<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
August 31, 1998
--------------------
(Date of Earliest Event Reported)
SOLV-EX CORPORATION
------------------------------------------------------
(Exact Name of Registrant as specified in its charter)
New Mexico
----------------------------------------------
(State or other jurisdiction of incorporation)
0-9897 85-0283729
- ----------------------------- ----------------------------------
(Commission File Number) (IRS Employer Identification Number)
2127 Menaul NE, Albuquerque, New Mexico 87107
-----------------------------------------------
(Address of principal executive offices including zip code)
(505) 883-0331
---------------------------------------------------
(Registrant's telephone number including area code)
Not Applicable
---------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 3. Bankruptcy or Receivership
(b) On August 1, 1997, the Company filed its petition for reorganization
protection under Chapter 11 of the United States Code in the case of In re Solv-
Ex Corporation, in the United States Bankruptcy Court within and for the
District of New Mexico, Case No. 11-97-14361 MA. Previously, on July 14, 1997,
the Company filed for like protection under the Companies' Creditors'
Arrangement Act in the Court of Queen's Bench of Alberta, Judicial District of
Calgary, in the proceeding styled as: In the Matter of the Companies Creditors
Arrangement Act, R.S.C., 1985, c.C-36, as amended, Case No. 9701-10022,
following the adoption of a Cross-Border Insolvency Protocol, which governed the
conduct of the parties and the Debtor's affairs during the pendency of the
Canadian and US insolvency proceedings. On or about July 31, 1998, the
Company's Plans of Reorganization and Arrangement (the "Plans"), respectively,
were confirmed by Orders of the U.S. and Canadian Courts. The effective date of
the Plans (the date upon which distributions were made to undisputed, allowed
claims), was August 31, 1998.
Generally, the Plans provided for the full satisfaction of almost all creditors
of Solv-Ex Corporation. The Plans approved included cash dividends in full
satisfaction of virtually all allowed administrative, priority, secured and
unsecured claims against the Company funded principally from the proceeds of the
sale of the Company's Athabasca oil sands assets and interests in Alberta,
Canada.
Under the confirmed Plans, a portion of the Company's indebtedness to allowed
non-insider convertible debentureholders in the pre-Chapter 11 amount of US $7.5
million was extended on terms similar to existing debentures and secured by a
pledge of a collateral interest in certain of the Company's tangible and
intangible assets. At August 31, 1988, the balance owing under the allowed
convertible debentures was US $3,511,016, maturing on June 30, 1999 and
US $375,000 maturing on November 30, 1999. In addition, the convertible
debenture claim of Phemex Establishment in the amount of US $33 million was
disallowed and extinguished. Finally, the allowed convertible debenture claim,
in the amount of US $2 million held by the Company's Chairman and CEO, John S.
Rendall, was allowed but satisfied by the issuance and delivery of shares of new
Solv-Ex common stock, together with warrants, authorized under the confirmed
plan of reorganization.
As to the allowed interests of holders of common equity in the Company, the
Order of the US Court established a record date of October 1, 1998 for fixing
shares of then existing, "old" Solv-Ex common stock subject to surrender and
exchange for shares of "new" Solv-Ex common stock. The date established by the
US Court for the surrender and exchange of existing Solv-Ex common stock was
December 1, 1998, and shares of common stock not surrendered by that date were
to be canceled. In addition, under the confirmed plan and Order of the US
Court, and according to the Company's instructions, each shareholder or a
brokerage firm on behalf of street name holders of the common stock, who
provided the Company with specified information prior to December 1, 1998,
received one warrant for the purchase of one share of new Solv-Ex common stock
for every three shares of new Solv-Ex common stock issued and received on
-2-
<PAGE>
account of such holder's interest. Each warrant provides the holder with a
right to purchase one share of common stock at a price of US $10 per share,
which right will expire on August 31, 2000.
As a result of the exchange of "old" Solv-Ex common stock for "new" Solv-Ex
common stock, as of December 1, 1998, there were 29,211,157 shares of "new"
common stock outstanding and 9,238,109 warrants to be issued under the confirmed
Chapter 11 plan.
Following confirmation of the Plan of Reorganization, a pool of shares of new
Solv-Ex common stock, together with attendant warrants, was regarded as reserved
for future issuance and delivery on account of either disputed claims to be
determined and allowed or in respect of claims and interests filed and allowed,
but not yet satisfied, under the plan. As of August 31, 1988, inasmuch as
certain claims remained either disputed or unsatisfied, the size of such pool of
shares likewise remained undetermined.
