SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
- --------------------------------------------------------------------------------
FORM 10-KSB
- --------------------------------------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
Commission file number 33-20954
KBF POLLUTION MANAGEMENT, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-2687588
- --------------------------------------------------------------------------------
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1 JASPER STREET, PATERSON, NEW JERSEY 07522
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 942-7700
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
0.00001 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 as
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days-.Yes X No
- --------------------------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB (__).
State issuer's revenues for its most recent fiscal year: $2,858,424.
Based upon the average closing bid and asked price of the Registrant's common
stock, the aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 27, 2000 was $27,399,667.
The number of outstanding shares common stock as of March 27, 2000 was:
73,821,778.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
EXECUTIVE SUMMARY
KBF Pollution Management, Inc. (the "Company"), a New York Corporation, was
organized in 1984 under the name Kreisler Bags & Filtration, Inc., which name
was changed to KBF Pollution Management, Inc. in 1986. The Company is engaged in
the environmental services business and has traditionally specialized as a
wastewater recycling service provider, recycling liquid hazardous and
non-hazardous metal bearing wastes. The holder of the exclusive rights to the
Selective Separation Technology(TM) ("SST") (U.S. Pat. Nos.: 5,753,125;
5,908,559) and other patent-pending and proprietary resource recovery processes,
the Company has researched, developed and implemented many innovative methods of
recycling hazardous and non-hazardous wastes at its facilities since 1984. The
Company's mission from its inception has been to develop and implement
innovative technologies for the recycling of hazardous and non-hazardous wastes,
in the process creating value by the manufacturing of ore-quality commodities
and by the prevented release of hazardous chemicals into the environment through
selective separation at their source.
In March 1998, the Company began operations in its first large-scale
recycling and commodity manufacturing center, operating as American Metals
Recovery, Corp. ("AMRC"), a wholly owned subsidiary of the Company. While
Management had originally intended on expanding AMRC's process infrastructure
steadily over time as the Company's market penetration increased, the decision
was made to expedite the expansion in December 1998 upon closure of the
Company's New York facility. By the end of the first quarter 1999, the Company
raised sufficient capital to build out AMRC (utilizing its subsidiary, New World
Recycling, Inc., formerly AMR, Inc. ("New World")), to more fully realize the
potential of the Company's patented and proprietary resource recovery processes.
The Company invested aggressively in expediting completion of the facility in
1999 while AMRC's recycling of liquid wastes continued. Management now
anticipates the final completion of the facility's expanded process
infrastructure within the second quarter 2000. The facility is designed for the
large-scale provision of a broad array of recycling services based on the
Company's intellectual properties and the diversification of the Company's
services into the hazardous and non-hazardous solid waste market, which is
estimated to be six times the size of the liquid waste market. The facility is
designed for annual service capacity 0f 50,000 tons of solid waste and 15
million gallons of liquid waste. The facility processed approximately 1.25
million gallons of liquid waste in 1998 and no solid waste. In 1999, the
facility processed about 1.6 million gallons of liquid waste and less than 1,000
tons of solid waste.
While investing in process infrastructure, Management implemented its plans
to invest aggressively in sales and service distribution. In July 1999, the
Company executed its first services distribution agreement with R.M. Jones &
Company, Inc., a New-England based environmental services provider with sales
management and a sales force experienced in hazardous waste sales. This
agreement (the "R.M. Jones Agreement") resulted in increased volume for AMRC in
1999. The Company has entered into preliminary negotiations with similar
organizations in the North East and Mid-Atlantic regions for similar agreements.
In January 2000, the Company began implementing its Corporate Restructuring
Plan with the principal objective of restructuring the Company into a full
service waste management company and to prepare the Company for the next stage
of its evolution. The details of this plan will be explained in a shareholder
letter slated for release in April 2000. The Company will be securing
experienced and seasoned management, highly talented sales personnel, additional
infrastructure and the means to maximize the distribution of the Company's
existing and anticipated new services.
