<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-9897
SOLV-EX CORPORATION
(Exact name of Registrant as specified in its charter)
New Mexico 85-0283729
------------------------------- -----------------------------
(State or other jurisdiction of (IRS employer identification)
incorporation or organization)
500 MARQUETTE, NW, SUITE 300, ALBUQUERQUE, NM 87102
(Address of principal executive offices)
(505)-243-7701
--------------
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed since last
report: None
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON, CAPITAL STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 12, 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 the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practicable date: Common Stock, $.01 par value,
23,297,989 shares outstanding as of January 20, 1997.
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets,
December 31, 1996 and June 30, 1996 (Unaudited) 1
Consolidated Statements of Operations,
three months ended December 31, 1996 and 1995,
six months ended December 31, 1996 and 1995,
and Cumulative from Inception (Unaudited) 2
Consolidated Statements of Stockholders' Equity,
six months ended December 31, 1996 and
Cumulative from Inception (Unaudited) 3
Consolidated Statements of Cash Flows,
six months ended December 31, 1996 and 1995,
and Cumulative from Inception (Unaudited) 4-5
Notes to Consolidated Financial Statements
(Unaudited) 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 9-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13-14
Item 4. Submission of Matters to Vote of Security
Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Each other item of information required under Part II is inapplicable for the
quarter ended December 31, 1996.
(i)
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND JUNE 30, 1996
(UNAUDITED)
DECEMBER 31, JUNE 30,
ASSETS 1996 1996
- ------ ------------ --------
Current assets:
Cash and cash equivalents $15,978,681 43,902,567
Accounts receivable 5,674,827 2,154,135
Deferred financing costs 1,598,190 1,067,285
Notes receivable - stockholder 1,534,950 1,534,950
Prepaid expenses 1,591,343 3,390,920
Other 89,779 44,358
------------ ----------
Total current assets 26,467,770 52,094,215
------------ ----------
Property, plant and equipment at cost:
Mineral lease 1,976,432 1,976,432
Pilot plant land 167,768 167,768
Buildings 6,187,617 2,774,171
Heavy equipment 7,807,621 5,001,753
Field and laboratory equipment 2,775,802 2,124,058
Furniture, fixtures and leasehold
improvements 847,547 398,143
Construction in process 46,571,977 14,362,025
------------ ----------
66,334,764 26,804,350
Less accumulated depreciation
and amortization 1,779,835 1,078,871
------------ ----------
Net property, plant and equipment 64,554,929 25,725,479
------------ ----------
Patents, at cost, net of accumulated
amortization of $57,758
at December 31, 1996, and
$47,109 at June 30, 1996 375,109 364,081
Deferred financing costs 1,650,022 1,613,353
Other assets, at cost 808,732 369,710
------------ ----------
$ 93,856,562 80,166,838
------------ ----------
------------ ----------
DECEMBER 31, JUNE 30,
1996 1996
LIABILITIES AND STOCKHOLDERS' EQUITY ------------ ----------
Current liabilities:
Accounts payable and accrued expenses $ 9,626,061 4,468,605
Deferred compensation 99,000 99,000
Current installments of long-term debt 369,391 25,367
------------ ----------
Total current liabilities 10,094,452 4,592,972
------------ ----------
Long-term debt, excluding current
installments 46,707,817 33,057,000
------------ ----------
Total liabilities 56,802,269 37,649,972
------------ ----------
Stockholders' equity:
Common stock, $.01 par value
Authorized 30,000,000 shares;
issued and outstanding 23,014,587
shares at December 31, 1996, and
22,846,649 at June 30, 1996 230,146 228,466
Additional paid-in capital 67,670,983 67,556,328
Unearned compensation (247,500) -
Deficit accumulated during development
stage (30,599,336) (25,267,928)
------------ ----------
Total stockholders' equity 37,054,293 42,516,866
------------ ----------
Commitments and contingencies
------------ ----------
$ 93,856,562 80,166,838
------------ ----------
------------ ----------
See accompanying notes to consolidated financial statements.