In accordance with Staff Legal Bulletin No. 2, an audited balance sheet at
August 31, 1998, the effective date of the Plans, is attached as an exhibit.
Item 7. Financial Statements and Exhibits
(c) Exhibits
1. Debtor's Second Amended Plan of Reorganization dated June 23, 1998 -
"P"
2. Order Confirming Debtor's Second Amended Plan of Reorganization dated
June 23, 1998-"P"
3. Audited Balance Sheet at August 31, 1998
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 17, 1999 SOLV-EX CORPORATION
(Registrant)
By /s/ Frank Ciotti
-------------------
Frank Ciotti,
Chief Financial Officer
-4-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Table of Contents
Independent Auditors' Report................2
Consolidated Balance Sheet..................3
Notes to Consolidated Balance Sheet.......4 - 19
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Solv-Ex Corporation and Subsidiaries
Albuquerque, New Mexico
We have audited the accompanying consolidated balance sheet of Solv-Ex
Corporation and Subsidiaries (development stage enterprises) as of August 31,
1998. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether this financial statement is 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Solv-Ex Corporation and
Subsidiaries (development stage enterprises), as of August 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying financial statement has been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company's working capital deficit, stockholders' equity deficit,
and operating losses raise substantial doubt about its ability to continue as a
going concern. The financial statement does not include any adjustments that
might result from the outcome of this uncertainty.
/s/Meyners + Company, LLC
Meyners + Company, LLC
Albuquerque, New Mexico
January 27, 1999
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Consolidated Balance Sheet
<TABLE>
<CAPTION>
August 31,
Assets 1998
- ------ ------------
<S> <C>
Current assets:
Cash and cash equivalents (Note 4) $ 1,390,699
Receivables 1,460,569
Prepaid expenses 7,613
------------
Total current assets 2,858,881
Property and equipment, net (Notes 5 and 8) 1,851,825
Patents, net (Note 6) 352,494
Other assets (Note 7) 1,111,572
------------
Total assets $ 6,174,772
============
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 1,064,064
Accrued expenses 196,859
Due to related parties (Note 15) 2,830,555
Current maturities of long-term debt (Note 8) 3,568,401
------------
Total current liabilities 7,659,879
Long-term debt, net of current portion (Note 8) 461,694
------------
Total liabilities 8,121,573
Stockholders' equity (Notes 2, 9, 10, 11, 15 and 16):
Common stock, $.01 par value, authorized 100,000,000 shares,
issued 26,382,278 shares 263,823
Preferred stock, authorized 50,000,000 shares, no shares issued -
Additional paid-in capital 82,474,141
Deficit accumulated during development stage (84,684,765)
------------
Total stockholders' equity (1,946,801)
------------
Commitments and contingencies (Notes 3, 7, 9 and 13)
Total labilities and stockholders' equity $ 6,174,772
============
- ----------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Balance Sheet.
-3-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet
1) Business and Organization
On July 2, 1980, Solv-Ex Corporation (the "Company") was incorporated as a
New Mexico corporation. Since its inception, the Company has devoted its
resources primarily to the development of a process for the extraction of
bitumen, a semi-solid hydrocarbon compound that can be converted into
synthetic crude oil from oil sands. It also advanced its technologies to
include recovery of metals and minerals from the fine clays associated with
the oil sands. As a result of continued research conducted in connection
with metals and minerals, the Company believes its technology has been
broadened in a manner that enables the production of certain metals and
minerals from natural resource products, in addition to the fine clays
associated with oil sands.
During 1996 and 1997, the Company was engaged in a major project to
construct an initial stage oil extraction plant on one of the two oil sands
leases that it owned in northern Alberta, Canada. However, after expending
approximately $93 million towards construction of the plant, support
facilities and equipment, funds available to the Company were insufficient
to: (i) complete certain modifications to the plant following initial
commissioning in order to achieve continuous operations; and (ii) pay
amounts due to certain suppliers of goods and services to the Company, both
at the plant site in Canada and for general and administrative expenses in
the United States. On August 1, 1997, the Company filed for protection
under Chapter 11 of the U.S. Bankruptcy Code, having previously filed on
July 14, 1997 for similar protection in Canada under the Companies'
Creditors Arrangements Act (the "CCAA").
