capitalize interest cost on long-term
construction projects. Interest costs capitalized is approximately
$256,000 during 1996 and none during each of the two fiscal years
ended June 30, 1995 and 1994.
(f) RESEARCH AND DEVELOPMENT
The costs associated with research and development, including
modification of the pilot plant for development or improvement of
technology, are expensed as incurred. During the fiscal year ended
June 30, 1995, $2,032,956 in funds received from United Tri-Star
Resources Ltd. under an agreement to perform work in contemplation
of development of the Company's oil sands lease were recorded as an
offset to expense under "Research and development funded by others."
No research and development funds were received from others during
the fiscal years ended June 30, 1996 or 1994.
(g) STOCK OPTIONS AND WARRANTS
The Company accrues the excess, if any, of the quoted market price
over the exercise price of options and warrants at the measurement
date (generally the date of issue) as expense over the period earned
by the holder. The expense is recorded as a charge to earnings and
as a credit to additional paid-in capital. At time of exercise, the
excess of cash received from the holder over the par value is
credited to additional paid-in capital.
In October 1995, the FASB issued Financial Accounting Standard No. 123
("FAS 123"), "Accounting for Stock Based Compensation." Under the
provisions of FAS 123, companies may elect to account for
stock-based compensation plans using a fair-value-based method or
may continue measuring compensation expense for those plans using
the intrinsic-value-based method. Companies electing to continue
using the intrinsic-value-based method must provide pro forma
disclosures of net income and earning per share as if the
fair-value-based method had been applied. The Company intends to
continue to account for stock-based compensation using the
intrinsic-value-based method and, as such, FAS 123 will not have an
impact on the Company's results of operations or financial position.
FAS 123 becomes effective in fiscal year 1997.
-49-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Using this method, deferred tax assets and liabilities are
provided on differences between the financial statement and income
tax bases of assets and liabilities using estimated income tax rates
for the year in which the differences are expected to reverse.
(i) LOSS PER COMMON SHARE
Loss per common share is based on the weighted average shares
outstanding during the period. Stock options, warrants and common
stock held as security for indebtedness are excluded from loss per
share calculations because of their anti-dilutive effect.
(j) STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, cash equivalents
include amounts invested in interest-bearing deposits with
maturities of 90 days or less.
(k) FOREIGN CURRENCY TRANSLATION
All foreign currencies are translated into U.S. dollars using the
translation procedures specified in STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 52. For application of such procedures,
the U.S. dollar is the functional currency. All amounts herein are
stated in U.S. dollars except amounts preceded by a "C" denoting
Canadian dollars.
(l) INTANGIBLES
Patent costs are amortized over their remaining life.
The Company is in the process of efforts to complete financing
arrangements for additional capital to add further capacity to the
initial commercial plant currently under construction. Costs paid
for origination fees associated with such financings have been
deferred and will be deducted from the proceeds if the financings
are completed or will be charged to the results of operations when
it is determined that they no longer have future value.
-50-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) CARRYING VALUE OF ASSETS
The Company reviews the carrying value of its assets on a regular
basis to determine whether any changes have occurred which may
impair such value or which otherwise may affect the classification
of such assets in its financial statements. Any impairments to asset
carrying values will be charged to results of operations in the
period in which a determination of impairment has been made.
(n) FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Values of Financial Instruments", requires the fair value
of financial instruments be disclosed. The Company's financial
instruments are accounts and notes receivable, accounts payable, and
long-term debt. The carrying amounts of accounts receivable,
accounts payable, and long-term debt, because of their terms and
nature, approximate fair value.
(o) 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.
(2) ACQUISITION OF MINERAL LEASE
In 1988, the Company acquired an oil sands lease in the Athabasca region
of Alberta, Canada. Additional payments are to be made to Can-Amera, a
subsidiary of the Company, at a rate of C$.07 per barrel when production
begins. The lease provides for successive 21 year renewal terms if the
property is in production at the end of the preceding term. Under the
lease terms, construction and operation of a plant having a minimum
processing capacity of 10,000 tons per day of bituminous sands or 10,000
barrels of bitumen per day by December 14, 1997 will satisfy the
requirements for renewal. As a practical matter, the Company does not
anticipate any difficulty in proceeding with third
-51-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(2) ACQUISITION OF MINERAL LEASE (CONTINUED)
term renewal. Moreover, government regulations allow for third term
renewal without production on terms which the Company could easily meet
in any event, and recent proposed regulations offer the probability that
requirements for third term renewal will be further liberalized in an
effort to encourage additional oil sands development. The Company does
not believe there is a material risk that the lease will be terminated at
the expiration of the second term and will take such action as may be
necessary or advisable to extend the lease.
The production royalty is established by the Alberta Provincial government
and expected to be 1% of gross revenues until invested capital
(including imputed interest and including capital which may be spent for
plant expansion) is recovered, at which time the royalty is expected to
be based upon a percentage of net operating revenues. The Company has
held several discussions with the government regarding computation of
royalty for an operation co-producing minerals and metals with the oil
and it has not yet been determined how this will affect computation of
royalties. Payment of royalties to the government is not expected to have
a significant impact on operation of the initial stage oil plant and,
depending upon the ability of the Company to expand initial operations,
may not have a significant impact until commercial operations have been
fully established at ultimate rates of production.
On July 20, 1995, the Company acquired the Fort Hills oil sands lease from
Petro-Canada for a cash consideration of approximately US$440,000, of
which 10% was paid by United Tri-Star Resources Ltd. which acquired an
undivided 10% working interest in the lease from the Company pursuant to
its agreement with the Company. The lease adjoins the Company's
Bitumount oil sands lease to the north, east and south, is much larger in
acreage and is known to contain a substantially larger resource base on
the basis of work performed by Petro-Canada and reviewed by the Company's
consultants. In the event production is obtained from the lease,
Petro-Canada will also receive certain payments out of production to a
maximum amount of C$20 million, which is approximately US$14.6 million at
current exchange rates. The terms of the Fort Hills Lease are the same as
for the Bitumount Lease, except that the second term does not expire
until February 18, 2002 and the production
-52-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
requirement to extend the lease beyond the second term is 25,000 barrels
per day.
-53-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(3) LONG-TERM DEBT
Long-term debt is as follows:
June 30
---------------------
1996 1995
-------- --------
Convertible note payable at 12%;
matures April 30, 1999' first
year's interest prepaid; interest
payable quarterly in each of the
second and third years; principal
is convertible into the Company's
common stock at the option of the
lender at a conversion price of
$32.50 per share; secured
by 1,016,000 shares of the
Company's common stock issued
in the name of the Company $33,000,000 -
Mortgage note payable to bank at
prime rate plus 1.5% (9.75% at
June 30, 1996); payable in
monthly installments of $792
plus interest; matures
June 30, 1998; secured by
pilot plant land and buildings
with a depreciated cost at
June 30, 1996 of $332,425 $ 66,500 76,000
Other 15,867 427
----------- ----------
Total long-term debt 33,082,367 76,427
Less current installments 25,367 9,927
----------- ----------
Long-term debt,
excluding current installments $ 33,057,000 $ 66,500
------------ ----------
------------ ----------
Principal maturities of long-term debt as of June 30, 1996 are as follows:
1997 $ 25,367
-54-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
1998 57,000
1999 33,000,000
------------
$ 33,082,367
------------
------------
-55-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(4) STOCKHOLDERS' EQUITY
The following describes certain activity affecting stockholders' equity:
(a) DIRECTORS COMPENSATION-STOCK PURCHASE
In July, 1992, the Board of Directors granted to its members the
right to purchase 600,000 shares of restricted common stock at a
purchase price of $.50 per share in cash. The difference
between the exercise price of $.50 and the market price at the date
of exercise, $.75 for restricted non-registered shares, was
recorded as compensation. All shares were purchased by four
directors in August and October, 1992, and compensation of $150,000
was recorded.
(b) STOCK FOR SERVICES AND EXPENSES
In September, 1993, an officer of the Company received 25,000 shares
of non-registered, forfeitable common stock as compensation. The
stock had a fair market value of $5.20 and compensation of $78,000
was recorded for the year ended June 30, 1994. Unearned compensation
of $52,000 at June 30, 1994 was recognized through January, 1995,
the date that forfeitability ceased.
In March, 1994, an employee of the Company received 10,000 shares of
non-registered, forfeitable common stock as compensation. The stock
had a fair market value of $5.20, and compensation of $8,744 was
recorded for the year ended June 30, 1994. Unearned compensation of
$43,256 at June 30, 1994 will be recognized through January, 1996,
the date that forfeitability ceases.
During June, 1994, the Company issued to an employee 22,200 shares of
non-registered common stock at $5.00 to $5.70 per share in exchange
for employment services rendered during the fiscal year. At such
time, the same employee was also issued 7,800 shares of such stock
at $2.69 per share in exchange for employment services rendered
during the prior year. The issuance price of the common stock
represents the market value of the common stock when the services
were rendered.
During June, 1994, the Company also issued to two employees 10,000 and
5,000 shares, respectively, of non-registered common stock at $.75
and $1.50 per share, respectively, in exchange for employment
-56-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(4) STOCKHOLDERS' EQUITY (CONTINUED)
(b) STOCK FOR SERVICES AND EXPENSES (CONTINUED)
services rendered during the prior fiscal year. The issuance price
of the common stock represents the market value of the common stock
when the services were rendered.
(c) STOCK OPTIONS
The Company had adopted a non-qualified stock option plan in
which options were granted to certain officers, directors, and key
employees of the Company at a price determined at the time the
options were granted. The options are exercisable for a period of
not more than five years from the date of grant. The plan terminated
July 2, 1990, and, as a result no additional options may be granted
under the plan and options that were granted under this Plan have
been exercised or have expired.
The following table summarizes certain information relative to the
non-qualified stock option plan:
Years ended June 30
-------------------
1996 1995
-------- --------
Options outstanding at beginning of year - 59,240
Expired - 20,000
Exercised - 39,240
-------- --------
Options Outstanding at end of year - -
Option price range at end of year n/a $1.84
The Company has also adopted an incentive stock option plan
under which options are granted to certain officers and employees of
the Company and its subsidiaries to purchase common shares at a
price equal to the fair market value at the date of grant, and the
options are exercisable within five years from the date of grant.
The option price for individuals owning more than 10 percent of the
Company's common stock must be equal to 110 percent of the fair
market value of the common stock at the date of grant. The incentive
stock option plan will terminate October 8, 2002.
-57-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(4) STOCKHOLDERS' EQUITY (CONTINUED)
(c) STOCK OPTIONS (CONTINUED)
The following summarizes certain information relative to the
incentive stock option plan:
<TABLE>
<CAPTION>
Years ended June 30
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Options outstanding at beginning of year 861,500 549,000
Granted 308,000 353,500
Expired 8,000 58,000
Exercised 203,400 -
------------ ------------
Options outstanding at end of year 958,100 861,500
------------ ------------
------------ ------------
Option price range at end of year $1.50-21.50 $1.50-$5.75
Price range for exercised options $1.50-$5.75 n/a
Options exercisable at end of year 525,850 540,000
Options available for grant at end of year 26,500 155,500
</TABLE>
The shares available under the incentive option plan are
registered under the Securities Act of 1933.
The Company has no registered shares available for exercise under an
incentive stock option plan which was terminated in October, 1992.