- 1 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND CUMULATIVE FROM JULY 2, 1980 (INCEPTION)
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
DECEMBER 31, DECEMBER 31, CUMULATIVE
-------------------------- -------------------------- FROM JULY 2, 1980
1996 1995 1996 1995 (INCEPTION)
---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract fees - - - - 5,278,637
Interest 278,961 16,046 699,089 42,896 3,041,956
Gain on sale of equipment - - - - 15,078
State grant - - - - 407,760
---------- ---------- ---------- ---------- ----------
278,961 16,046 699,089 42,896 8,743,431
---------- ---------- ---------- ---------- ----------
Expenses:
Research and development 1,683,485 780,328 2,699,942 1,311,558 22,087,511
Research and development
funded by others - - - - (2,032,956)
General and administrative 650,266 484,540 2,338,130 724,864 16,478,313
Interest expense, net of $1,452,541 985,399 - 992,425 - 992,425
capitalized during the period
ended 1996, and none during
the period ended 1995
Write-off of mineral lease - - - - 1,447,453
---------- ---------- ---------- ---------- ----------
3,319,150 1,264,868 6,030,497 2,036,422 38,972,746
---------- ---------- ---------- ---------- ----------
Minority interest in loss
of subsidiary - - - - 113,920
---------- ---------- ---------- ---------- ----------
Net (loss) (3,040,189) (1,248,822) (5,331,408) (1,993,526) (30,115,395)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding 22,994,586 20,901,793 19,207,982 20,795,291 21,973,591
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
(Loss) per common share (0.13) (0.06) (0.28) (0.10) (1.37)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
- 2 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JULY 1, 1996
THROUGH DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
DEFICIT
ACCUMULATED
PRICE COMMON STOCK ADDITIONAL UNEARNED DURING
PER ------------------ PAID-IN COMPEN- DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL SATION STAGE TOTAL
--------- ---------- -------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 22,846,649 $228,466 $67,556,328 $ - $(25,267,928) $42,516,866
Issued to employees as compensation - - 288,750 (247,500) - 41,250
Issued to individual as compensation
July 1, 1996 through September 30, 1996 4.92-8.00 25,653 257 179,868 - - 180,125
October 1, 1996 through December 31,
1996 6.94-7.66 4,900 49 35,845 - - 35,894
Due to GFL Advantage per private
placement agreement - - - (564,974) - - (564,974)
Stock options exercised:
August 12, 1996 1.500 15,600 156 23,244 - - 23,400
September 3, 1996 2.560 500 5 1,275 - - 1,280
September 20, 1996 2.56-8.53 12,500 125 91,575 - - 91,700
September 24, 1996 2.560 12,500 125 31,875 - - 32,000
October 7, 1996 2.560 5,000 50 12,750 - - 12,800
October 16, 1996 2.560 5,000 50 12,750 - - 12,800
December 18, 1996 2.560 1,000 10 2,550 - - 2,560
Stock options exercised with stock:
October 17, 1996 1.500 85,285 853 (853) - - -
Net (loss) - - - - (5,331,408) (5,331,408)
---------- -------- ----------- ---------- ------------- ------------
Balance at December 31, 1996 23,014,587 $230,146 $67,670,983 $(247,500) $(30,599,336) $37,054,292
---------- -------- ----------- ---------- ------------- ------------
---------- -------- ----------- ---------- ------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND CUMULATIVE FROM JULY 2, 1980 (INCEPTION)
(UNAUDITED)
<TABLE>
SIX MONTHS ENDED
--------------------------
DECEMBER 31 CUMULATIVE
-------------------------- FROM JULY 2, 1980
1996 1995 (INCEPTION)
----------- ----------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,331,408) $(1,993,527) $(30,599,336)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 711,613 90,138 $ 2,081,190
Amortization of financing costs 483,331 - 629,997
Write-off of mineral leases and other - - 1,505,541
Gain on sale of equipment - - (15,078)
Issuance of stock, warrants, and options for
services performed 257,269 45,847 2,673,686
Minority interest in loss of subsidiary - - (113,920)
Changes in certain assets and liabilities:
Receivables and other assets (1,766,536) (144,385) (8,889,507)
Accounts payable and accrued expenses 4,592,482 (45,026) 9,051,867
Accrued deferred interest - - 167,260
Deferred compensation - - 370,250
----------- ----------- ------------