As a result of these actions, the Company was unable to (i) obtain audited
financial statements for the fiscal years ended June 30, 1998 and 1997; and
(ii) file a Form 10-K with respect to such fiscal years. As a result, the
Company's common stock was delisted from trading on the Nasdaq Small Cap
market in September 1997. Additionally, the Company was also unable to meet
certain filing requirements with the Securities and Exchange Commission,
which it is now attempting to rectify.
On July 31, 1998, an order was entered in the United States Bankruptcy
Court for the District of New Mexico confirming the Company's Amended Plan
of Reorganization ("Plan of Reorganization"), filed as a part of the
bankruptcy proceedings. A similar order was entered in Canada under the
CCAA, thereby marking the emergence of the Company from bankruptcy
proceedings in both countries.
In connection with the bankruptcy proceedings, the Company sold its
interest in the two Alberta oil sands leases (including related property,
plant and equipment) for a total of C$34,400,000, plus 5 million shares of
United Tri-Star Resources Ltd. ("UTS"). The sales proceeds were utilized to
pay approved secured and unsecured creditors (including interest on their
claims) and to provide a minimal amount of working capital to commence
operations of the Company under the Plan of Reorganization.
-4-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
The Company has two wholly owned subsidiaries, Duo-Ex Corporation ("Duo-
Ex") and Shale Research, Inc. ("Shale"), which were engaged in research and
development of a process to extract oil from oil shale. These two
companies, together with a third wholly owned subsidiary that provided
employees to run the pilot plant, Applied Remedial Technology, Inc., are
currently inactive.
The Company has a controlling interest in Can-Amera Oil Sands, Inc., ("Can-
Amera"), a Canadian company. Can-Amera was principally involved in the
exploration and development of oil sands deposits in Canada.
Although in prior years the Company generated some revenues from a contract
for the use of its pilot plant and engineering services and from government
subcontracts, the Company has not, as of August 31, 1998, generated any
revenues from the sale of product. Therefore, the accompanying consolidated
balance sheet has been presented as a development stage enterprise in
accordance with Statement of Financial Accounting Standards No. 7.
2) Summary of Significant Accounting Policies
a) Principles of Consolidation
The accompanying consolidated balance sheet includes the accounts of
the Company and all of its wholly owned and majority owned
subsidiaries. Significant intercompany balances and transactions have
been eliminated in consolidation.
b) Cash and Cash Equivalents
The Company considers all investments with original maturities of three
months or less to be cash equivalents.
c) Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
individual assets, which range from three to twenty years. Leasehold
improvements are amortized over the individual lives of the leases or
estimated useful lives of the assets, whichever is less.
d) Research and Development
The costs associated with research and development are expensed as
incurred and are included in operating expenses.
e) Advertising Costs
Advertising costs are charged to operations when incurred.
-5-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
f) 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 Financial Accounting Standards Board 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 earnings 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 became effective
in fiscal year 1997.
g) 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.
h) Intangibles
Patent costs are amortized using the straight-line method over the
lesser of 17 years or their remaining lives.
i) Income Taxes
The Company files a consolidated return with its wholly owned and
majority owned subsidiaries. The Company accounts for income taxes
using the asset and liability method. Under 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 as provided for in the enacted tax
law, based on when the differences are expected to reverse.
-6-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
j) 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 impairment to asset carrying values
will be charged to results of operations in the period in which a
determination of impairment has been made.
k) Financial Instruments
Unless otherwise specified, the Company believes the book value of the
financial instruments approximates their fair value.
l) 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.
m) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 states that
all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual
financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to the
public. It also establishes standards for disclosure regarding products
and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of a company about which separate
financial information is available that is evaluated by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Specific information to be reported for
-7-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment information
to amounts reported in the financial statements is also to be provided.
Both SFAS 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997, and require comparative
information for earlier years to be restated. Because of the recent
issuance of SFAS 131, management has been unable to fully evaluate the
impact, if any, on future financial statement disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits," which standardizes
the disclosure requirements for pensions and other postretirement
benefits and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate
financial analysis. It does not change the measurement or recognition
of those plans. SFAS 132 is effective for years beginning after
December 15, 1997, and requires comparative information for earlier
years to be restated, unless such information is not readily available.
The Company has no pensions or postretirement benefit plans in place at
this time. There is no impact on the Company's financial statements
related to the issuance of this statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies
to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133 will be effective for the Company in Fiscal 2000. Management of
the Company has not yet evaluated the effects of this statement on the
Company's financial position, results of operations or cash flows.