During the fiscal year ended June 30, 1996, options to purchase
35,832 shares at prices ranging from $1.50 to $2.60 per share were
exercised under the plan.
In October, 1992, the Company established a non-qualified stock option
plan for directors who are not employees of the Company. Options are
to be granted to purchase common shares at a price equal to the fair
market value at the date of grant. The options are exercisable
within 5 years from the date of grant. The plan provides for 500,000
shares to be awarded to nonemployee directors through non-qualified
stock options. The plan will terminate October 8, 2002 and provides
at a minimum that each eligible director receive an option to
purchase 10,000 shares of common stock on each annual meeting date.
-58-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(4) STOCKHOLDERS' EQUITY (CONTINUED)
(c) STOCK OPTIONS (CONTINUED)
The following summarizes certain information relative to the
non-qualified stock option plan for directors which are not
employees of the Company:
<TABLE>
<CAPTION>
Years ended June 30
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Options outstanding at end of year 150,000 95,000
Granted 50,000 55,000
Expired - -
Exercised 45,000 -
------------ ------------
Options outstanding at end of year 155,000 150,000
------------ ------------
------------ ------------
Option price range at end of year $1.50-$13.81 $1.50-$4.91
Price range for exercised options $1.50-$4.91 n/a
Options exercisable at end of year 155,000 125,000
Options available for grant at end of year 300,000 325,000
</TABLE>
The shares available under this non-qualified stock option plan for
directors are registered under the Securities Act of 1933.
(5) GRANT AND CONTRACT OBLIGATIONS
On October 29, 1982, the Company entered into a professional services
agreement with an agency of the State of New Mexico. The agreement
provided that allowable expenditures for certain research and development
activities conducted through November 30, 1983, would be funded by the
agency. On June 30, 1984, the allowable research activities had been
completed and $407,760 had been funded by the agency. The agreement
provided that if a commercial plant was not constructed in New Mexico,
and was subsequently constructed outside the State, the Company would be
required to repay all grant funds at the rate of 2 percent of the gross
proceeds received from operation of the plant.
In November, 1992, the Company entered into an agreement with and received a
funding commitment from Alberta Oil Sands Technology and Research
Authority (AOSTRA) for up to $300,000 for continued research and
development of the extraction process. At June 30, 1993, the allowable
research activities had been completed. In exchange for funding, AOSTRA is
entitled to recover up to three times the
-59-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(5) GRANT AND CONTRACT OBLIGATIONS (CONTINUED)
amount of its funding from certain defined future commercial operations
which use the technology.
In August, 1994, effective as of July 1, 1994, the Company entered into an
agreement with and is to receive funding to complete a feasibility report
and related pre-construction activities on the Company's oil sands lease
in Northern Alberta from United Tri-Star Ltd., Calgary ("UTS"). Pursuant
to the agreement, UTS also acquired an undivided 10% working interest in
the Bitumount Lease and has the option to acquire 10% of any working
interest acquired by Solv-Ex (on the same terms and conditions as Solv-Ex)
in other projects for oil sands development in the Athabasca Region using
the Solv-Ex technology. The Company is currently in the process of
finalizing a limited partnership agreement with UTS pursuant to which UTS
will pay its 10% share of projects costs, $500,000 of which has already
been paid by UTS pursuant to an informal understanding pending completion
of financing arrangements for the project.
(6) INCOME TAXES
At June 30, 1996, the Company and its subsidiaries, excluding amounts for
foreign taxes, had net operating loss carryforwards, and research and
experimentation tax credit and investment tax credit carryforwards for
income tax and financial reporting purposes as follows:
Net Tax Credits
Year of Operating Research &
Expiration Loss Experimentation Investment
---------- ---------- --------------- ----------
1997 $ 251,000 44,000 1,000
1998 875,000 61,000 3,000
1999 3,708,000 213,000 14,000
2000 1,896,000 23,000 1,000
2001 1,121,000 - -
2002 154,000 - -
2003 582,000 - -
2004 990,000 - -
2005 708,000 - -
2006 456,000 - -
2007 402,000 - -
-60-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
2008 2,596,000 - -
2009 2,556,000 - -
2010 1,101,000 - -
2011 6,220,000 - -
----------- ------- ------
$23,616,000 341,000 19,000
----------- ------- ------
----------- ------- ------
The Company's Canadian subsidiary, Can-Amera, which is subject to Canadian
taxation, has net operating loss carryforwards for income tax and
financial reporting purposes of approximately $C20,000 which expire
ratably for income tax purposes through December of 2001.
(7) INCOME TAXES (CONTINUED)
Significant components of deferred tax assets and liabilities were as
follows:
June 30
-------
1996 1995
---- ----
Deferred tax assets:
Deferred compensation $ 38,000 38,000
Tax credits and carryforwards 9,806,000 7,350,000
----------- ----------
Total Deferred tax assets 9,844,000 7,388,000
Less valuation allowance (9,734,000) (7,278,000)
----------- ----------
Net deferred tax assets 110,000 110,000
----------- ----------
Deferred tax liabilities:
Patents (109,000) (109,000)
Other (1,000) (1,000)
----------- ----------
Total deferred tax liabilities (110,000) (110,000)
----------- ----------
Net deferred taxes $ - -
----------- ----------
----------- ----------
In assessing the realizability of deferred tax assets, management considered
whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the Company's history of operating
losses, management believes the ultimate realization of the deferred tax
assets is not assured. Therefore, the Company has provided a valuation
allowance to fully reserve the net deferred taxes.
-61-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Notes to Consolidated Financial Statements
(7) LIQUIDITY
Historically, the Company has principally met its obligations and its
working capital requirements through the sale of common stock. During the
fiscal year ended June 30, 1996, the Company sold common stock and issued
convertible debt, which generated a total of approximately $73,000,000 in
additional funding.
This significant increase in funding, relative to any prior activity,
allowed the Company to continue construction of the initial stage
commercial plant on leased property in Alberta, Canada. With the
availability of these significant funds and its 10% partner UTS, the
Company now believes that it will be able to successfully complete
construction of the initial stage commercial plant and initiate commercial
production and sale of bitumen in the first quarter of calendar year 1997.
As a result of the capital raised during the year and the other events and
circumstances herein described, the Company believes that its current capital
position is sufficient to conduct normal operations, meet its obligations when
due and to construct and operate the Company's initial stage commercial plant
with minimal modifications.
(8) RELATED PARTY TRANSACTIONS
The Company's Chairman and Chief Executive Officer has a note payable to the
Company in the principal amount of approximately $1,500,000, which is
payable upon demand and bears interest at 5.87% per annum.
A Vice President in charge of the Company's Calgary operations, is the owner
of Alcoss Enterprises, Ltd., an engineering firm which provides services
to the Company in connection with the plant being constructed on the
Bitumount Lease. Alcoss retained contractors and subcontractors on behalf
of the Company and has passed these costs through to the Company with a
small allowance to cover general and administrative expenses. Payments
made to Alcoss for the years ended 1996, 1995 and 1994 were $2,249,522,
$295,585 and $54,127 respectively.
-62-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) and (b) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth the name, age and all positions held with the
Company (including length of service) by each director and executive officer of
the Company.
<TABLE>
<CAPTION>
NAME Age Offices Held Length of
Service
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
John S. Rendall 62 Chairman, Chief Executive Since 1980
Officer, and Director (1)
W. Jack Butler 77 President and Director Since 1991
(2)
Herbert M. Campbell II 52 Senior Vice President, Since 1992
General Counsel, and (3)
Director
J.E. Czaja 65 Vice President - Canada Since 1993
Julius D. Heldman 77 Director Since 1980
(4)
M. Norman Anderson 65 Director Since 1986
(5)
Thompson MacDonald 49 Director Since 1993
(6)
M.E. (Pat) Davey 70 Director Since 1995
(7)
Annette L. Cottrell 36 Secretary Since 1995
Stephen Lane 50 Vice President Since 1995
Aldo Corti 50 Vice President Since 1995
</TABLE>
(1) Mr. Rendall was President of the Company from July 2, 1980 to October 1,
1983, and from January 1, 1989 until July 1, 1992. Since November 1989, he
has also served as President and a director of Can-Amera Oil Sands, Inc., a
subsidiary of the Company.
(2) Mr. Butler became Executive Vice President of the Company on February 22,
1991 and became President on July 1, 1992.
(3) Mr. Campbell became Vice President, Secretary and General Counsel of the
Company on June 1, 1992. He was appointed as a Director on October 15,
1992, became Senior Vice President in September, 1994 and also serves as
Corporate Secretary for Can-Amera Oil Sands, Inc., a subsidiary of the
Company.
-63-
<PAGE>
(4) Dr. Heldman served as Senior Vice President of the Company from September
15, 1988 until October 9, 1992 and is Chairman of the Company's Audit and
Compensation Committee.
(5) Mr. Anderson is a member of the Company's Audit and Compensation Committee.
(6) Mr. MacDonald has also served since March, 1994 as a director of Can-Amera
Oil Sands, Inc., a subsidiary of the Company, and also serves as a paid
consultant to the Company.
(7) Mr. Davey serves as a paid consultant to the Company.
No arrangement exists between any of the above officers and directors
pursuant to which any of those persons was elected to such office or position.
(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES
There are no significant employees who are not also directors or executive
officers of the Company.
(d) FAMILY RELATIONSHIPS
There are no family relationships among persons who are directors or
executive officers of the Company.
(e) BUSINESS EXPERIENCE
The following sets forth the business experience of the directors and
executive officers of the Company named above. No director of the Company is a
director of any other company which is subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended, except as described below.
JOHN S. RENDALL was associated with RTL Contractor Holdings, S.A. from 1977
through 1979 as plant manager of RTR Oil Sands (Alberta) Ltd. (a subsidiary of
Rio-Tinto, Inc.), an oil sands extraction pilot plant at Fort McMurray in
Canada. From June 1979 through December 1979, he was also a part-time sales
representative for RTL and RTR in the United States, responsible for the
licensing of certain patents which he had sold to these companies.
W. JACK BUTLER was associated with Mobil Oil Corporation and its affiliated
companies in Europe, Africa and the Middle East since 1951 until his retirement
in 1985. Mr. Butler retired as the Middle East Regional Director - London for
Mobil Oil Corporation and as Chairman and Director of several of Mobil Oil
Corporation's Middle East and African companies, including Mobil Saudi Arabia,
Inc..
HERBERT M. CAMPBELL II was previously employed from 1967 through 1984 by
Ranchers Exploration and Development Corporation, a diversified mining company
which merged into Hecla Mining Company in 1984. He was Senior Vice President and
Chief Counsel at the time of the merger, and, from 1985 until 1989, served as
President and a Director of Olympic Mining Corporation, which controls a silica
sand mining and processing operation in Southern California. From 1989 until he
was employed by the Company, Mr. Campbell was associated
-64-
<PAGE>
with Mains & McConnell, Inc., a commercial insurance brokerage firm. He is a
member of the New Mexico State Bar.
J.E. CZAJA served as Executive Vice President and a Director of Shell
Canada Limited from 1983 until his retirement in 1991. At the time of his
retirement, he was responsible for its oil (including oil sands), gas and coal
exploration and production activities.
JULIUS D. HELDMAN served as Vice President of Shell Development Company and
as Vice President of Shell Oil Company from April 1969 to his retirement in
October 1980, and was extensively involved in its patenting and licensing
activities and research and development programs. Since his retirement, Dr.