Net cash used by operating activities (1,053,249) (2,046,953) (23,138,050)
----------- ----------- ------------
Cash flows from investing activities:
Proceeds from short-term investments - - 2,296,745
Additions to property, plant and equipment (39,530,414) (2,444,812) (66,650,161)
Proceeds from sale of equipment - - 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 (21,677) (35,529) (427,563)
Expenditures for other (439,022) - (695,591)
----------- ----------- ------------
Net cash used for investing activities (39,991,113) (2,480,341) (67,463,516)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of short and long-term debt 14,262,153 - 48,777,435
Proceeds from loan from stockholder - 1,000,000 -
Proceeds from issuance of common stock 176,540 3,506,947 63,404,062
Principal payments on short-term and long-term debt (267,312) (5,177) (1,683,328)
Payment of costs associated with financing (1,050,905) (66,546) (3,936,297)
Other - - 18,375
----------- ----------- ------------
Net cash provided by financing activities 13,120,476 4,435,224 106,580,247
----------- ----------- ------------
Change in cash and cash equivalents (27,923,886) (92,070) 15,978,681
----------- ----------- ------------
----------- ----------- ------------
(continued)
</TABLE>
- 4 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND CUMULATIVE FROM JULY 2, 1980 (INCEPTION)
(UNAUDITED)
<TABLE>
SIX MONTHS ENDED
--------------------------
DECEMBER 31 CUMULATIVE
-------------------------- FROM JULY 2, 1980
1996 1995 (INCEPTION)
----------- ----------- -----------------
<S> <C> <C> <C>
Change in cash and cash equivalents, forwarded $(27,923,886) $ (92,070) $ 15,978,681
Cash and cash equivalents at beginning of period 43,902,567 854,719 -
----------- ----------- ------------
Cash and cash equivalents at end of period 15,978,681 762,649 15,978,681
----------- ----------- ------------
----------- ----------- ------------
Supplemental disclosure of cash flow information:
Interest paid (net of amount capitalized) $ 4,799 $ 8,211 $ 4,225,975
----------- ----------- ------------
----------- ----------- ------------
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.
- 5 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF NOTE PRESENTATION
The notes to the consolidated financial statements do not present all
disclosures required under generally accepted accounting principles but
instead, as permitted by Securities and Exchange Commission regulations,
presume that users of the interim financial statements have read or have
access to the June 30, 1996 audited consolidated financial statements and
that the adequacy of additional disclosure needed for a fair presentation may
be determined in that context.
The accompanying consolidated interim financial statements include all
adjustments which are, in the opinion of management, necessary to fair
presentation of the consolidated results of operations for the periods
presented. All such adjustments are of a normal recurring nature.
(2) LEASE COMMITMENTS
The Company has leased certain facilities and heavy equipment under
agreements which are classified as either operating or capital leases.
At December 30, 1996, future minimum annual rental commitments under lease
obligations are as follows:
Capital Operating
Lease Lease
------------------------------------------------------------------
June 30, 1997 $207,335 $713,846
June 30, 1998 207,335 492,350
June 30, 1999 207,335 405,049
June 30, 2000 207,335 245,360
(3) DEBT
The Company has entered into certain debt financing, consisting of a capital
lease, referred to in footnote 2 above, and certain short term insurance
premium financing with a balance of $170,396 as of December 31, 1996. The
insurance financing carries a Canadian annual rate of interest of 5.33
percent, and terminates in June, 1997.
- 6 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In October, 1996, the Company acquired a 3,782 square foot office building in
Albuquerque, New Mexico, to allow for the expansion of technical and
professional staff. The Company acquired the building for $249,305, of which
$108,000 was financed by a mortgage payable to private individuals. The debt
is payable in monthly installments of $1,383, bears interest at a rate of
9.25%, and matures October 31, 2006. The debt is secured by the acquired
land and building.