3) Going Concern
The accompanying balance sheet has been prepared in conformity with
generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. At August 31, 1998, current liabilities
exceeded current assets by approximately $4,800,000, and total
stockholders' equity reflected a deficit of $1,946,801. Additionally, as
discussed above, the Company has been in the development stage since its
inception on July 2, 1980. Realization of a major portion of the assets is
dependent upon the Company's ability to meet its future financing
requirements and the success of future operations. This includes the
Company's ability to meet lease obligations as discussed in Note 13(b).
These factors raise substantial doubt about the Company's ability to
continue as a going concern.
4) Restricted Cash
As of August 31, 1998, $1,215,540 of the Company's cash balance was
restricted. $45,100 was restricted pursuant to a Consent Agreement and
Consent Order ("CACO") with the U.S.
-8-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
Environmental Protection Agency, executed on September 12, 1996. These
funds can only be used in accordance with the CACO. $1,170,440 was
restricted pursuant to the terms of the Company's Amended Plan of
Reorganization.
5) Property and Equipment
Property and equipment consist of the following at August 31, 1998:
Land $ 279,955
Buildings 577,798
Machinery and equipment 2,854,678
Furniture and fixtures 162,602
Leasehold improvements 7,515
----------
3,882,548
Less accumulated depreciation and amortization 2,030,723
----------
$1,851,825
==========
6) Patents
At August 31, 1998, the book value of patents, net of accumulated
amortization of $102,679, amounted to $352,494.
7) Other Assets
Other assets consist of the following at August 31, 1998:
Land clearing costs - Ruth Lake site
(see Note 13(b) below) $1,041,779
Canadian Environment Bond Deposit 63,920
Other 5,873
----------
$1,111,572
==========
8) Long-Term Debt
Long-term debt consists of the following at August 31, 1998:
8% Secured Convertible Debentures maturing
June 30, 1999; interest payable in arrears
at maturity; principal is convertible into
the Company's common stock at a conversion
price equal to the lesser of 120% of the
market price on the date of issuance or 80%
of the market price at date of conversion,
-9-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
principal is secured by a general lien
against the Company's tangible personal
property together with the Company's
interest in certain unresolved matters
related to the bankruptcy proceeding
(see Note 13(d)) and a second mortgage
lien on the technology center land and
building. Total security on this debt
has a depreciated cost at August 31,
1998 of $3,161,631 (see Note 16). $3,511,016
5% Convertible Debentures maturing
November 30, 1999; interest payable in
arrears at maturity; principal is
convertible into the Company's common
stock at a conversion price equal to the
lesser of 120% of the market price on
the date of issuance or 80% of the
market price at the date of conversion
(see Note 16). 375,000
Mortgage note payable to a bank which
matured June 30, 1998; interest rate on
the matured loan of 13% at August 31, 1998;
secured by pilot plant land and buildings,
with a depreciated cost at August 31, 1998
of $292,935. The Company is currently
negotiating with the bank for an extension
of the maturity date. 49,875
Mortgage note payable to a loan servicing
company at 9.25%; payable in monthly
installments of $1,383; matures October 31,
2006; secured by the technology center land
and building, with a depreciated cost at
August 31, 1998 of $304,967. 94,204
----------
Total long- term debt 4,030,095
Less current maturities 3,568,401
----------
Long-term debt excluding current maturities $ 461,694
==========
Long-term debt maturities:
Years ending August 31:
1999 $3,568,401
2000 383,950
2001 9,814
2002 10,761
2003 11,799
2004 and thereafter 45,370
----------
$4,030,095
==========
-10-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
9) Stock Options
a) Incentive Stock Option Plan
The Company adopted an Incentive Stock Option Plan ("ISO Plan") in
October 1992, 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. The
maximum aggregate number of shares, which may be optioned and sold
under the Plan, excluding those shares constituting the unexercised
portion of any canceled, terminated, or expired options, is 1,500,000
shares. 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 vesting and
terms of the options granted under the ISO Plan are determined when
awarded by the Board of Directors. If an eligible employee's employment
with the Company or a Subsidiary terminates for any reason, including
disability, except by reason of death, an Option held at the date of
termination (but only to the extent exercisable at the time of
termination) may be exercised in whole or in part at any time within 90
days after the date of termination (but in no event after the term of
the Option expires), and shall thereafter automatically terminate. In
the event of the death of an eligible employee, an Option held at the
date of termination (to the extent exercisable), may be exercised in
whole or in part at any time within one year after the date of
termination (but in no event after the term of the Option expires), and
shall thereafter automatically terminate. The ISO Plan will terminate
October 8, 2002.