Heldman has been president of Heldman Associates, petroleum consultants.
M. NORMAN ANDERSON is president of his own consulting firm, Anderson &
Associates in Vancouver, a natural resources management consulting firm with
major international clients. From January, 1987 until December, 1992, he was a
principal and managing director of Anderson Genssler & Schwab, Inc., management
consultants. From February, 1991 until August, 1992 he was also Chairman of
International Corona Corporation, a mining and exploration company. From 1980
until 1986, Mr. Anderson was Chairman and Chief Executive Officer of Cominco
Ltd., a mining, refining and manufacturing company. Mr. Anderson is also a
director of Homestake Mining Company, the Toronto Dominion Bank, Finning Ltd.,
Western Star Trucking and Prime Resources.
THOMPSON MACDONALD is the president of his own communications consulting
firm in Calgary, Alberta (Canada), which provides strategies for media and
government relations to a wide variety of public and private sector clients,
including the Company. Prior to forming his consulting firm in January, 1988,
Mr. MacDonald was Vice President, News and Public Affairs, for CFCN Television
Calgary for more than 10 years. Mr. MacDonald is also a director of the Canadian
Broadcasting Corporation and Multi-corp Inc., which is engaged in
telecommunications and language translation technologies.
M.E. ("PAT") DAVEY holds B.S. degree in Mechanical Engineering from the
Washington State University and is currently acting as a consultant to manage
the Solv-Ex program for production of aluminum from alumina in a new
electrolytic cell. Mr. Davey has more than 40 years of experience in the
aluminum smelting industry in both management and consulting positions. He
worked on a wide variety of plant development and management assignments for
Kaiser Aluminum & Chemical Corporation in the U.S. and several foreign
countries. Mr. Davey retired from Kaiser as International Engineering and
Maintenance Manager in 1982 and has been active as a consultant to the aluminum
smelting industry since his retirement.
ANNETTE L. COTTRELL has been Secretary of the Company since 1995. She has
been employed by the Company as its Controller since July 1995. Prior to then,
she was Chief Financial Officer and Corporate Secretary with Vivigen, Inc., a
publicly-traded medical laboratory, from 1987 to 1993, and was controller for a
law firm during 1994. Ms. Cottrell received a Bachelor of Science degree from
Colorado State University in 1982 and is a Certified Public Accountant in New
Mexico and Colorado.
STEPHEN LANE has been Vice President of the Company since 1995 and manages
construction activities for the Bitumount oil sands project. He and has been
employed by the Company since 1994. He holds a Bachelor of Science degree from
Carleton University
-65-
<PAGE>
(Ottawa), a Master of Chemical Engineering degree from McMaster University
(Hamilton) and an MBA degree in finance from the University of Alberta. From
1981, he was involved with his own natural resource companies (including oil
sands-related work) and has previous experience with Dome Petroleum Ltd. and
Syncrude Canada Limited.
ALDO CORTI has been Vice President of the Company since 1995 and manages
the offices of the Company in Calgary, Alberta. He has been employed by the
Company since 1993. Until 1993 Dr. Corti was vice president of RTR Oil Sands
(Alberta) Ltd. and RTR Oil Sands (Canada) Ltd. He has also participated in
several mineable and IN SITU oil sands projects with Gulf Canada, Petro Canada,
and Suncor, and has been involved in the oil sands industry since 1977. Dr.
Corti holds a PhD. in Chemical Engineering from Polytechnic University, Milano.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of the directors or executive officers of the Company have been
involved in any legal proceedings of the nature described in Item 401(f) of
Regulation S-K.
(g) PROMOTERS AND CONTROL PERSONS
This item is not applicable inasmuch as the Company has been subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, for
more than the past twelve months.
(h) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon the Company's review of copies of forms it receives from
officers and directors and upon representations it receives from certain of such
persons, the Company believes that during the fiscal year ended June 30, 1996,
all filing requirements under Section 16(a) of the Securities Exchange Act of
1934 were made by such persons on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
(a) and (b) SUMMARY COMPENSATION TABLE
The table which follows sets forth information concerning the compensation
to the Chief Executive Officer of the Company for the 1993, 1994 and 1995 fiscal
years. During the periods, the Company had no other executive officer whose
annual salary and bonus exceeded $100,000.
-66-
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION (CONTINUED) LONG TERM COMPENSATION (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
AWARDS AWARDS PAYOUTS
- ------------------------------------------------------------------------------------------------------------------------------------
NAME YEAR SALARY ($) BONUS ($) OTHER ANNUAL RESTRICTED OPTIONS/SARS LTIP PAYOUTS ALL OTHER
COMPENSATION STOCK AWARDS (#) (1) ($) (1) COMPENSATION
($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John S. Rendall, 1996 120,000 -0- 6,000 -0- -0- -0- -0-
Chairman and CEO 1995 120,000 -0- 6,000 -0- 100,000 -0- -0-
1994 89,372 -0- -0- -0- -0- -0- 33,000(2)
Herbert M. Campbell, II 1996 90,000 200,000 -0- -0- -0- -0- -0-
Sr. VP and 1995 90,000 -0- -0- -0- 60,000 -0- -0-
General Counsel 1994 72,000 -0- -0- -0- 75,000 -0- -0-
</TABLE>
(1) The Company does not have in effect either a plan of Stock Appreciation
Rights ("SAR's") or a Long-Term Incentive Plan.
(2) Effective January 1, 1989, Mr. Rendall agreed to a salary deferment of
approximately 50% (including automobile allowance) until such time as the
operations and financial condition of the Company permit resumption of full
salary payments. As of June 30, 1996, the aggregate of such deferred
compensation was $99,000 (for years 1993 and 1994), which Mr. Rendall
exchanged for 33,243 shares of Common Stock valued at the fair market value
of such shares at the time the services were performed (average value was
$2.98 per share). There were no salary deferrals during the fiscal years
ended June 30, 1995 or 1996.
(c) OPTION/SAR GRANTS TABLE
No stock options were granted to either of the executive officers named in
the Summary Compensation Table during the fiscal year ended June 30, 1996 under
the Incentive Stock Option Plan approved by the shareholders of the Company on
October 7, 1993.
(d) AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTION/SAR VALUE TABLE
The following table sets forth information concerning exercises of stock
options during the fiscal year ended June 30, 1996 by the executive officers
named in the Summary Compensation Table, and the value of their unexercised
stock options as of June 30, 1996, based upon a price of $19.50 per share, which
was the price of the closing trade for the Company's Common Stock as reported by
the Nasdaq Small Cap Market on such date.
<TABLE>
<CAPTION>
Name Shares Value Number of Options Value of Unexercised
Acquired on Realized Unexercised at June In-the-Money
Exercise (#) ($) 30, 1996 Options at June 30,
Exercisable/ 1996
Unexercisable Exercisable/
Unexercisable
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John S. Rendall -0- -0- 200,000/-0- $3,900,000/-0-
Herbert M. Campbell II 135,000/-0- $2,366,400/-0-
</TABLE>
Employees of the Company, including officers, are also eligible to receive
options to purchase Common Stock of the Company pursuant to the Incentive Stock
Option Plan approved by the shareholders of the Company on October 7, 1993.
During the fiscal year
-67-
<PAGE>
ended June 30, 1996, options were granted to employees (including officers)
to purchase a total of 120,000 shares of Common Stock at option prices
ranging between $7.09 and $21.50 per share. No options were granted to the
executive officers named in the Summary Compensation Table during the fiscal
year ended June 30, 1996.
Options to purchase Common Stock under the Incentive Stock Option Plan are
granted at an option price equal to the fair market value of such stock on the
date of grant except in the case of the holder of 10% of more of the Company's
outstanding Common Stock, in which the option price must be at least 110% of the
fair market value on the date of grant. Option grants for executive officers of
the Company are determined by the Compensation Committee of the Board of
Directors and option grants for employees who are not executive officers are
determined by the Chairman and Chief Executive Officer of the Company in
accordance with the terms of the Plan.
(e) LONG-TERM INCENTIVE PLAN ("LTIP") AWARDS TABLE
The Company does not have a long-term incentive awards plan and, therefore,
this table is inapplicable.
(f) DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE
The Company does not have a defined benefit or actuarial plan and,
therefore, this table is inapplicable.
(g) COMPENSATION OF DIRECTORS
At present, the Company does not provide any cash compensation to directors
who are not employees, but does reimburse such directors for necessary travel
expenses incurred in attending meetings or otherwise acting on the Company's
behalf. Such directors have in the past been given the opportunity to purchase
restricted shares of Common Stock at prices below market value, primarily for
the purpose of raising funds for the Company, and have also been granted options
to purchase shares of Common Stock pursuant to the Company's Stock Option Plan
for Directors ratified by the shareholders of the Company on October 7, 1993.
Under the Plan, a director is granted an option to purchase 25,000 shares of the
Company's Common Stock on the date such person is first elected or appointed as
a director at a purchase price equal to the fair market value of such stock on
the date of grant. On each annual meeting date thereafter at which such person
is elected as a director, he shall be granted an additional option to purchase
10,000 shares of Common Stock at a price equal to the fair market value on the
date of grant. Each option granted under the Plan becomes fully exercisable
after six months of continuous service as a director following the date of
grant.
As of June 30, 1996, options to purchase a total of 155,000 shares at
option prices ranging between $1.50 and $13.81 were outstanding under the Stock
Option Plan for Directors.
(h) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
There are no employment contracts, termination of employment arrangements,
or change-in-control arrangements between the Company and any executive officer.
-68-
<PAGE>
(i) REPORT ON REPRICING OF OPTIONS
No options were repriced during the fiscal year ended June 30, 1996, and,
therefore, this item is inapplicable.
(j) COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Compensation Committee of the Board of Directors is composed of Dr.
Julius D. Heldman (Chairman) and Mr. M. Norman Anderson. Neither Dr. Heldman
nor Mr. Anderson were, during the fiscal year ended June 30, 1996, previously or
subsequently, an officer or employee of the Company or any of its subsidiaries,
or has had any relationship with the Company (other than as a director) which
requires disclosure herein, except that from September 1988 until October 1992
Dr. Heldman was Senior Vice President of the Company.
No executive officer of the Company served as a director of, or member of
the compensation committee (or other board committee performing an equivalent
function) in, any other entity of which Dr. Heldman or Mr. Anderson, or any
other director of the Company, was an executive officer.
(k) BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee consists of Dr. Julius D. Heldman, who serves as
its Chairman, and Mr. M. Norman Anderson, neither of whom are presently officers
of the Company. With respect to executive compensation, the function of the
Committee and the Board of Directors has been somewhat limited in recent years
because the Company did not have the funds to employ executive officers at
levels of compensation comparable to operating companies in the natural
resources industry. In this regard, Mr. Butler, President of the Company,
currently receives no cash compensation for his services, nor did Dr. Heldman
during his four year tenure as Senior Vice President.
The Company is actively engaged in efforts to become an operating company
during the current fiscal year. This also includes efforts to obtain project
financing and adequate funding for the Company's general and administrative
expenses, which has increased significantly since the Company has begun
construction of its first commercial project. As a result, the responsibilities
of the Compensation Committee can be expected to be expanded to (i) align the
Company's compensation policies with its long-term business strategy; (ii)
reward executives for performance and enhancement of shareholder value; and
(iii) attract and retain executives whose abilities and dedication are
considered essential to optimum operating efficiency and the long-term growth
and success of the Company. The Committee also has exclusive authority to
administer the Company's Incentive Stock Option Plan as applied to executive
officers.