On November 15, 1996, the Company issued $13 million in debt which is
convertible into common stock of the Company at the option of the holder at a
price which is equal to the lesser of $14.50 per share or 82% of the closing
bid price per share at a date immediately preceding the date of the
conversion. The convertible debenture matures on November 30, 1998, and
bears interest at 8% per annum, payable quarterly in arrears. Conversion of
the debentures can occur in increments of one-third of the principal amount
outstanding following periods of 45 days, 90 days and 105 days, respectively,
after the date of issuance. Subsequent to December 31, 1996, certain holders
of the debentures exercised their rights of conversion in accordance with the
terms of the Debentures. Debt in the amount of $3,333,000 was converted into
shares of common stock of the Company.
(4) CONTINGENCY
During the quarter, the Company has terminated a temporary verbal arrangement
to provide skilled and unskilled labor on a contract basis payable monthly
with Fort McKay Metis Corporation ("FMMC"), and hired directly the local work
force of more than 250 persons to continue work on the Bitumount Lease. The
termination of the arrangement resulted from the Company's concern over
unsubstantiated and excessive billing, and is seeking a detailed review of
invoices from FMMC. The Company has withheld certain payments to FMMC
pending resolution of its concerns over the computation and propriety of
billings. FMMC has filed a Cdn$3,825,388 lien against the Company's oil
sands lease as a result of the withheld payments. The Company is actively
seeking a resolution of the dispute and has reflected an accrual for the
estimated costs associated with the final resolution of the matter.
- 7 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) LEGAL PROCEEDINGS
The Company and certain officers of the Company are defendants in legal
matters pending in various jurisdictions. The matters do not specify any
amount of damages. The Company intends to vigorously defend the actions and
believes that the allegations made against the Company and its officers are
without merit.
(6) SUBSEQUENT EVENTS
Subsequent to December 31, 1996, a limited partnership agreement was
formalized by Solv-Ex Canada Limited, a wholly-owned Canadian subsidiary of
the Company, and United Tri-Star Resources Ltd. ("UTS"). The partnership
will be engaged in the operation and management of the facility currently
under construction on the Bitumount Lease. UTS will hold a 10% interest in
the partnership, with the remaining partnership interest being held by a
wholly-owned Canadian subsidiary of the Company.
To date, the Company has received $5 million from UTS as payment of its
portion of the construction costs of the facility and expects to receive an
additional $2 million in the immediate future pursuant to the terms of the
partnership agreement.
(7) RELATED PARTY TRANSACTIONS
Subsequent to December 31, 1996, the Company received in excess of $1.5
million from the Company's Chairman and Chief Executive Officer in full
satisfaction of amounts owned under a note receivable agreement.
- 8 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND NOTES THERETO. INFORMATION DISCUSSED
HEREIN, AS WELL AS OTHER ITEMS OF THE QUARTERLY REPORT ON FORM 10-Q, MAY
INCLUDE FORWARD-LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE 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; NO REVENUES FROM OPERATIONS; NEED
FOR ADDITIONAL FINANCING; THE COMPANY'S STATUS AS A DEVELOPMENT STAGE
COMPANY; RISKS INVOLVED IN COMMERCIALIZING THE TECHNOLOGY; 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; COMPETITION; LACK OF OR CHALLENGES TO PATENT PROTECTION OF KEY
PROCESSES; POTENTIAL INABILITY TO COMPLY WITH GOVERNMENT ENVIRONMENTAL
REGULATIONS; DEPENDENCE ON KEY PERSONNEL; HIGH VOLATILITY OF SHARE PRICE;
LITIGATION IN WHICH THE COMPANY IS CURRENTLY INVOLVED; AND OTHER RISK FACTORS
LISTED FROM TIME TO TIME IN DOCUMENTS FILED BY THE COMPANY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
OPERATIONS
Research and development expenditures for the quarter and six months ended
December 31, 1996, of $1,683,485 and $2,699,942, respectively, compared to
the same periods a year ago, reflect costs associated with continued
refinement of the bitumen and minerals extraction process from tar sands and
tar sands tailings, development of the electrolytic cell for the production
of aluminum metal and development costs associated with Ti0(2)S. Included in
research and development expenses are non-cash compensatory expenses of
$20,739 and $112,036, for the three and six month periods ended December 31,
1996.