As of August 31, 1998, there were 353,000 options outstanding with
exercise prices ranging from $2.56 to $20.81 per share. In addition, as
of August 31, 1998, there were 744,500 shares available for future
grant under the ISO Plan.
b) Non-Qualified Stock Plan for Directors
The Company adopted a Non-Qualified Stock Option Plan for Directors
("Directors Plan") in October 1992, under which options are granted to
directors who are not employees of the Company at a price equal to the
fair market value at the date of grant. The options are exercisable any
time following six months of continuous service following the date of
the grant and expire in five years. The maximum aggregate number of
shares, which may be optioned and sold under the Plan, excluding those
shares constituting the unexercised portion of any canceled,
terminated, or expired options, is 500,000 shares. The Directors Plan
provides for a grant of 25,000 shares to each newly elected director
and an annual grant to each director of 10,000 shares upon election of
the director at an Annual Meeting of the Company. If an eligible
director's membership on the Board terminates for any reason, including
disability, except by reason of death, an Option held at the date of
termination may be exercised in whole or in part at any time within 90
days after the date of termination (but in no event after the term of
the Option expires), and shall thereafter automatically
-11-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
terminate. In the event of the death of an eligible Director, an Option
held at the date of death may be exercised in whole or in part at any
time within one year after that date (but in no event after the term of
the Option expires), and shall thereafter automatically terminate. The
Directors Plan will terminate October 8, 2002.
As of August 31, 1998, there were 180,000 options outstanding with
exercise prices ranging from $3.94 to $16.31 per share. In addition, as
of August 31, 1998, there were 275,000 shares available for future
grant under the Directors Plan.
10) Accumulated and Other Comprehensive Income
SFAS 130 requires a supplemental examination of income, showing net income
adjusted by transactions and events, which were not reflected in net income
that occurred during the period, and that affected the Company's equity
from non-owner sources. Typically, comprehensive income includes equity
adjustments for unrealized gains and losses on available-for-sale
securities, minimum pension liabilities adjustments, and foreign currency
transaction adjustments. On this basis, at August 31, 1998, the Company
recognized as a component of stockholders' equity accumulated comprehensive
income of $234,652 related to foreign currency transaction adjustments.
11) Prior Period Adjustments
The accompanying balance sheet as of August 31, 1998 has been restated to
correct an error relating to the excess of acquired net assets over cost.
The effect of the restatement was to decrease the accumulated deficit and
paid-in capital by $201,736, thus restatement had no effect on total
stockholders' equity.
12) Income Taxes
Significant components of deferred tax assets and liabilities at August 31,
1998 were as follows:
Deferred tax assets:
Tax credits and carryforwards $29,110,000
-----------
Total deferred tax assets 29,110,000
Less valuation allowance 29,001,000
-----------
Net deferred tax assets 109,000
Deferred tax liabilities:
Patents (109,000)
-----------
Total deferred tax liabilities (109,000)
-----------
Net deferred taxes $ -
===========
-12-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
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 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 the 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.
At August 31, 1998, 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 as
follows:
Tax Credits
--------------------------
Year of Research &
Expiration NOL Experimentation Investment
---------- ----------- --------------- ----------
1999 $ 3,693,000 213,000 14,000
2000 1,966,000 23,000 1,000
2001 1,121,000 - -
2002 153,000 - -
2003 582,000 - -
2004 990,000 - -
2005 708,000 - -
2006 456,000 - -
2007 402,000 - -
2008 2,595,000 - -
2009 2,556,000 - -
2010 2,871,000 - -
2011 5,039,000 - -
2012 9,205,000 - -
2013 41,939,000 - -
2014 500,000 - -
----------- ------- ------
$74,776,000 236,000 15,000
=========== ======= ======
The Company's Canadian subsidiary, Can-Amera, which is subject to Canadian
taxation, has net operating loss carryforwards of approximately C$20,000,
which expire ratably through December of 2001.
-13-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
13) Commitments and Contingencies
a) Litigation
The Company and certain officers of the Company were 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
plaintiff asked 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.