The Committee does not believe that the compensation (including deferred
compensation as hereinafter described) to Mr. Rendall, as Chief Executive
Officer, adequately reflects the contribution of Mr. Rendall in developing the
Company's technology and maintaining the Company's existence during recent
years. In this regard, however, the Committee believes that the primary measure
of success for the Company will be its ability to establish profitable,
commercial operations through implementation of its technology, and will
determine Mr. Rendall's future compensation based upon the Company's performance
in
-69-
<PAGE>
achieving this objective, as well as consultation with one or more
independent consultants having expertise in the field of executive
compensation.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
-Julius D. Heldman, Chairman
-M. Norman Anderson
(l) PERFORMANCE GRAPH
The following graph compares the total annual return on the Company's
Common Stock with the annual return of the CRSP Total Return Index for the
NASDAQ Stock Market (U.S. and Foreign Companies) for the period July 1, 1991 to
June 30, 1996, and with the CRSP Index for NASDAQ stock with SIC codes 1000-1099
(metal mining companies). Although the Company has not previously engaged in
mining operations and has been classified as a development stage company for
accounting purposes, its research and development activities during the period
have primarily related to metals extraction from crude ores or residues created
by mining and processing oil sands crude ores. Accordingly, the stock price
performance shown on the graph is not necessarily indicative of future price
performance.
SUMMARY
<TABLE>
<CAPTION>
CRSP Total Returns Index for: 06/28/91 06/30/92 06/30/93 06/30/94 06/30/95 06/30/96
- ----------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Solv-Ex Corporation 100.0 84.4 373.3 151.1 577.8 1386.7
Nasdaq Stock Market (US & Foreign) 100.0 119.9 151.3 152.1 201.7 257.3
NASDAQ Stocks (SIC 1000-1099 US + 100.0 82.1 122.0 140.3 140.6 170.3
Foreign) Metal Mining
</TABLE>
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the only person known by the Board of
Directors to be the beneficial owner of more than 5% of the outstanding shares
of the Company as of September 17, 1996:
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
John S. Rendall 3,701,860(1) 16.2%
500 Marquette N.W., Suite 300
Albuquerque, New Mexico 87102
(1) Includes 39,000 shares held of record by Mr. Rendall's wife and 300,000
shares held in trust for Mr. Rendall's children, together with currently
exercisable options to purchase a total of 200,000 shares of Common Stock
under the Company's Incentive Stock Option Plan. Of these, 3,000,000
shares are currently pledged to secure Mr. Rendall's margin account at
Smith Barney & Co.
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information, as of September 18, 1996
regarding the number of shares of the Common Stock of the Company beneficially
owned by each of the directors and by all directors and executive officers as a
group. Except as otherwise noted, the directors and the executive officers each
have sole voting and investment power with respect to the shares listed. The
ownership and percentage information is computed for each named individual (and
the group) by including all shares which are subject to stock options held by
-70-
<PAGE>
the individual (and members of the group for purposes of that computation) which
are exercisable within 60 days.
NAME OF INDIVIDUAL OR AMOUNT OF BENEFICIAL PERCENT OF
IDENTITY OF GROUP OWNERSHIP CLASS
- -----------------------------------------------------------------------
M. Norman Anderson 176,934 (1) *
W. Jack Butler 872,500 (2) 3.8%
Herbert M. Campbell II 173,000 (3) *
J.E. Czaja 110,000 (4) *
M.E. (Pat) Davey 54,453 (5) *
Julius D. Heldman 290,000 (6) 1.3%
Thompson MacDonald 59,730 (7) *
John S. Rendall 3,701,860 (8) 16.2%
All directors and 4,804,477 (9) 21.0%
executive officers
as a group (11 persons)
* Less than one percent.
(1) Total includes fully exercisable options to purchase 55,000 shares.
(2) Total includes a fully exercisable option to purchase 90,000 shares.
(3) Total includes fully exercisable options to purchase 115,000 shares.
(4) Total includes a fully exercisable option to purchase 85,000 shares.
(5) Total includes fully exercisable option to purchase 35,000 shares.
(6) Total includes a fully exercisable option to purchase 10,000 shares.
(7) Total includes 39,000 shares held of record by Mr. Rendall's wife, 300,000
shares held in trust for Mr. Rendall's children and fully exercisable
options to purchase 200,000 shares. Of these, 3,000,000 shares are
currently pledged to secure Mr. Rendall's margin account at Smith Barney &
Co.
(8) Total includes fully exercisable options to purchase 45,000 shares.
(9) Total includes fully exercisable options to purchase 717,500 shares,
including those options described in notes 1-8, above.
(c) CHANGES IN CONTROL
Except for the pledge by Mr. Rendall of certain securities as described
above, there are no arrangements known to the Company, the operation of which
may at a subsequent date result in a change of control of the Company.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS
See Item 13(c), below. In addition, a Vice President in charge of the
Company's Calgary operations, is the owner of Alcoss Enterprises, Ltd., an
engineering firm which provides services to the Company in connection with the
plant being constructed on the Bitumount Lease. Alcoss retained contractors and
subcontractors on behalf of the Company and has passed these costs through to
the Company with a small allowance to cover general and
-71-
<PAGE>
administrative expenses. Payments made to Alcoss for the years ended 1996,
1995 and 1994 were $2,249,522, $295,585 and $54,127 respectively.
(b) CERTAIN BUSINESS RELATIONSHIPS
Not Applicable.
(c) INDEBTEDNESS OF MANAGEMENT
During the period between December 8 and December 31, 1995, John S. Rendall
the Company's Chairman and Chief Executive Officer, advanced the Company
$1,000,000 in the form of a loan in order to provide working capital. Mr.
Rendall obtained the funds through a margin loan at an unaffiliated broker-
dealer against 3,000,000 shares of his personal holdings of common stock in the
Company. At the same time, Mr. Rendall borrowed an additional $1.5 million for
use by the Company in connection with the Company's planned debt financing for
the balance of its capital requirements (which transaction was not completed).
The loan from Mr. Rendall to the Company was interest bearing at 10% per annum
and was to be repaid as of March 31, 1996.
On March 25, 1996, the price of Solv-Ex Common Stock dropped from $22 to
$7.375 following media reports concerning alleged government investigations into
manipulation of trading in such stock. Although the value of Mr. Rendall's
personal stock held by the broker-dealer was sufficient to negate the likelihood
that a margin call would have been made against Mr. Rendall, Solv-Ex stock had
been removed from the list of stock eligible for margining on March 25, 1996 by
at least one other broker-dealer. Because of the precipitous decline in the
price of the Company's stock and the risk that the broker-dealer holding Mr.
Rendall's stock could have made a margin call or sell the underlying shares
(which would likely have exacerbated the market situation for the Company's
common stock at that time), the General Counsel for the Company caused the
Company to repay the entire margin balance on Mr. Rendall's behalf. By reason
of this action, and after netting the amounts owed by the Company to Mr.
Rendall, Mr. Rendall owed the Company $1,534,950 at March 31, 1996. Based on
his agreement with the Company, this amount is payable on demand and accrues
interest at 5.87% per annum. The loan was ratified by the disinterested
directors of the Company.
At June 30, 1996, the amount due to the Company from Mr. Rendall was
$1,557,414, including the principal and accrued interest of $22,464. Mr.
Rendall has provided the Company with sufficient documentation to assure the
disinterested directors of the Company that he has sufficient cash readily
available to repay the loan at any time. The Company has not demanded payment
because: (i) the rate of interest being earned by the Company is in excess of
that which could be obtained by the Company through short-term investments; and
(ii) the Company believes that repayment of the loan will be made promptly upon
demand as determined by its cash requirements in connection with construction of
the plant for co-production of oil and minerals from the Bitumount Lease.
(d) TRANSACTIONS WITH PROMOTERS
Not Applicable.
-72-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following financial statements are filed as a part of this report under
Item 8:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The following exhibits are either incorporated by reference into this
report as indicated below or are filed as part of this report immediately
following the signature pages:
2.1 Agreement between Registrant and Petrosearch International Company,
dated August 14, 1989 and as amended(1)
3.1 Articles of Incorporation(2)
3.2 Bylaws, as amended October 9, 1992(3)
10.1 Stock Option Plan for Directors Ratified October 7, 1993(10)
10.2 Incentive Stock Option Plan Ratified October 7, 1993(10)
10.3 Agreement dated as of September 21, 1994 between the Company and
Suncor Inc.(10)
10.4 Agreement dated as of July 1, 1994 between the Company and United Tri-
Star Resources Limited.(10)
10.5 Incentive Stock Option Plan Adopted April 24, 1984(4)
10.6 Employees' Non-Qualified Stock Option Plan
as Amended January 25, 1984 and April 24, 1984(5)
10.7 Agreement between the Company and Can-Amera Oil Sands, Inc. dated
June 29, 1987 (Portions of the document have been excluded pursuant
to the granting of a confidential treatment request by the Securities
and Exchange Commission.)(6)
10.8 Form of Indemnity Agreement entered into between the Company and each
of its Officers and Directors.(7)
10.9 Management Agreement between the Company and Can-Amera Oil Sands, Inc.
dated February 8, 1990.(8)
10.10 Agreement entered into in November, 1992 between the Company and the
Alberta Oil Sands Technology and Research Authority.(9)
-73-
<PAGE>
10.11 Agreement dated as of May 9, 1995 (executed on July 20, 1995) between
the Company and Petro-Canada, including Conveyance and Royalty
Agreement, both dated and executed on July 20, 1995.(12)
10.12 Letter Agreement dated June 12, 1995 between the Company and Gibson
Petroleum Company Limited.(12)
10.13 Marketing and Sales Representation Agreement dated June 6, 1995
between the Company and ITC., Inc.(12)
10.14 Convertible Loan Agreement dated April 18, 1996 between the Company
and PheMex Establishment
21 Subsidiaries of registrant
23 Consent of KPMG Peat Marwick LLP (Certified Public Accountants) as
Independent Auditors
______________________________________________
(1) Incorporated by reference from the same numbered exhibit filed with
the Company's Report on Form 10-K dated December 18, 1989.
(2) Incorporated by reference from the same numbered exhibit filed with
the Company's Registration Statement on Form S-3, No. 33-76504,
effective April 5, 1994.
(3) Incorporated by reference from the same numbered exhibit filed with
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1993.
(4) Incorporated by reference from Exhibit 10.4 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1984.
(5) Incorporated by reference from Exhibit 10.5 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1984.
(6) Incorporated by reference from Exhibit 10.9 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1987.
(7) Incorporated by reference from Exhibit 10.10 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1990.
(8) Incorporated by reference from Exhibit 10.11 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1990.
(9) Incorporated by reference from Exhibit 10.12 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993.
(10) Incorporated by reference from the same numbered exhibit filed with
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1994.
(11) Incorporated by reference from Exhibit 22 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1993.
(12) Incorporated by reference from the same numbered exhibit filed with
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995.
The registrant did not file any reports on Form 8-K during quarter ended
June 30, 1996.
The exhibits required in this report as listed above are either incorporated by
reference into this report or are filed as part of this report immediately
following the signature pages.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are inapplicable or the
information required is included in the consolidated financial statements or
related notes and, therefore, have been omitted.