INDUSTRY BACKGROUND AND COMPETITION
Most chemical wastes generated in the United States by industrial processes
have been handled on-site at the generators' facilities. Over the past 30 years,
increased public awareness of the harmful effects of unregulated disposal of
chemical wastes on the environment and health has led to fedral, state and local
regulation of chemical waste management activities. The statutes regulating the
management of chemical wastes include the Resource Conservation and Recovery Act
of 1976, as amended ("RCRA"), the Toxic Substances Control Act
2
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)
("TSCA") and the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("Superfund"), and are primarily administered by the
federal Environmental Protection Agency ("EPA"). This body of laws and
regulations by federal and state environmental regulatory agencies impose
stringent standards for the management of chemical wastes and provide penalties
for violators, as well as continuing liability by generators and others for past
disposal and environmental degradation. For example, under Superfund,
responsible parties may be subject to remedial costs at abandoned hazardous
waste sites and, in some instances, treble damages. As a result of the increased
liability exposure associated with chemical waste management activities and a
corresponding decrease in the availability of insurance and significant cost
increases in administering compliance and facility capital improvements, many
generators of chemical wastes have found it uneconomical to maintain their own
treatment and disposal facilities or to develop and maintain the technical
expertise necessary to assure regulatory compliance. Accordingly, many
generators have sought to have their chemical wastes managed by firms that
possess both the appropriate treatment and disposal facilities, as well as the
expertise and financial resources necessary to attain and maintain compliance
with applicable environmental regulatory requirements. At the same time,
governmental regulation has resulted in a reduction of the number of facilities
available for chemical waste treatment, storage or disposal, as many facilities
have been unable to meet the strict standards imposed by RCRA or other laws.
The hazardous waste industry is best characterized today as being
fragmented. Service quality and type differs from region to region and pricing
accordingly is subject to extreme variance from region to region. The Company's
principal competition takes the form of landfill or incineration. While there
are many companies that provide waste management services (some of which are of
considerable size) no single company holds what the Company's Management feels
to be a dominant position with significant competitive advantage or a focused
suite of core competencies. The generators of waste (the Company's customers)
expect a high-quality, uniform service that caters to all of their waste
management needs - recycling and disposal, and expect their service provider of
choice to have the technical, regulatory and distribution capabilities to
address these needs.
Companies of moderate to very small size exist that offer distinct regional
services that, to some extent, compete with the Company's recycling services. No
single company, however, offers as diverse an array of services and the
capability to process as many waste streams as the Company. The Company's
unique, patented and proprietary technologies, in conjunction with its
large-scale process infrastructure, make possible the ready ability to recycle
more waste streams than any other recycling service provider. This process
capability is viewed by Management as one of the Company's principal competitive
advantages.
PATENTS AND PROPRIETARY INFORMATION
KBF's patented Selective Separation Technology(TM) (U.S. Pat. Nos.:
5,753,125; 5,908,559) and other patent-pending and proprietary Resource Recovery
Technologies separate, remove and recover a wide range of metals from liquid and
solid wastes as well as other production and manufacturing media. Through
resource recovery, KBF's technologies recycle metals, both hazardous and
non-hazardous, in their elemental state at highly competitive prices. Wastes
managed with KBF's technologies become products that are comparable and superior
to the quality of virgin ore material extracted from the ground. Use of KBF's
technologies eliminates the federally mandated "cradle-to-grave" liability for
which a waste generator would otherwise remain perpetually liable. KBF's
technologies apply to manufacturing, industrial and municipal waste processes
that contain metals or otherwise produce a metal bearing waste by-product.
The Company has many other patent-pending and proprietary resource recovery
technologies and processes. Pursuant to a license agreement between Mr. Lawrence
Kreisler and the Company, executed in November 1997 and ratified by the
shareholders of the Company, the Company is able to utilize the processes in its
operations, as well as other related technologies which remain proprietary and
for which patents are currently pending. In accordance with the License
Agreement with Mr. Kreisler, the conditions upon which royalty payments begin to
accrue, have not yet been attained by the Company. Accordingly, no royalty
payments have been made or accrued. The license agreement has a minimum 15 year
minimum term, and subsequent five year evergreen terms. The license agreement
can be terminated after the minimum term by either party.
3
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)
SUBSIDIARIES AND DIVISIONS
On May 6, 1997, the Company formed three corporations: Gryphon Industries,
Inc., New World Recycling, Inc. (formerly AMR, Inc.) and American Metals
Recovery, Corp. pursuant to the laws of the State of Nevada. In June 1998, the
Company formed KBF-LI pursuant to the Laws of the State of New Jersey.
American Metals Recovery, Corp. was activated in December 1997 to operate
the New Jersey facility as discussed above.
New World Recycling, Inc. ("New World") (formerly, AMR, Inc.) was activated
in late 1998 for the purpose of an expansion project. During the fourth quarter
of 1998 the company spent $47,070 as an investment in New World, in conjunction
with AMR, Inc.'s capital raising activities.