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, were consolidated with the other 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 sought class action treatment for
purchasers of the Company's common stock 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. The case was dismissed against the Company during
its Chapter 11 proceedings but is still pending against Deutsche Morgan
Grenfell and the individual defendants. The Company cannot determine at
present how this litigation will proceed and whether any further
proceedings will be pursued against the individual defendants, Messrs.
Rendall and Butler. Mr. Rendall is a director and the Chairman and
Chief Executive Officer of the Company and Mr. Butler is a former
officer and director of the Company and, as such, both individuals have
certain rights of indemnification against the Company as provided in
the By-laws.
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 alleged
violation of the Arizona Securities Act, fraud, consumer fraud,
negligent
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<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
misrepresentation, and breach of contract resulting from the
plaintiffs' purchase of shares of the Company's common stock in the
open market and in a private placement directly from the Company. The
case was removed by the defendants to the United States District Court
for the District of Arizona (No. CIV 96-2765 PHX ROS), where it is
pending against the individual defendants.
The Order of the United States Bankruptcy Court for the District of New
Mexico, dated July 31, 1998, confirming the Company's Plan of
Reorganization constitutes a permanent injunction against the
Plaintiffs in the Sedita and Phoenix Pacific Properties cases regarding
further pursuit of the litigation claims against the Company other than
as claims against the estate through the Bankruptcy Court. The Court
Order does not, however, affect the litigation claims against the
individual defendants, all of whom may have claims for indemnification
against the Company regarding defense of the actions.
The Company intends to vigorously defend the claims filed against it if
such actions are pursued as claims in the U.S. Bankruptcy Court and
believes that the allegations made against the Company, its officers
and directors are without merit. Within limits of its financial
capability, the Company also intends to provide the legal defense for
the individual officer and director defendants named in the New York,
New Mexico and Arizona actions described above.
The Company brought an action, Solv-Ex Corporation v. Quillen, Quilcap
Corporation, Zweig, Zweig Advisors, Weir Jones Engineering Consultants,
Ltd., case # 96-6057(JSR), United States District Court, Southern
District of New York, on August 9, 1996. The Company's complaint
alleged, among other things, defendants' breach of Confidentiality
Agreements, interference with prospective economic advantage, fraud,
breach of trust and unjust enrichment, and that the Zweig and Quillen
defendants used information gained from the Company to damage the
Company and further their own short selling schemes. Damages in excess
of $12,000,000 were sought. The action was dismissed without prejudice
in the early stages of discovery as a result of the Company's
bankruptcy proceedings, at which time the discovery that was previously
obtained supported the Company's position concerning the conduct of the
defendants.
On December 4, 1998, the Company brought an action styled as, Solv-Ex
Corporations, et al. v. Deutche Bank AG et al., in the District Court
for the State of New Mexico, Bernalillo County, case #CV98-11647,
against Deutsche Bank AG, and its affiliates, Deutsche Morgan Grenfell,
Inc., and Morgan Grenfell Asset Management Ltd., as well as against
certain short-sellers of the Company's common stock, including Parker
Quillen, Quilcap Corporation, Martin Zweig, Zweig Advisors, Michelle
Sarian, Fahnestock & Co. Inc., George Voelker, Tim Rice, Rice Voelker
Bros. & Frantzen, Lee Mikles, Mark Miller, Mikles/Miller Management
Inc., Stanley Trilling, Trilling Partners, Paine Webber Group, Inc.,
Manuel Asensio, Asensio & Co., and Weir-Jones Engineering Consultants,
Ltd.
-15-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
In the suit, the Company alleges damages caused by a campaign to
destroy the Company as an ongoing concern, misuse of its confidential
information and manipulation of its common stock. The Company also
alleges that it was forced to seek bankruptcy protection as a result of
the alleged wrongdoing. The Zweig, Quilcap and Weir-Jones defendants
attempted to block this action as to them by claiming that the suit was
brought in violation of the New York Federal Court's order in Solv-Ex
v. Quillen et al., which was dismissed without prejudice as described
above. On January 29, 1999, the New York Court ruled against the
defendants, which allows the suit to continue in New Mexico.
Preliminary proceedings regarding all defendants, including
jurisdiction and venue, are pending and in the process of determination
by the Courts.