-74-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOLV-EX CORPORATION
(Registrant)
September 27, 1996 By /s/ John S. Rendall
-----------------------------------------------------
John S. Rendall, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
September 27, 1996 /s/ John S. Rendall
-----------------------------------------------------
John S. Rendall, Chief Executive Officer and Director
September 27, 1996 /s/ W. Jack Butler
-----------------------------------------------------
W. Jack Butler, President, Chief Financial
Officer and Director (Principal Financial Officer)
September 27, 1996 /s/ Herbert M. Campbell II
-----------------------------------------------------
Herbert M. Campbell II, Senior Vice President,
and Director (Principal Accounting Officer)
September 27, 1996 /s/ J.E. Czaja
-----------------------------------------------------
J.E. Czaja, Vice President and Director
September 27, 1996 /s/ M. Norman Anderson
-----------------------------------------------------
M. Norman Anderson, Director
September 27, 1996 /s/ M.E. Davey
-----------------------------------------------------
M.E. Davey, Director
September 27, 1996 /s/ Julius D. Heldman
-----------------------------------------------------
Julius D. Heldman, Director
September 27, 1996 /s/ Thompson MacDonald
-----------------------------------------------------
Thompson MacDonald, Director
-75-
<PAGE>
INDEX TO EXHIBITS
PAGE NUMBER
IN SEQUENTIAL
EXHIBIT NUMBER AND DESCRIPTION NUMBERING SYSTEM
- ------------------------------ ----------------
2.1 Agreement between Registrant and Petrosearch
International Company, dated August 14, 1989 and
as amended *
3.1 Articles of Incorporation *
3.2 Bylaws, as amended October 9, 1992 *
10.1 Stock Option Plan for Directors Ratified October 7, 1993 *
10.2 Incentive Stock Option Plan Ratified October 7, 1993 *
10.3 Agreement dated as of September 21, 1994 between the
Company and Suncor Inc. *
10.4 Agreement dated as of July 1, 1994 between the Company
and United Tri-Star Resources Limited. *
10.5 Incentive Stock Option Plan *
10.6 Employees' Non-Qualified Stock Option Plan
as Amended January 25, 1984 and April 24, 1984 *
10.7 Agreement between the Company and Can-Amera Oil
Sands, Inc. dated June 29, 1987 (Portions of the
document have been excluded pursuant to the granting
of a confidential treatment request by the Securities
and Exchange Commission.) *
10.8 Form of Indemnity Agreement entered into between
the Company and each of its Officers and Directors. *
10.9 Management Agreement between the Company and Can-Amera
Oil Sands, Inc. dated February 8, 1990. *
10.10 Agreement entered into in November, 1992 between
the Company and the Alberta Oil Sands Technology
and Research Authority. *
10.11 Agreement dated as of May 9, 1995 (executed on
July 20, 1995) between the Company and Petro-Canada,
including Conveyance and Royalty Agreement, both
dated and executed on July 20, 1995. *
10.12 Letter Agreement dated June 12, 1995 between the
Company and Gibson Petroleum Company Limited. *
10.13 Marketing and Sales Representation Agreement dated
June 6, 1995 between the Company and ITC., Inc. *
10.14 Convertible Loan Agreement dated April 18, 1996 between
the Company and PheMex Establishment
21 Subsidiaries of the registrant
23 Consent of KPMG Peat Marwick LLP (Certified Public
Accountants) as Independent Auditors
* These exhibits are incorporated by reference from the like numbered
exhibits filed with the documents described under Item 14.
-76-
<PAGE>
CONVERTIBLE LOAN AGREEMENT
between
PHEMEX ESTABLISHMENT, Altenbach 8, P.O. Box 339, FL-9490 Vaduz
(hereinafter referred to as "Lender")
and
SOLV-EX CORPORATION , 500 Marquette N.W. Suite 300, Albuquerque, New Mexico
87102
(hereinafter referred to as "Solv-Ex.")
<PAGE>
I N D E X
PREAMBLE
Article Page No.
- ------- --------
1 DEFINITIONS 4
2 LOAN AMOUNT AND USE OF FUNDS 6
3 INTEREST 7
4 REPRESENTATIONS AND WARRANTIES 7
5 DRAW DOWN NOTICE AND DISBURSEMENT PROCEDURE 10
6 CONVERSION AND SHARE CERTIFICATES 10
7 COVENANTS 11
8 FEES 15
9 REPAYMENT 15
10 PAYMENTS 16
11 DELAYED PAYMENTS 16
12 SECURITY 17
13 PROTECTION OF ENVIRONMENT 17
14 OTHER OBLIGATIONS OF SOLV-EX 18
15 CONDITIONS PRECEDENT 19
16 COSTS, CHARGES AND EXPENSES 20
17 EVENTS OF DEFAULT 20
18 MISCELLANEOUS 22
<PAGE>
PREAMBLE
A WHEREAS the Lender is a company incorporated in 1995 under Liechtenstein
law with its registered office in Liechtenstein; and
B. WHEREAS Solv-Ex is a company incorporated in New Mexico with one class of
approximately 23,000,000 Common Shares outstanding which are quoted and
publicly traded on the NASDAQ Small Cap Market with a total of 30,000,000
of Common Shares authorized; and
C. WHEREAS Solv-Ex was formed in 1980 to develop a second generation
technology to efficiently extract oil from oil sands with small units and
to co-produce metal and mineral products from fine clays which were in the
past considered as waste tailings; and
D. WHEREAS Solv-Ex holds the Bituminous Lease near Fort Murray and the
management of Solv-Ex has decided to exploit the Bituminous Lease to apply
its technology and expertise for construction and operation of a production
facility to initially produce 14,000 barrels of oil and a substantial
amount of Alumina per day; and
E. WHEREAS Solv-Ex has successfully completed a significant amount of
research, development and pilot plant work to develop its process which is
protected by various patents to extract and upgrade oil from oil sands and
to market the oil under the registered trademark "PCO"; and
F. WHEREAS pursuant to the terms and conditions of an Offshore Distribution
and Sale Agreement dated March 21, 1996, the Lender has exercised its
rights to provide a loan to Solv-Ex in the amount of USD 33,000,000.-- for
the construction of a plant to extract and to upgrade the oil from the oil
sands to be mined from the Lease, thereby allowing Solv-Ex to commence the
construction of the Project; and
G. WHEREAS Solv-Ex will secure the Loan in the amount of USD 33,000,000.-- by
delivering 1,O16,000 restricted Common Shares in Solv-Ex with a share
transfer form duly signed by
3
<PAGE>
Solvex as a collateral to the Lender and by consenting that the Lender may
sell said shares if Solv-Ex is in an unremediable default at his
discretion; and
H. WHEREAS Solv-Ex and the Lender shall agree that the Loan of USD shall be
granted at a fixed interest rate of 12% per annum and that the Lender may
charge the first annual interest payable of USD 3,960,000.-- of the
Principal and whereas the interest in the second and the third year of the
Loan shall be paid on a quarterly basis in four equal installments of USD
990,000 on April 30, July 31, September 30 and December 31 of the
respective year; and
1. WHEREAS Solv-Ex and the Lender shall agree that the Principal of USD
33,000,000.-- shall be convertible into shares in Solv-Ex in whole or in
part at the option of the Lender on a conversion price of USD 32.50 per
share at any time until the Principal and all interest shall be repaid in
full by Solv-Ex to the Lender; and
K. WHEREAS Solv-Ex shall only be permitted to spend USD 26,400,000.-- of USD
33,000,000.-- on the financing of the construction of the oil sands co-
production facility on the Bitumount Lease to commence with the oil
production under the trademark PCO in early 1997 to generate 14,000 barrels
of oil per calendar day as well as a substantial amount of alumina;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained, the Lender and Solv-Ex hereby agree as follows:
ARTICLE 1
DEFINITIONS:
In the context of this Agreement the following terms shall mean:
"Agreement" shall mean this Convertible Loan Agreement.
"Appendices" shall mean Annexes to this Agreement, which shall form an integral
part of this Agreement.
"Business Day" shall mean each day on which banks and foreign exchange markets
are open for business in such places contemplated for the transactions required
by this Agreement.
"Commitment" shall mean USD 33,000,000.-- (thirty three million).
"Common Shares" shall mean fully paid and non assessable Common Shares in
Solv-Ex, including the Common Shares issued or to be issued hereunder.
4
<PAGE>
"Current Assets" shall mean the aggregate of Solv-Ex's cash, marketable
securities, trade and other receivables realizable within one year, inventories
and prepaid expenses which are to be charged to income within one year.
"Current Liabilities" shall mean the aggregate of all liabilities of Solv-Ex
falling due on demand or within one year, including dividends to be disbursed
and the portion of long-term debt falling due within one year, but excluding
liabilities for property, plant and equipment to the extent of the amount of
funds therefore excluded from the calculation of Current Assets.
"Current Ratio" shall mean the result obtained by dividing Current Assets by
Current Liabilities.
"Debt" shall mean the aggregate of all obligations of Solv-Ex then outstanding
for the payment or repayment of money, also including:
- - any amounts payable by Solv-Ex under leases or similar arrangements with
respect to vehicles, plant and equipment over their respective periods;
- - any credit to Solv-Ex from a supplier of goods or under any instalment
purchase or other similar arrangement; and
- - the aggregate amount at that time outstanding liabilities and obligations
of third parties to the extent that they are guaranteed by Solv-Ex.
"Drawdown Date" shall mean the date upon which the Commitment is made available
to Solv-Ex.
"Equity" shall mean shareholders' equity, effectuated in accordance
with the GAAP of the United States certified by the Auditors and approved by
Solv-Ex.
"Exercise Price" shall mean USD 32.50 for each Common Share in Solv-Ex which are
held in escrow by the Escrow Agent on behalf of Solv-Ex and the Lender.
"Expiry Date" shall mean April 15,1999, 4 pm.
"GAAP" shall mean the American Generally Accepted Accounting Principles,
consistently applied.
"Interest Payment Date" shall mean on the same day as the Drawdown was presented
in each year. Should this date not fall on a Business Day, the Interest Payment
Date will be the first Business Day thereafter.
"Interest Rate" shall mean 12% per annum on the Principal of USD 33,000,000.--
throughout the Loan Period calculated from the Drawdown Date.
"Interest Period" shall mean the period from, and including, the day of
disbursement and ending on the day immediately and including, subsequent
Interest Payment Dates and ending on the day immediately before the Interest
Payment Dates thereafter.
"Interest Payment Date" shall mean that the interest for the first year of USD
3,960,000.-- shall be paid in advance and may be deducted from the Principal of
USD 33,000,000.-- by the Lender and whereas the interest in the second and the
third year of the Loan shall be paid on a quarterly basis in four equal
installments of USD 990,000.-- on April 30, July 31, September 39 and December
31.
"Loan" shall mean the funds made available to Solv-Ex under this Agreement and
any portion thereof.
5
<PAGE>
"Net Worth" shall mean the difference between net assets and net liabilities.
"Pledge over Shares" shall mean that the 1,O16,000 Common Shares which will be
granted by Solv-Ex as a collateral to the Lender shall, with all dividends and
bonuses and all rights and benefits attached, thereon constitute a continuing
security to the Lender for the Repayment of the principal and all interest on
the Loan.
"Principal" shall mean USD 33,000,000.--.
"Project" shall mean the investment as set out in the Business Plan of Solv-Ex
which describes a plant to extract 14,000 barrels of oil to be upgraded into
marketable heavy crude oil and whose estimated cost shall amount to USD
125,000,000.--.