As of the date hereof, Gryphon Industries, Inc. remains inactive, no stock
has been issued and remains available for future use.
KBF-LI ceased all activity during the first quarter of 1999 and is now
defunct.
TRANSPORTATION SERVICES
The Company uses the services of Metal Recovery Transportation, Corp.
("MRTC") that is licensed in New York, Connecticut, Rhode Island, New Jersey,
Massachusetts and New Hampshire. Mr. Lawrence M. Kreisler, Chairman, President
and Chief Executive Officer of the Company, is the president and sole
shareholder of MRTC (See "Certain Relationships and Related Transactions"). The
Company also utilizes other unaffiliated licensed transport companies.
EMPLOYEES
The Company currently has thirty-seven full-time employees. In addition to
its five executive officers, the company employs a staff attorney, three
salesmen, staff engineers, process managers, maintenance managers,
administrative personnel and general facility technicians. There is no union
representation for any of the Company's employees and the Company considers its
relations with its employees satisfactory.
DESCRIPTION OF R.M. JONES & COMPANY, INC.
R.M. Jones was founded in 1962 and received the first in the nation
distributorship from the DuPont Company for a proprietary cleaning solvent.
Since that time R.M. Jones has serviced industrial clients throughout New
England as a supplier of chemicals and since 1980 has provided environmental
management services. R.M. Jones also operates a facility which will serve as a
transfer facility to ship materials to the facility. The R.M. Jones Agreement
implements a "reverse-distribution" sales mechanism in which waste generators
"supply" waste materials, R.M. Jones distributes the services of the Company and
the facility provides its recycling and commodity manufacturing services. All
compensation under the R.M. Jones Agreement is performance specific and tied to
actual sales of the Company's services.
LIABILITY INSURANCE
The Company maintains pollution liability insurance in the amount of
$1,000,000 per incident and $2,000,000 in aggregate covering the premises, and
vehicle liability insurance in the amount of $5,000,000. To date, the Company
has not experienced any material liability claims.
4
<PAGE>
ITEM 2. SELECTED FINANCIAL DATA
The selected financial data pertaining to the financial condition and
operations of the Company for the years ended December 31, 1999 and 1998 has
been obtained from the Company's financial statements. The financial statements
for the year ended December 31, 1999 and December 31, 1998 were audited by
Irving Handel & CO., Independent Auditor. The information set forth below should
be read in conjunction with such financial statements and the notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31.
-----------------------
1999 1998
-----------------------------------
<S> <C> <C>
SUMMARY OF OPERATIONS (in 000's, except per share data)
Net Revenues 2,858 3,079
Net Income (1,397) 13
Earnings per Share (0.0202) 0.0001
SUMMARY OF BALANCE SHEET
Current Assets 900 874
Current Liabilities 1,169 688
Working Capital (269) 186
Total Assets 5,561 3,486
Total Long-Term Debt 1,394 160
Total Liabilities 2,563 848
Stockholders' equity 2,998 2,637
</TABLE>
5
<PAGE>
ITEM 3. MANAGEMENT'S DISCUSSION AND ANALYSIS.
The following discussion should be read in conjunction with the Company's
audited financial statements and notes thereto set forth elsewhere in this
annual report.
Results of operations for the year Ending
December 31, 1999 as Compared to the Year Ended
December 31, 1998
Total revenues for the year ended December 31, 1999 were $2,858,424 as
compared to $3,078,567 for the same period in 1998, a decrease of 7.15%. The
Company attributes this decrease predominately to the non-recurring initial
license fee of $500,000 received during the first quarter of 1998 and royalty
income of $321,123, related to the terminated licensing agreement (see Financial
Statement Notes Nos. 3, 7, & 9). Total revenues for the year ended December 31,
1999, as compared to the adjusted revenues for the same period in 1998, without
regard to the licensing fee and royalty income, increased by 26.62%. This
increase in revenues is due to the Company's move to New Jersey where there are
increased business opportunities, along with the Company's expansion of both
internal and external sales efforts, increased market penetration and the
expansion of the Company's recycling and commodity manufacturing capabilities.
Management expects this upward trend to continue.