On July 20, 1998, the Securities and Exchange Commission ("SEC") filed
a civil action against the Company and two of its senior officers,
Securities and Exchange Commission v. Solv-Ex Corporation, et al.,
Civil No. 98-860 BB/RLP, United States District Court, District of New
Mexico. The complaint alleges among other things that the Company, John
S. Rendall (Chairman and CEO) and Herbert M. Campbell II (Senior Vice
President), violated the securities laws through issuance of false,
misleading or deficient public statements and filings during the period
January 1995 through April 1997 regarding the Company's processes
developed to extract oil and industrial minerals from oil sands, as
well as its technology to produce metallic aluminum. The complaint also
alleges that the Company understated its outstanding common stock by 3
million shares in the Form 10-Q filed for the period ended March 31,
1996. This allegation relates to a 3 million-share certificate issued
in the name of Mr. Rendall (which was subsequently cancelled) in
connection with a transaction, which was never completed.
The complaint seeks injunctive relief against the defendants with
respect to future violations of the securities laws and, in the case of
Mr. Rendall and Mr. Campbell, civil penalties in an amount to be
determined by the Court. No civil penalties are being sought against
the Company.
In its answer, the Company denies any allegations of wrongdoing and, in
a separate motion filed concurrently, specifically asked that the Court
dismiss the complaint with respect to allegations involving issuance of
the 3 million-share certificate to Mr. Rendall. The Company also has
requested that it be awarded its fees and other expenses in the matter
pursuant to the Equal Access to Justice Act.
b) Lease
In connection with its activities in Alberta, Canada, during 1996 and
1997, the Company leased an approximately 50-acre tract (known as the
Ruth Lake site) from the Province of Alberta (the "Province"). The
original planned use for the leased land, which is located north of
Fort McMurray on Highway 63, was for the construction of a plant to
recover minerals from oil sands tailings generated by others. The site
was also used by the
-16-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
Company as a staging area for its construction activities on its own
oil sands lease. The Company spent $1,041,779 for site preparation,
most of which was for clearing and ground preparation and also posted a
C$100,000 reclamation bond ($63,920 current value as of August 31,
1998), which amounts are recorded in Other Assets on the Company's
balance sheet, in anticipation of further use or disposal of the site.
However, the lease, as amended, required the Company to commence
construction of the plant by August 1, 1998, which the Company was
unable to do. Thereafter, the Company requested an extension of the
lease provision requiring the commencement of construction. The request
was denied, which is being appealed by the Company. In the interim, the
Company has been involved in mediation with the Province in an effort
to find an alternative solution to proceeding with the appeal. The
Province has set a deadline of July 30, 1999, by which the Company must
have completed a transaction for assignment of the lease to another
party for another use. If the Company is unable to do so or if its
appeal is not successful, the lease will be terminated and the asset
value will be expensed. At present, the Company is unable to determine
the terms of any such assignment that may be made or the consideration
to be received from such assignment, and, therefore, is unable to
determine the remaining carrying value of the asset. In addition, the
Company is unable to determine whether the Province would in fact
reclaim the site. Accordingly, a question remains as to how much, if
any, of the C$100,000 reclamation bond will be returned to the Company.
c) Environmental Liability
In November 1997, the State of New Mexico Environmental Department
("NMED") identified an area next to the Company's pilot plant building
where soil vapor testing indicated solvent contamination. The matter
was deferred until after the emergence of the Company from bankruptcy.
The Company has contacted the NMED to discuss the environmental cleanup
requirements. The NMED will test the site to identify the area of
contamination and thereafter, the Company will have a 60-day period to
present to the NMED, a Voluntary Abatement Plan ("VAP") as prescribed
in the New Mexico Water Quality Control Commission Regulations, Subpart
4106. Upon public notification and approval by the Secretary of the
NMED, the Company will execute the VAP. At present, the Company is
unable to determine the amount of cleanup that will be required or the
cost thereof, and therefore, no liability has been accrued by the
Company at August 31, 1998.
d) Canadian Tax Assessment
As part of obtaining bankruptcy court approval for the sale of the
Company's assets referred to in Note 1, an order was entered by the
bankruptcy court requiring the Company to pay C$2,700,000 to Revenue
Canada for withholding purposes pursuant to the Canadian Income Tax
Act. In March 1998, the Company filed an objection to the assessment of
Part XIII withholding tax related to the years ended June 30, 1996 and
1997. The tax assessed for the 1996 and 1997 years was C$1,457,527 and
C$345,015, respectively, plus penalties and interest. Revenue Canada
currently has the Company's objections under consideration, and
-17-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
therefore, no decision has been rendered in the matter. The potential
refunds, if any, are pledged as security to the 8 percent Secured
Convertible Debentures. At present, the Company is unable to determine
the result of its objections to the assessment of the Part XIII
withholding tax filed with Revenue Canada, and therefore, no asset or
liability has been recorded on the accompanying balance sheet.