"Project Completion Date" shall mean September 30,1997.
"Repayment Date" shall mean the date prior to which the Lender converts the
Principal or the repayment of USD 33,000,000.-- on April 30, 1999 into shares in
Solv-Ex.
"Right of Conversion" shall mean the right of the Lender to convert a part or
all of USD 33,000,000.- into 1,O16,000 Common Shares in Solv-Ex which are
held by the Lender by submitting a written statement that he is converting
the Loan into 1,O16,000 Common Shares in Solv-Ex and by sending the
certificate of 1,O16,000 of the Common Shares in Solv-Ex for reregistration
to the transfer agent of Solv-Ex in order that a new certificate shall be
issued to an entity to be identified by the Lender.
"Security Documents" shall mean the transfer form duly executed by Solv-Ex that
the certificate of 1,O16,000 shares of Common Shares in Solv-Ex may be
transferred and are to be reregistered by the transfer agent of Solv-Ex.
"Securities Exchange Act" shall mean the Securities Exchange Act of the United
States of 1934.
"Securities and Exchange Commission" shall mean the Securities
and Exchange Commission of the United States.
"USD and US Dollars" shall mean the lawful currency of the United States of
America.
ARTICLE 2
LOAN AMOUNT AND USE OF FUNDS
The Lender undertakes to provide Solv-Ex with a loan of USD 33,000,000.--
(thirty three million United States Dollars) and Solv-Ex shall accept this Loan
on the following terms and conditions. The Lender will disburse 26,400,000.--
to Solv-Ex. Solv-Ex hereby approves that the commission of 7 % of Fiba Nordic
Securities (UK) Ltd., the cost for setting. up this Loan Agreement of 1 % and
the interest for the first year may be deducted and paid by the Lender directly.
6
<PAGE>
ARTICLE 3
INTEREST
3.1 Solv-Ex shall pay interest at the rate of 12% p.a. (twelve per cent per
annum) on loan balances outstanding after the signing of this Agreement.
3.2 Interest will be owed from the day of disbursement of the Loan and is
debited until the day immediately before repayments are credited to the
Lendees account.
3.3 Interest for the first year of USD 3,960,000.-- shall be paid in advance
and may be deducted from the Principal of USD 33,000,000.-- by the Lender,
in the second and the third year the interest shall be paid on a quarterly
basis in four equal instalments of USD 990,000.-- on April 30, July 31,
September 39 and December 31. For the purpose of calculating interest
payable, a year shall comprise 360 days and a month shall comprise 30 days.
Interest payable in respect of each calendar day shall be calculated by
dividing annual interest due by 360.
3.4 Interest shall be payable by Solv-Ex without deduction or retention of any
present or future tax liabilities, charges or official payments whatsoever,
except where such deduction or retention is prescribed by law. In such
cases, Solv-Ex shall make an additional payment to the effect to fully
compensate the deducted or retained amount.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 Solv-Ex is a corporation duly incorporated and in good standing under the
laws of the jurisdiction of New Mexico, is duly authorized to transact
business in each jurisdiction in which its business is conducted, and is
duly authorized and empowered by its corporate bodies to complete the
transactions herein. Solv-Ex hereby assures that all corporate action
required on its part to complete the transactions herein contemplated have
been duly and effectively taken.
4.2 Solv-Ex has by proper corporate action authorized and reserved the number
of unissued shares of Common Stock of the Company required for the
conversion of the the Debt into Common Shares in Solv-Ex. This Convertible
Loan Agreement will be a valid and enforceable obligation of Solv-Ex and
Solv-Ex warranties that it is in accordance with its Corporate Charter,
Bylaws, or any other agreement entered by Solv-Ex and that the terms of
this Agreement do not violate any provision of Law.
7
<PAGE>
4.3 Solv-Ex has furnished to the Lender Financial Statements of 1993, 1994,
1995 and other disclosure information contained in the documents referred
to hereinafter. Solv-Ex hereby represents and warrants that the Annual
Financial Statements which were established by consistently applying the
GAAP and the documents hereinafter referred to are true, complete and
accurate as at the date thereof:
(a) Annual report on Form 1O-K for the year ending June 30, 1995:
(b) Quarterly reports on Form 1O-Q for the quarters ending September 30,
1995 and December 31, 1995;
(c) Current reports on Form 8-K and press releases dated subsequent to
June 30, 1995;
(d) Business Plan describing the Project and containing certain forward-
looking information which is subject to the qualifications stated
therein.
4.4 Solv-Ex hereby warrants, that there has been no material adverse change in
the condition, financial or otherwise, of the Company and its subsidiaries
taken as a whole since December 31, 1995.
4.5 Solv-Ex hereby warrants, directly or indirectly through related parties,
that it has good title, free and clear of all liens and encumbrances to all
material real estate, plants, fixed property and to all other properties
and assets reflected on Solv-Ex's financial statements other than as
disposed of in the ordinary course of business since the date of such
financial statements.
4.6 Further Solv-Ex warranties that it is not in material default under any
indenture, mortgage, deed of trust, agreement or other instrument to which
it is a party or by which it may be bound. Neither the execution and
delivery of this Agreement or any instrument or document to be delivered
under this Agreement, the completion of the transactions contemplated
herein or therein, nor compliance with the provisions hereof and thereof,
will: violate any law, regulation, order, or decree; nor will they conflict
with, or result in the breach of, or constitute a default under, any
indenture, mortgage, deed of trust, agreement, or other instrument to which
Solv-Ex is a party or by which it is bound; nor will they result in the
creation or imposition of any lien, charge, or encumbrance upon any of the
Company's
8
<PAGE>
property thereunder; or violate any provision of the Company's
Articles, Certificate of Incorporation, or Bylaws.
4.7 Solv-Ex holds valid leases covering the use or occupancy of all
property or assets used in its respective businesses and none of said
leases is in default. Solv-Ex warranties that it shall not encumber
or dispose in any kind of the Bituminous Lease 7276120TO5 without the
previous written consent of the Lender. The Lender shall only
withhold such a consent with proper cause if Solv-Ex wants to encumber
said lease to set up the rest financing to finalize the Project.
4.8 Solv-Ex warranties that it is not a party to any agreement or
instrument or subject to any corporate restriction (including any
restriction set forth in its Articles or Certificate of Incorporation)
materially and adversely affecting its operations, business,
properties, or financial conditions.
4.9 Solv-Ex possesses all the material trademarks, trade names,
copyrights, patents, licenses, permits (including those for
environmental compliance) or rights, adequate for the conduct of its
respective business, in particular, extraction of minerals and other
resources in the United States and any other country, as now conducted
and presently proposed to be conducted, without conflict with the
rights or claimed rights of others.
4.10 Solv-Ex hereby warranties that there is no litigation, legal or
administrative proceedings, investigation or other action of any
nature pending or, to its knowledge, threatened against or affecting
it which involves the possibility of any judgment or liability not
fully covered by insurance or which may materially and adversely
affect any of the assets of Solv-Ex or its respective rights to carry
on business as now conducted. Solv-Ex has disclosed to the Lender
certain documents regarding an ongoing investigation of the Securities
and Exchange Commission about the trading or issuance of Common Shares
in Solv-Ex.
4.11 No action of, or filing with, any governmental or public body or
authority is required to authorize, or is otherwise required, in
connection with the execution, delivery, and performance of this
Agreement or any instrument or document to be delivered pursuant to
the Agreement, except that the filing with respect to the capital
structure must be reported to the Securities and Exchange Commission
of the United States and Nasdaq immediately after having executed this
Agreement. Solv-Ex shall document the Lender with a certified copy of
its filing of this Agreement to the Lender within five business days
after compilation of such filing.
9
<PAGE>
4.12 All federal, state and other tax returns and reports of Solv-Ex
required by United States law to be filed, have been duly filed and
all federal, state and other taxes, assessments, fees and other
governmental charges (other than those presently payable without
penalty) imposed upon Solv-Ex or the properties or assets of Solv-Ex
which are due and payable have been paid.
4.13 Neither Solv-Ex nor any agent acting on its behalf has offered the
common stock underlying this Convertible Loan Agreement to any person
or persons other than the Lender.
4.14 Solv-Ex shall inform the Lender promptly and in writing of any change
in the aforementioned representations.
ARTICLE 5
DRAW DOWN NOTICE AND DISBURSEMENT PROCEDURE
5.1. The Loan of USD 33,000,000.-- will be disbursed in one payment of USD
26,400,000.-- as described in Article 2 of this Agreement upon
presentation of a draw down notice by Solv-Ex. The Commitment shall
be made available to Solv-Ex in one amount five days after the
presentation of a Drawdown Notice to an account specified by the
Lender.
5.2. A drawdown notice shall only be valid if it corresponds to the
contents of Appendix 2 of this Agreement and its submission to the
Lender represents the last condition precedent to disbursement.
ARTICLE 6
CONVERSION AND SHARE CERTIFICATES
6.1 The Principal shall be convertible at the option of the Lender into Common
Shares of Solvex based on an exercise price of USD 32.50 per share at any
time until the termination of this Agreement.
6.2 Solv-Ex warrants that by proper action of its Board of Directors it has
appropriated and reserved the number of the now authorized and unissued
shares in Solv-Ex's Common Stock to allow the conversion of the Convertible
Debt of USD 33,000,000.-- upon a written statement into 1,016,000 Common
Shares in Solv-Ex. Solv-Ex shall irrevocably instruct its transfer agent
to reregister the certificate of 1,O16,000 of the Common Shares in Solv-Ex
to
10
<PAGE>
issue and send a new certificate to an entity to be identified by the
Lender within seven business days after having received the certificate
provided as a collateral for this Loan of 1,O16,000 Common Shares in
Solv-Ex for exchange.
6.3 Whenever Solv-Ex will issue shares of its common stock for no consideration
(such as in the case of a stock split or stock dividend) or whenever
Solv-Ex will reclassify the shares into a smaller number of shares (such
as in the case of a reverse stock split), then, upon such issue or
reclassification, the conversion price shall be reduced (or increased in
the case of a reverse stock split or similar actions which result in a
lesser number of shares outstanding) by multiplying the conversion price
immediately prior to the transaction requiring the adjustment by a fraction
of which the numerator shall be the number of Common Shares outstanding
immediately prior to such transaction and the denominator shall be the
total number of Common Shares outstanding immediately after such
transaction. For the purpose of this provision, the Common Shares
outstanding shall include shares held by Solv-Ex if such dividend,
distribution, combination or subdivision is made with respect to, or
affects, such shares. The certificate of any firm of independent public
accountants of recognized standing selected by the Board of Directors of
Solv-Ex shall be conclusive evidence of the correctness of any computation
made.
6.4 If Solv-Ex shall consolidate or merge with or into any other corporation or
shall sell all or substantially all of its property as an entirety, lawful
provision shall be made a part of the terms of such transaction that the
Lender may then or thereafter, upon exercise thereof, receive in lieu of
each Common Share issuable to them upon such exercise and with the same
protection against dilution (all as herein provided) the same kind and
amount of stock (and other securities and assets, if any) as may be
issuable or distributable upon such transaction with respect to each
outstanding Common Share, and after such transaction the conversion rights
of the Lender shall be merely to receive upon exercise thereof such stock
(and other securities and assets, if any). Upon the conversion of the
Convertible Debt, Solv-Ex shall not issue a fractional share but shall
issue the largest number of full shares obtainable upon such conversion
and no account shall be taken of any right in respect of a fractional
share.