Trade accounts receivable has increased 4.65% as compared to December 31,
1998. Current trade accounts receivable are aged as follows:
0-30 days $259,678
30-45 days 143,266
45-60 days 25,523
60-90 days 8,548
90-120 days 3,108
120+ days 34,880
----------
$475,003
An allowance for doubtful accounts in the amount of $34,011 has been
provided against the foregoing receivables, which are presented on the Balance
Sheet net of the allowance. Based upon the Company's collection history,
Management believes this allowance is adequate.
Long term accounts receivable, relating to the terminated licensing
agreement (see Financial Statement Notes Nos. 3, 7, & 9), of $350,820, as
presented on December 31, 1998, has been written off, in full, as a bad debt
expense. Management believes, based upon events occurring during 1999, that
collection of this receivable is remote.
The cost of operations for the year ended December 31, 1999 increased to
74% of revenue from 46% of revenues for the same period in 1998. This increase
is primarily the result of the non-recurring license fee of $500,000 and royalty
income of $321,123, relating to the terminated licensing agreement (see
Financial Statement Notes Nos. 3, 7, & 9) included in sales during 1998. The
percentage cost of sales without regard to this income in 1998 was 64%. The
increase from the adjusted 64% in 1998 to 74% in 1999 is primarily related to
increased facility overhead costs associated with the significantly larger
facility in New Jersey and depreciation expenses related to newly acquired
equipment.
General and administrative expenses increased by 14% to $1,269,124 for the
year ended December 31, 1999 from $1,108,474 for the comparable period in 1998.
This increase is primarily due to increases in management and administrative
personnel (approximately $25,000) and the inclusion of 1998 and 1999 outside
director fees, paid in stock options granted in 1999 and valued under FASB 123
(approximately $140,000) as expenses.
Selling expenses increased by 72% to $220,539 for the year ended December
31, 1999 from $144,253 for the same period in 1998. This increase is due to the
increased sales effort undertaken by Management in 1999.
6
<PAGE>
ITEM 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
The bad debt expense of $350,820 is the result of Management's change in
its estimate as to the collectability of the royalty receivable relating to the
now terminated licensing agreement (see Financial Statement Notes Nos. 3, 7, &
9). Based upon events occurring during 1999, Management now believes that
collection of this royalty receivable is remote and has revised its allowance
against the receivable to be 100% thereof, resulting in the foregoing bad debt
expense.
Research and development was non-existent during 1998, compared to an
expense of $220,539 during 1999. The research and development expenses relate to
the Company's development of methodology to be used by New World upon
commencement of operations of its expansion project, set to begin in 2000.
The anticipated saving in moving the Company's facility has predominately
been realized even though costs, as described above, have increased. Facility
overhead for 1999, which is mostly rent, is being compared to a period in 1998
when the Company, under a temporary agreement, was paying reduced rent. Further,
additional equipment, increasing the Company's capacity, has resulted in utility
costs, which exceed the 1998 costs. Had capacity remained stable, utility costs
would have declined. Depreciation costs relating to this equipment have also
resulted in increased costs. The Company's sales efforts and management
personnel costs are also greater than they were in 1998, again skewing the
comparison. Other expenses where savings were anticipated, such as telephone,
administrative and facility labor, insurance, etc. are in fact lower in New
Jersey. Management believes the Company will continue to derive cost saving
benefits relating to its move to New Jersey but these savings may not be
apparent as the Company continues to expand its physical capabilities, increase
its sales efforts and employ management to grow the Company.
The unrealized loss on available for sale securities was $86,591 for the
year ended December 31, 1999 as compared to $373,430 for the same period in
1998. These losses relate to the declines in value of common stock received in
conjunction with the terminated licensing agreement (see Financial Statement
Notes Nos. 3, 7, & 9), which Management believes are permanent.
The Company incurred a net loss of ($1,397,479) for the year ended December
31, 1999 as compared to a profit of $13,179 for the same period in 1998. This
loss is due to the increases in costs discussed above. Without the bad debt of
$350,820, the permanent stock write down of $86,591, and the research and
developments costs of $220,539, which are non-recurring, the 1999 adjusted loss
is $739,529, of which $345,616 is attributable to depreciation and amortization.
Management believes that the continued growth of traditional sales, coupled with
the commencement of the Company's expansion project and the continued growth
efforts being undertaken by Management, will improve the Company's gross profit.
Management also anticipates increased selling and administrative expenses
commensurate with sales growth. Management anticipates continued legal expenses
of approximately $50,000 during 2000 in conjunction with ongoing legal and
professional fees.