General and administrative expense for the quarter and six months ended
December 31, 1996, were $1,133,597 and $2,338,130, respectively, compared to
$484,540 and $724,864 for the same periods in 1995. Increases in 1996 from
1995 result from significant legal expenditures associated with certain
litigation (see Part II - Other Information, Item 1), additions to personnel
needed as construction activities on the Bitumount Lease increase, and normal
salary adjustments. Included in general and administrative expenses are
non-cash compensatory expenses of
- 9 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
$17,917 and $145,233, for the three and six month periods ended December 31,
1996.
Interest expense increased over the prior period as a result of project
financing obtained during calendar 1996. Interest expense included non-cash
amounts of $219,999 and $483,331, for the three and six month periods ended
December 31, 1996 to record the amortization of financing costs.
The Company recorded a net loss of $3,040,189 for the three months ended
December 31, 1996, and a net loss of $5,331,408 for the six months ended
December 31, 1996. These compare to a net loss of $1,248,823 and $1,993,527,
respectively, for the same periods ended December 31, 1995. The 1996 net
losses are substantially greater than the losses in the previous year because
of the increased level of corporate activities during the periods ended
December 31, 1996, including continued construction activity on the Bitumount
Lease and expanded research and development efforts at the pilot plant.
Revenues were generated from interest earned on cash balances. Interest
income for the three and six months ended December 31, 1996 was $278,961 and
$699,089, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The primary requirement for working capital is to fund the continuing
construction of the initial stage plant and the acquisition of heavy
equipment and processing equipment to be used in association with the
Company's anticipated commercial oil sands processing.
The Company's net working capital was $16,373,318 at December 31, 1996,
compared to working capital of $47,501,243 at June 30, 1996. Expenditures
exceeding $39.5 million for property, plant and equipment, account for a
majority of the working capital used during the six months ended December 31,
1996. Included in the $39.5 million is $32 million spent on site preparation,
detailed engineering and procurement associated with the construction of the
initial stage plant on the Bitumount Lease, and $3.4 million for buildings
located on the Bitumount Lease and staging area sites. An additional $2.8
million has been spent to acquire heavy equipment to be used in the
construction effort currently in process, and in the future will be used in
commercial operations on the Company's Bitumount Lease.
- 10 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
On November 15, 1996, the Company issued $13 million in debt which is
convertible into Common Stock of the Company at a price which is equal to the
lesser of $14.50 per share or 82% of the closing bid price per share at a
date immediately preceding the date of the conversion. The convertible
debenture matures on November 30, 1998, and bears interest at 8% per annum,
payable quarterly in arrears. Conversion of the debentures can occur in
increments of one-third of the principal amount outstanding following periods
of 45 days, 90 days and 105 days, respectively, after the date of issuance.
Subsequent to December 31, 1996, $3,333,000 of debt was converted into shares
of common stock of the Company.
As discussed in footnote 6, a partnership agreement was formalized between
the Company and UTS subsequent to December 31, 1996. To date, the Company
has received $5 million from UTS as partial payment of its portion of the
costs of the facility and certain operating expenditures and expects to
receive an additional $2 million in the immediate future pursuant to the
terms of the partnership agreement.
The Company continues to record a receivable from UTS for 10% of the project
costs, along with certain monthly operating expenditures. Payment by UTS for
these expenditures allows UTS to maintain its 10% working interest in the
development of the Company's co-production process and associated projects
using the Company's technology.
Subsequent to December 31, 1996, the Company received in excess of $1.5
million from the Company's Chairman and Chief Executive Officer in full
satisfaction of amounts owed under a note receivable agreement.
As of December 31, 1996, total cash and receivables, including Canadian sales
tax refunds and funds due from UTS, totaled over $23 million.
The Company believes that existing cash and receivables, funds to be received
from UTS under the limited partnership agreement and additional capital which
may be raised as required will be adequate to cover the cost to complete the
initial stage plant. In this regard, the Company has also continued to use
funds in the normal course of construction which are associated with its
plans to add a mineral extraction plant. Management believes that product
development for minerals has been sufficiently encouraging to merit this
course of action and believes that it will be able to raise additional
capital as required in connection with both oil and minerals extraction.