ARTICLE 7
COVENANTS
7.1 Solv-Ex will duly and punctually pay the principal and interest on the
dates and in the manner provided in this Loan Agreement.
11
<PAGE>
7.2 Solv-Ex will provide to the Lender financial and other material information
concerning operations, especially all information and documents regarding
the Investigation with the Securities and Exchange Commission and any other
investigating governmental authorities to which it has access or to which
it will have access.
(a) as soon as practicable, two copies of each annual and interim
financial and other report or communication sent by the Company to its
shareholders or filed with the Securities and Exchange Commission;
(b) as soon as practicable, two copies of every press release and every
material news item and article in respect of the corporate affairs of
the Company which is released for publication by the Company; and
(c) such additional non-confidential and readily available documents and
information with respect to Solv-Ex and its business affairs and the
business affairs of any Subsidiaries as the Lender may request from
time to time in writing.
7.3 Solv-Ex will pay promptly and discharge all taxes lawfully levied or
imposed, pay when due all lawful claims for liabilities which if unpaid
would by law be a lien or charge upon the property of Solv-Ex or lead to
the suspension of the business of Solv-Ex; provided, however, that nothing
herein shall require it to make any such payment or compliance so long as
it is in good faith and by appropriate proceedings diligently conducts
contests of its obligation to do so, if such reserve as shall be required
by Generally Accepted Accounting Principles shall have been made therefore,
and if such contest will not result in the forfeiture or loss of any
property of Solv-Ex.
7.4 Solv-Ex will maintain insurance with financially sound and reputable
insurers, with respect to its properties and business against such
casualties and contingencies, and in such types and amounts as may be
required by the Lender from time to time. Schedules of all insurance of
Solv-Ex and each Subsidiary will be submitted to the Lender within 30 days
after signing of this Agreement. Such schedules will contain a description
of the risks covered, the amounts of insurance carried on each risk, the
name of the insurer and the cost of such insurance to Solv-Ex. Solv-Ex
shall be obliged to insure the production plant reflecting its cost.
12
<PAGE>
7.5 Solv-Ex will, at all times, keep, and will cause each of its subsidiaries
to keep true and complete books and records in connection with its assets
and operations, in accordance with GAAP.
7.6 Solv-Ex will maintain in good repair, working order and condition all
properties used and useful in the business of Solv-Ex and make all such
repairs, renewals, replacements, additions and improvements thereto as may
be needed and appropriate.
7.7 Solv-Ex will maintain its status as a reporting company and will continue
to file reports as required by Sections 12 and 13 of the Securities
Exchange Act of 1934. Solv-Ex will furnish to the Lender a copy of any
report filed with the Securities and Exchange Commission pursuant to said
Sections within 5 business days after filing such reports with the
Securities Exchange Commission. Solv-Ex undertakes to furnish the Lender
with all the relevant information and documents regarding all
communications with the Securities and Exchange Commission.
7.8 Solv-Ex shall maintain the following ratios and tangible net worth:
(a) Current assets divided by current liabilities (as reflected in the
financial statements contained in any report filed with the Securities
and Exchange Commission) shall not be less than 1.2.
(b) Net Worth (shareholders equity) divided by total indebtedness (not
including contingent indebtedness) (as reflected in the financial
statements contained in any report filed with the Securities and
Exchange Commission) shall not be less than 1.
(c) Tangible Net Worth (shareholders' equity) as reflected in the
financial statements contained in any report filed with the Securities
Exchange Commission shall not be less than USD 5,000,000.
7.9 Solv-Ex shall conduct, directly or indirectly through any subsidiary,
only those businesses and activities in which Solv-Ex is presently
actively engaged, or which are disclosed in the Business Plan referred
to in Section 4.2(d) hereof.
7.10 Solv-Ex will promptly furnish on request of the Lender such
information as may be reasonably necessary to determine whether (a) it
is complying with its covenants and
13
<PAGE>
agreements contained in the Loan Agreement, (b) an event of default
has occurred hereunder at any time.
7.11 Solv-Ex will permit, at such reasonable times as will not unreasonably
interfere with the conduct of the business, the Lender or any of the
Lender officers, employees or designated representatives to visit and
inspect any property of Solv-Ex and make available for inspection or
copying to any such officer, employee or designated representative any
of Solv-Ex's books and records. A designated officer of Solv-Ex will
discuss with the Lender, or any of the Lender's officers, employees
or designated representatives, any of the affairs, finances and
accounts at such reasonable times and as often as the Lender may
reasonably request.
7.12 No default exists with respect to any indebtedness of Solv-Ex or its
subsidiaries for borrowed money or any agreement or indenture relating
thereto.
7.13 Solv-Ex shall make full and timely payment of the principal and
interest and duly comply with all terms and covenants contained
pursuant to this Agreement.
7.14 Solv-Ex shall, at its own expense, upon Lender's request, duly execute
and deliver to the Lender all further instruments and do, and cause to
be done, all further acts necessary and proper, in the Lender's
opinion, to carry out more efficiently the provisions and purposes of
this Agreement.
7.15 Solv-Ex undertakes with the Lender as from the date hereof and for so
long as any amounts are owned by Solv-Ex to the Lender hereunder that
it will and shall procure that:
a) Solv-Ex shall not make any advances except in the ordinary course of
business or make any loan other than to a subsidiary (if any) without
the previous written consent of the Lender. The Lender shall only
withhold such approval with proper cause.
b) Solv-Ex shall not raise a Loan except with the previous written
consent of the Lender. The Lender approves by consenting to a further
debt financing of Solv-Ex to finalize the Project that his claim shall
be subordinated thereto. The Lender may shall only withhold such
approval with proper cause.
14
<PAGE>
c) Solv-Ex or its subsidiaries shall not, without the previous written consent
of the Lender, incur or secure by way of any of its assets any
indebtedness; the Lender may not withhold such approval unreasonably.
d) Solv-Ex shall not directly or indirectly purchase, acquire, redeem or
retire any shares of its Common Shares outstanding other than to accept
shares in payment of the exercise price for stock options granted by
Solv-Ex in accordance with the terms of such options.
e) Solv-Ex shall not pay any dividends in any fiscal year, including the
current year (other than dividends payable solely in its shares) except
with the written consent of Lender. The Lender may shall only withhold
such approval with proper cause.
f) Solv-Ex shall not consolidate or merge with, or purchase, all or a
substantial part of the assets of any corporation, firm, association or
enterprise, or sell, lease or otherwise transfer any assets or other than
in the normal course of its business, except that this restriction shall
not prevent any subsidiary of Solv-Ex (now existing or hereafter formed)
from liquidation into or merger with Solv-Ex or with another subsidiary
provided that in any merger involving Solv-Ex, Solv-Ex shall be the
surviving corporation. This restriction shall not be deemed to preclude
Solv-Ex for entering into a joint venture or similar arrangement to obtain
financing of the Project provided it has received the previous written
consent of the Lender. Such consent shall not be withheld without proper
cause.
ARTICLE 8
FEES
Solv-Ex shall pay a one time commitment fee on the aggregate Loan of 1%
p.a., after signing of this Agreement and it hereby approves that USD
330,000.-- are charged by the Lender on the disbursement of the Loan.
ARTICLE 9
REPAYMENT
9.1 Solv-Ex shall repay the Loan of USD 33,000,000.-- in one instalment on
April 15, 1999, if the Lender has not previously exercised his right to
convert the Principal into shares in Solv-Ex at the Exercise Price.
15
<PAGE>
9.2. Provided that the Lender has made use of his Right of Conversion no
repayment shall become due under this Agreement.
ARTICLE 10
PAYMENTS
10.1 Payment obligations of Solv-Ex arising from this Agreement are
satisfied only if and in so far as, after deduction of all costs and
expenses, the respective amounts are credited not later than 9:00 a.m.
local time on their due dates to the Lender's bank account in United
States Dollars which shall be nominated to Solv-Ex not later than 7
days prior to the respective obligation falling due.
10.2 The setting off of counterclaims against the Lender's claims arising
from this Agreement as well as Solv-Ex's right to withhold payments
shall not be permitted. This shall not apply to the setting off of
Solv-Ex's claims that are undisputed or that have been adjudicated
upon without recourse.
10.3 In so far as Solv-Ex's payments do not satisfy all due obligations,
the Lender may determine to which obligations they shall be applied.
10.4 Should Solv-Ex be compelled by legal regulations to make lesser
payments than are due or payments in a currency other than that
contracted, it shall be obliged to make further payments until the
contracted sum has been reached and, in the case of payment in a
currency not specified in this Agreement, shall be obliged to pay the
difference between the contracted amount and the equivalent in United
States Dollars of the amount paid converted at the same time.
ARTICLE 11
DELAYED PAYMENTS
11.1 For repayments which are not made on their due dates, additional
interest of 5% p.a.,calculated from such due date to the date of
payment, shall be payable. The payment has to be effected on the
next Interest Payment Date.
16
<PAGE>
11.2 ln the event that interest due to the Lender is not paid, Solv-Ex
shall be obliged to make a penalty payment to the Lender. By way
of penalty payment, Solv-Ex shall pay the Lender an amount
equalling interest on the delayed payments for the period of their
delay at a rate being five percentage points above the interest
agreed.
ARTICLE 12
SECURITY
12.1 Solv-Ex assures that its assets as specified in the afore-mentioned
financial statements which form Appendix 3 hereto are not pledged by
any other charges than those mentioned in such financial statements
provided to the Lender.
12.2 Solv-Ex shall not pledge its assets or part thereof without the
Lender's prior consent in writing. The Lender may not withhold such
consent unreasonably.
12.3. Solv-Ex shall provide certificates of 1,016,000 Common Shares in
Solv-Ex as a collateral of the Loan of the Lender. The Lender and
Solv-Ex hereby agree that the l,Ol6,000 Common Shares in Solv-Ex may
be sold by the Lender in accordance with the applicable laws if
Solv-Ex will not remove the occurrence of a default within 30 days and
Solv-Ex hereby approves that the Lender may compensate the returns of
such sale against the principal and the interest due.
12.4 At the Lender's request, Solv-Ex shall, at any time during the
effectiveness of this Agreement, create and register in favour of
the Lender securities over such of its assets as the Lender will
specify to cover the balance then outstanding of the Loan plus
interest and other claims as stipulated in this Agreement. If the
Lender has asked for more security, Solv-Ex shall have the right to
prepay the Loan in one instalment to the Lender within 30 days after
such request was received.
ARTICLE 13
PROTECTION OF ENVIRONMENT
Solv-Ex undertakes to put in place at any time measures necessary to ensure
environmental protection and occupational health and safety in accordance with
the specific Environmental Regulations of the Province of Alberta and Canada in
particular to ensure that
17
<PAGE>
a) the special protection measures mentioned in the Project Description are
properly implemented and maintained;
b) plans as set out in the Project Description are developed and implemented
for the environmental improvement of the existing installations;
c) the necessary measures are promptly taken to protect against environmental
dangers which arise or become known at a later date;
d) the Lender receives annual reports on the performance of Solv-Ex's plant
concerning environmental protection on occupational health and safety and
containing such detailed information as set out in the Project Description;
e) the Lender is notified forthwith of unusual events concerning the
environment or occupational health and safety and special measures taken.