14) Year 2000 Issue
Like any other company, advances and changes in technology can
significantly affect the business and operations of the Company. For
example, a challenging problem is that many computer systems worldwide
cannot properly recognize the year 2000 or years thereafter. No easy,
comprehensive, technological "quick fix" has yet been developed in the
United States or elsewhere for this problem. Not only might the problem
affect a company's computers, but the company could also be impacted by
problems at other companies, through supplier relationships, etc.
Fortunately, the Company's present small base of operations is not heavily
dependent upon computers. The Company uses accounting software on a small
network and other software tools for financial reporting and word
processing. Steps have been taken to test for compliance and, as necessary,
computer and software upgrades are being made within the Company.
Management is reasonably confident, in general, about the Company's level
of exposure. However, with the drastic scenarios worldwide discussed in the
media, the Company cannot guarantee that it will not be detrimentally
impacted.
15) Related Party Transactions
Mr. Rendall, the Company's Chairman and Chief Executive Officer, loaned the
Company $2,000,000 on March 26, 1997, which was payable on March 31, 1999,
with interest at 10 percent per annum. On September 9, 1998, Mr. Rendall
converted the loan and accrued interest of $291,506 into 5,728,767 shares
of the Company's common stock.
Also, on September 9, 1998, the Board of Directors authorized the issuance
of common stock to certain officers and directors in payment of services
rendered and indemnification of expenses. Messrs. Anderson, Campbell, Davey
and MacDonald received 55,000 shares, 29,603 shares, 80,000 shares and
65,670 shares, respectively.
On August 31, 1998, the Canadian Monitor made distributions to unsecured
creditors in accordance with the Plan of Reorganization that included
distributions to Messrs. Anderson and Davey in the amounts of C$1,797 and
$73,774, respectively.
-18-
<PAGE>
SOLV-EX CORPORATION AND SUBSIDIARIES
(Development Stage Enterprises)
Notes to Consolidated Balance Sheet - continued
16) Subsequent Events
In accordance with the Plan of Reorganization, the Court Order established
a date of record of October 1, 1998 for the exchange of one share "old"
common stock for one share of "new" common stock. Shares not exchanged by
December 1, 1998 were canceled. In addition, each shareholder or brokerage
firm on behalf of street name holders of the common stock, who provided the
Company with specified information prior to December 1, 1998, received one
warrant for each three shares of common stock held. Each warrant provides a
right to purchase one share of "new" common stock at $10 per share on or
before August 31, 2000. Also under the Plan of Reorganization, certain
shares of "new" common stock were issued or reserved for satisfaction of
other claims allowed in the reorganization. As of December 1, 1998, there
were 29,211,157 shares of "new" common stock outstanding and 9,238,109
warrants to be issued as a result of the Plan of Reorganization, subject to
certain adjustments (not including shares and warrants issued in the
private placement - see below). These securities generally were not subject
to resale restrictions as provided under 11 U.S.C. (S) 1145.
In November 1998, the Company completed a private placement of shares of
restricted common stock and warrants. The Company issued 1,624,000 shares
of common stock and 919,400 warrants resulting in proceeds to the Company
of $812,000. The warrants are exercisable at $1.00 per share with a
maturity date of November 1, 2003. The majority of the proceeds of the
private placement has been earmarked for the costs of defending the SEC
enforcement action and for prosecuting the suit filed against Deutsche Bank
and the short-sellers (see Note 13(a) - Litigation).
As of December 31, 1998, the maturity date of the 8 percent Secured
Convertible Debentures was extended from December 31, 1998 to June 30,
1999. As consideration for the extension of the maturity date, a $200,000
principal reduction was made, accrued interest to December 31, 1998 was
paid, and the interest rate was increased from 6 percent to 8 percent per
annum effective January 1, 1999.
In January 1999, $100,000 principal amount of the 5 percent Convertible
Debenture was converted into the Company's common stock. As part of the
conversion, 379,627 shares of the Company's common stock were issued to the
debenture holder. The debenture holder has questioned the method used by
the Company to determine the market price of the Company's common stock
utilized in the conversion computation, and the Company has reserved its
right to adjust the number of shares issued based on the market activity in
its common stock.
-19-