Construction of the initial stage oil extraction plant is nearing completion
and the Company expects to begin operations as projected during the first
quarter of calendar year 1997. The Company has pursued an aggressive
schedule to accomplish progress
- 11 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
to date and has substantially maintained its construction schedule despite
delays in receipt of certain plant components and severe cold weather around
the first of the calendar year. Although this has necessitated additional
labor than originally planned, which has added to the capital cost, the
Company does not believe that the increase will have significant effect on
overall project economics.
The Company expects that it will experience normal and customary difficulties
in commissioning and starting up the new plant. The primary objectives
during commissioning and start-up will be to: (i) determine optimum
throughput capacity for the primary extraction equipment; (ii) confirm the
ability of the plant and equipment to produce bitumen meeting market
specifications on a continuous basis; (iii) achieve continuous
production at the rate of approximately 100,000 barrels of bitumen per month;
and (iv) confirm operating cost projections for full scale operations at the
rate of approximately 450,000 barrels of oil per month. There can be no
assurance that the plant will, in fact, operate as anticipated without
delays, additions or modifications, which could add significantly to capital
costs and working capital requirements, and the Company intends to make
arrangements for additional capital to cover such contingencies.
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 the availability of additional capital and, to a large
extent, upon the successful operation of the initial stage plant. Although
there can be no assurance that any additional financing can be arranged or
arranged upon acceptable terms and conditions, the Company believes it will
be able to do so through a combination of efforts or methods, including joint
ventures, licensing agreements for the Company's technology, equity investors
(public or private), venture capital groups, institutions, issuance of
convertible or subordinated debt or a form of business combination, as well
as operating cash flow which it expects to derive from the initial stage
bitumen plant.
- 12 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and certain officers of the Company are defendants in securities
actions pending in the federal courts of New York and New Mexico and in state
courts in Arizona and New Mexico. In October 1996, the Company was served
with a complaint in the SEDITA V. SOLV-EX CORPORATION, BUTLER, CAMPBELL,
RENDALL AND DEUTSCHE MORGAN GRENFELL, Inc., case #96CIV7575, U.S. District
Court, Southern District of New York, and in December 1996, the Company was
also served with a complaint in JOSEPH B. GROSSMAN AND STEPHEN DISCH V.
BUTLER, RENDALL, CAMPBELL, DEUTSCHE MORGAN GRENFELL, INC., CHARLES MAXWELL,
AND SOLV-EX CORPORATION, case #96CIV8744, United States District Court,
Southern District of New York. On December 23, 1996 the New York federal
court consolidated the two actions. The complaints in the consolidated
actions allege, among other things, damage to shareholders of the Company by
acts or conduct of the Company and its officers in violation of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
and the New Mexico Securities Act. The plaintiffs ask that the court accord
class action status to purchasers of the Company's common stock between
February 15, 1995 and September 30, 1996. Two similar actions were filed in
U.S. District Court, District of New Mexico, and served upon the Company in
November, 1996. In these two cases, FOURNIER V. SOLV-EX CORPORATION,
BUTLER, CAMPBELL, RENDALL AND DEUTSCHE MORGAN GRENFELL, INC., case
#CIV961526JC, and BOYER V. SOLV-EX CORPORATION, RENDALL AND DEUTSCHE MORGAN
GRENFELL, INC.,case #CIV96602JC, attorneys for the plaintiffs have filed
affirmations seeking dismissal of those actions without prejudice and
stating their intention to join the pending consolidated actions in the U.S.
District Court, Southern District of New York.
In November 1996, the Company was served with a complaint in MURKEN V.
SOLV-EX CORPORATION, RENDALL, BUTLER, DEUTSCHE MORGAN GRENFELL, INC., case
CV9609869, Second Judicial District, Bernalillo County, New Mexico, in which
plaintiffs seek class action treatment for purchasers of the Company's shares
between February 15, 1995 and September 10, 1996, alleging that shareholders
suffered damage as a result of violations of New Mexico securities laws and
negligent misrepresentation.