ARTICLE 14
OTHER OBLIGATIONS OF SOLV-EX
14.1 Solv-Ex undertakes:
a) to implement the Project in strict conformity with the Project
Description, to carry out its business activities in general in
accordance with accepted principles of care, prudence and
commercial practice as well as in conformity with commercial,
financial and technical standards in force, and to retain
sufficient qualified personnel;
b) to obtain all consents, permissions, approvals, licences and
authorizations from, among others, authorities, shareholders and
creditors, and, where necessary to keep them in force and to
renew them as required by the applicable laws, statutes,
regulations and agreements in order to fulfil this Agreement and
not to breach the terms of such consents, permissions, approvals,
licences and authorizations;
c) to provide the Lender at any time upon request with any
information about itself and its business activities and to
provide copies of requested documents and papers (including
correspondence, contracts, minutes of meetings);
d) to permit access for the Lendees authorized representatives to
its business and works premises at any time during normal working
hours as well as inspection and
18
<PAGE>
examination of its financial records and all business papers and
documents, if Solv-Ex does not comply with an obligation under
this Agreement;
e) to ensure that its obligations under this Agreement are always
given at least equal treatment to those of other creditors as set
out in the Project Description with respect to their fulfilment
and security, in particular not to undertake early repayment of
other loan or credit liabilities without the prior written
consent of the Lender.
f) to sign a Registration Rights Agreement if the Lender will have
used his right to convert this Loan into 1,016,000 Common Shares
in Solv-Ex. Provided, however, that no such Registration Right
Agreement shall be required the Lender shall receive a legal
opinion of a legal counsel admitted to practicefin the United
States paid by Solv-Ex that the shares are otherwise marketable
in an equal manner in the United States under Regulation S
promulgated under the Securities Act of 1933 within 90 days
following transfer of the Common Shares of the Lender or another
exception for registration requirements to be available under
said act.
14.2 If Solv-Ex decides to market the technology in Europe Solv-Ex shall
provide the exclusive right to the Lender to market the technology
used within the Project in Europe. Solv-Ex shall provide a complete
list of all patents and a full decription of the technology used to
the Lender within 30 days after the signing of this Agreement.
ARTICLE 15
CONDITIONS PRECEDENT
15.1 The obligation of the Lender to make the Loan available is
conditional upon the Lender having received in form and substance
satisfactory to itself and its legal advisers:
a) Execution of this Agreement and and all Appendices hereto
b) Delivery of a Certificate of 1,016,000 Common Shares in Solv-Ex
as well as a Stock Transfer form, duly executed by Solv-Ex
together as a Collateral to the Lender.
c) Drawdown Notice of Solv-Ex
19
<PAGE>
15.2 Solv-Ex shall deliver the Certificate of 1,016,000 Common Shares in
Solv-Ex as well as a Stock Transfer form, duly executed by Solv-Ex to
the Lender on April 15, 1996. The Lender shall duly sign this
Agreement on April 18, 1996.
ARTICLE 16
COSTS, CHARGES AND EXPENSES
Solv-Ex shall bear the costs, taxes, fees and other charges and expenses
incurred in connection with the conclusion and implementation of this
Agreement, and the Registration Right Agreement, in particular those with
respect to the issue, the creation registration, enforcement and, if
necessary, the cancellation of securities, with the disbursement of the
Loan, the transfer and remittance of all payments to be made under this
Agreement and with pursuance and enforcement of rights in connection with
this Agreement.
ARTICLE 17
EVENTS OF DEFAULT
17.1 Each of the following events shall be an Event of Default:
(a) any principal of, or interest on, the Loan or any other amount due
under this Agreement is not paid upon the due date for payment
thereof;
(b) there is a material (in the sole opinion of the Lender) default on the
part of Solv-Ex under any of the provisions of this Agreement (other
than a) above) which (if in the sole opinion of the Lender it would be
capable of being remedied) is not remedied within 30 days after notice
to Solv-Ex requesting action to remedy such default;
c) any representation made by Solv-Ex in this Agreement or any notice,
certificate, or written statement delivered or made pursuant hereto
proves to be misleading or materially incorrect or inaccurate when
made;
d) the Lender's funding is declared due for repayment prior to the stated
maturity thereof as a result of the occurrence of an event of default
under the Loan Agreement;
e) a distress or other execution is levied upon or against any
substantial part of the property of Solv-Ex and is not discharged
within 30 days, unless such distress or execution is contested
20
<PAGE>
in good faith by Solv-Ex in appropriate proceedings diligently pursued
which protect Solv-Ex's interest in such property;
f) an order of a competent court or an event analogous thereto shall be
made, or any effective resolution shall be passed, with a view to the
bankruptcy, composition proceedings, liquidation or winding-up of
Solv-Ex;
g) Solv-Ex is unable or admits its inability in writing to pay its lawful
debts as they mature, or makes a general assignment for the benefit of
its creditors;
h) Solv-Ex ceases or threatens to cease to carry on its business or
dispose or threatens to dispose of a substantial part of its business,
properties or assets or of any portion of the Lendees share holding to
any acquiror other than the Lender, or the same are seized or
appropriated for any reason;
i) the Articles of Incorporation and/or Bylaws (if any) of Solv-Ex are
modified in any material way (in the sole opinion of the Lender)
without the prior consent in writing from the Lender;
k) any license, consent, permission or approval required in connection
with the implementation, maintenance and performance of this Agreement
is revoked, terminated of modified in a manner unacceptable to the
Lender;
l) two or more of the 5 key employees of Solv-Ex should resign their
positions during the Loan Period and their positions are not filled by
persons of a comparable competence acceptable to the Lender (such
approval must not be withheld unreasonably) within 3 months of the
date of the relevant resignation.
m) a material adverse change occurs in the financial condition of
Solv-Ex, by way of the operation, equity or result of Solv-Ex
deteriorating to such extent that more than 50 % of Solv-Ex's Equity
has been lost at any time during the Loan Period and provided that
the earnings of Solv-Ex at that time, in the reasonable opinion of
the Lenders and Solv-Ex's auditors, make it unlikely that such equity
will be regained within a period of six months.
17.2 Upon the occurrence of any Event of Default referred to in this Clause
and so long as such Event of Default continues, the Lender may, and in
case of default as set forth in Subclause of this Agreement, shall
accelerate the Loan and the Lender shall forthwith notify Solv-Ex in
writing that the entire amount of the Loan outstanding together with
interest and all other
21
<PAGE>
amounts outstanding under this Agreement shall become immediately due and
payable, and failing full repayment of all amounts then outstanding to the
Lender the Certificate of 1,016,000 of Common Shares in Solv-Ex may be sold
by the Lender at his discretion and compensated towards the Principal of
Solv-Ex.
ARTICLE 18
MISCELLANEOUS
18.1 All communications in connection with this Agreement shall be sent in
writing in English to the following addresses:
SOLV-EX Corporation:
500 Marquette NW, Suite 300
Albuquerque
New Mexico 87102
Phemex Est.
Altenbach 8
Postfach 339
FL-9490 Vaduz
Each party hereto undertakes to notify the other party of any change
of address.
18.2 Solv-Ex shall not assign or transfer, pledge or mortgage any rights
under this Agreement.
18.3 Any modification or amendment of this Agreement must be in writing.
18.4 Should any of the provisions of this Agreement be void for whatsoever
reason, the validity of the remaining provisions shall thereby not be
affected. In such case the parties to this Agreement shall, without
any delay, replace the ineffective provision by a legally effective
one which in its consequences shall approximate the ineffective
provision as closely as possible.
18.5 In case the Lender does not exercise any right to which it is entitled
under this Agreement, such an omission shall not be considered to
constitute a waiver of such right.
18.6 This Agreement shall be effective upon the date first above written
and shall remain binding as long as any amount is due to the Lender.
18.7 This Agreement shall be governed by, and construed in accordance with,
the laws of the United Kingdom.
22
<PAGE>
18.8 Exclusive jurisdiction in connection with this Agreement lies with the
competent courts of the City of London. Notwithstanding anything to
the contrary, the Lender may have recourse to any competent court or a
court of arbitration established in accordance with the rules and
regulations of the International Chamber of Commerce, Paris, whose
award shall be final and binding.
IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized
representatives, have caused this Agreement to be signed in their respective
names as of the day and year first above written.
The LENDER: Phemex Est.
[Signature illegible]
- -----------------------------------------
SOLV-Ex Corporation
Herbert M. Campbell II
- -----------------------------------------
23
<PAGE>
From: Solvex Corporation
To: Phemex Establishment
Dear Sirs,
We refer to the Convertible Loan Agreement (the "Loan Agreement") dated April
16, 1996 and made between ourselves as Borrower and yourselves as Lender. Terms
defined in the Loan Agreement shall have the same meaning in this notice.
We hereby give you notice that pursuant to the Loan Agreement and on (date of
drawing), we wish to drawdown the Loan upon the terms and subject to the
conditions contained therein.
We confirm that at the Drawdown Date all statements of the Loan Agreement are
true and that no event which is or may become (with the lapse of time or the
giving of notice or both) one of those Events of Default specified in the Loan
Agreement has occurred.
Payment instructions:
NORWEST BANK ALBUQUERQUE
ABA NO. 107002192
ACCOUNT NO. 1060172364
Yours faithfully,
Solv-Ex Corporation
[Name illegible]
-------------------------------
authorised officer
April 16, 1996
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of the registrant(1),
including the state or other jurisdiction of incorporation and the name (if
applicable) under which any such subsidiaries do business:
State or Other Status or Name under
Name Jurisdiction of Incorporation which Business is Conducted
- ---- ----------------------------- ---------------------------
Applied Remedial New Mexico Applied Remediation Tech-
Technologies, Inc. nologies or "ART"
Can-Amera Oil Province of Can-Amera
Sands, Inc. Alberta, Canada
Duo-Ex Corporation New Mexico Inactive
Shale Research, Inc. New Mexico Inactive
Solv-Ex Canada Limited Province of Solv-Ex or
Alberta, Canada Solv-Ex Canada
_________________
(1) All subsidiaries of the registrant are wholly owned except Can-Amera Oil
Sands, Inc., of this the Company controls approximately 50% of the
outstanding voting stock.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Solv-Ex Corporation:
We consent to incorporation by reference in the Registration Statements No.
333-01133 and No. 2-98871 on Forms S-8 and Registration Statement No.
33-32958 on Form S-3 of Solv-Ex Corporation of our report dated September 10,
1996, relating to the consolidated balance sheets of Solv-Ex Corporation and
subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of
the years in the three-year period ended June 30, 1996 and cumulative from
July 2, 1980 (inception), which report appears in the June 30, 1996 annual
report on Form 10-K of Solv-Ex Corporation.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
September 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 43,902,567
<SECURITIES> 0
<RECEIVABLES> 3,689,085
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,094,215
<PP&E> 26,804,350
<DEPRECIATION> 1,078,871
<TOTAL-ASSETS> 80,166,838
<CURRENT-LIABILITIES> 4,592,972
<BONDS> 33,057,000
0
0
<COMMON> 228,466
<OTHER-SE> 67,556,328
<TOTAL-LIABILITY-AND-EQUITY> 80,166,838
<SALES> 0
<TOTAL-REVENUES> 642,531
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,389,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 455,476
<INCOME-PRETAX> (6,202,177)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,202,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,202,177)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> 0
</TABLE>