- 13 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
In December 1996, the Company was served with a complaint in PHOENIX PACIFIC
PROPERTIES, LTD., JOHN C. PADELFORD III AND PATRICIA J. PADELFORD V. SOLV-EX
CORPORATION, RENDALL, AND CAMPBELL, case #CV96-20453, Superior Court,
Maricopa County, Arizona. The plaintiffs allege violation of the Arizona
Securities Act, fraud, negligent misrepresentation, and breach of contract
resulting from the Plaintiffs' purchase of shares of Solv-Ex common stock in
the open market and in a private placement directly from Solv-Ex.
None of the foregoing actions specifies the amount of damages requested. The
Company has only recently received the complaints and the proceedings are
only in the initial stages of response and discovery. The Company intends to
vigorously defend the actions filed against it and believes that the
allegations made against the Company and its officers are without merit.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on December 13,
1996, for the purpose of electing directors and to amend the Company's
Incentive Stock Option Plan to increase the number of options available for
issue. Proxies for the meeting were solicited pursuant to Regulation A under
the Securities Exchange Act of 1934.
Each nominee for election as a director was elected as follows:
Name Votes For Withheld
- ---- --------- --------
John S. Rendall 17,250,661 38,951
W. Jack Butler 17,229,841 59,771
Herbert M. Campbell II 17,250,811 38,801
Julius D. Heldman 17,232,857 56,755
M. Norman Anderson 17,251,860 37,752
Thompson MacDonald 17,250,516 39,096
J.E. Czaja 17,250,866 38,746
M.E. Davey 17,232,597 57,015
A total of 5,659,675 shares were not voted with respect to the election of
directors.
The proposed amendment to the Company's Incentive Stock Option Plan to
increase the number of options issuable under the plan to 1,500,000 passed
with 14,552,931 shares voted for the amendment, 670,583 shares voted against,
and 81,800 shares abstaining. A total of 7,643,973 shares were not voted
with respect to the Plan amendment.
- 14 -
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(DEVELOPMENT STAGE ENTERPRISES)
Item 5. Other Information
During the month of January, Solv-Ex Corporation expanded its senior
administrative and operational management. Mr. J. Brad Steward, former
Senior Manager with KPMG Peat Marwick LLP, has joined Solv-Ex as Vice
President and Chief Financial Officer. Mr. Steward's experience in such
areas as cash management, cost controls, information systems and SEC
accounting and reporting will help strengthen all facets of Solv-Ex's
management. Mr. Marshall G. Martin, former Senior Partner of Hinkle, Cox,
Eaton, Coffield & Hensley, LLP has joined the Company as Vice President and
General Counsel. Mr. Martin specializes in commercial transactions and
complex commercial litigation including anti-trust and natural resources law.
Mr. Martin has represented Solv-Ex in a number of matters in the past 5
years.
Item 6. Reports Filed on Form 8-K during the Quarter Ended December 31, 1996.
There were three reports filed on Form 8-K during the quarter ended December
31, 1996. An 8-K, dated October 4, 1996, was filed reporting certain
litigation under Item 5. A second 8-K, dated November 15, 1996, reporting
the sale of equity securities under Item 9 was filed on November 26, 1996.
The third 8-K, dated and filed December 4, 1996, reported certain litigation
under Item 5. No financial statements were included in the filings of the
above referenced 8-K filings.
- 15 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13, or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SOLV-EX CORPORATION
(Registrant)
By /s/ John S. Rendall
----------------------------------------
John S. Rendall, Chief Executive Officer
By /s/ J. Brad Steward
----------------------------------------
J. Brad Steward, Chief Financial Officer
DATE: February 14, 1997
- 16 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,978,681
<SECURITIES> 0
<RECEIVABLES> 5,674,827
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,467,770
<PP&E> 66,334,764
<DEPRECIATION> 1,779,835
<TOTAL-ASSETS> 93,856,562
<CURRENT-LIABILITIES> 10,094,452
<BONDS> 46,707,817
0
0
<COMMON> 230,146
<OTHER-SE> 36,824,147
<TOTAL-LIABILITY-AND-EQUITY> 93,856,562
<SALES> 0
<TOTAL-REVENUES> 699,089
<CGS> 0
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<OTHER-EXPENSES> 5,038,072
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 992,425
<INCOME-PRETAX> (5,331,408)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,331,408)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,331,408)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> 0
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