Results of operations for the year Ending
December 31, 1998 as Compared to the Year Ended
December 31, 1997
Total revenues for the year ended December 31, 1998 increased to $3,078,567
as compared to $1,926,895 for the same period in 1997, an increase of 60%. The
Company attributes the increase to a rise in sales volume, along with the
collection (in restricted common stock - see Notes to Financial Statements - #3)
of the licensing fee (of $500,000) and royalty income accrued ($350,820) in 1998
(see Financial Statement Footnotes 7 & 9 ).
The revenues from the licensing fee and royalties were derived from the
terminated license agreement (see Financial Statement Notes Nos. 3, 7, & 9) and
accounted for 28% of the 1998 revenue. The market value of the restricted common
stock received under the terms of the terminated licensing agreement, as of
December 31, 1998, was $86,591. A permanent decline of $373,430 is reflected as
a loss on the statement of Income. The licensee under the agreement had
repurchased its stock for cash in the amount of $39,979 and the Company received
no other cash payments from the licensee. Absent the license-related revenues,
the 1998 revenue was $2,226,747 as compared to
7
<PAGE>
ITEM 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
$1,926,892 for the same period in 1997, for an adjusted increase of 16%.
Management expects this trend to continue due to increased market penetration,
resulting from both internal and external sales efforts, and, expansion of the
Company's recycling and commodity manufacturing capabilities.
Despite the increase in sales volume, accounts receivable has remained
relatively constant. Current trade accounts receivable are as follows:
0-30 days $ 233,285
30-45 days 110,535
45-60 days 18,725
60-90 days 12,425
90-120 days 5,065
120 + days 72,559
-----------
$ 452,594
An allowance in the amount of $31,183 has been provided against the
foregoing receivables, which are presented on the balance sheet net of said
allowance. Based upon the Company's collection history, Management believes this
allowance is adequate.
Long-term accounts receivable (other receivable) represents minimum
royalties due under the terms of the terminated license agreement (see Financial
Statement Notes Nos. 3, 7, & 9). These amounts are due December 31, 1999 and are
presented at present value, net of an allowance for uncollectability as follows:
<TABLE>
<S> <C>
Minimum Royalty $ 750,000
Discount to Present Value (107,753)
---------
Present Value of Minimum Royalty 642,247
Interest Earned through December 31, 1998 29,697
---------
Total Other Receivable & Revenue
Before Allowance 671,944
Allowance for Doubtful Accounts (321,124)
---------
Total Other Receivable Presented
And Revenue Reflected Herein
as of December 31, 1998 $ 50,820
=========
</TABLE>
Cost of sales for the year ended December 31, 1998 decreased to 46% of
revenues from 66% of revenues for the same period in 1997. This decrease is the
result of the increase in total revenues mentioned above.
General and administrative expenses increased by 53% to $1,221,375 for the
year ended December 31, 1998 from $806,027 for 1997. This increase is due to the
continued operation of two facilities, legal fees to register as a reporting
company (approximately $15,000) and litigation fees (approximately $65,000)
relating to the prosecution of the Company's suit for compensatory and punitive
damages against the licensee. In addition, there were costs (approximately
$50,000) related to the closure of the Company's former New York facility under
New York State Department of Environmental Conservation regulations. Legal fees
associated with the terminated license agreement (see Financial Statement Notes
Nos. 3, 7, & 9) litigation will continue to occur and Management estimates that
the company will incur $100,000 of litigation related expenses in 1999.
The Company incurred a net profit of $13,179 for the year ended 1998, as
compared to a net loss of ($207,635) for the same period in 1997, due to the
increase in sales and other revenue and reduced costs mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has working capital of ($269,273) at December 31, 1999. This
amount is computed by subtracting current liabilities from current assets. As of
December 31, 1999 the current liabilities include $225,000 of long-term debt
that is payable out of anticipated New World earnings only. Working capital,
without this debt, is ($44,273).
8
<PAGE>
ITEM 3. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
During the first quarter of 1999, the Company raised $609,611 through the
sale of common stock in private placements and through the exercise of
outstanding common stock options. Management anticipates raising additional
capital during 2000, through similar efforts, to subsidize its continued
expansion and the Company's Corporate Restructuring Plan.
Management believes that projected increases in sales during 2000 will have
a positive impact on cash flows from operations and coupled with the capital
input during the first quarter of 2000 and the anticipated additional capital
raises, offset the negative working capital position and provide sufficient
working capital for the balance of 2000.
LONG ISLAND FACILITY
The Company has ceased operations at the Long Island, New York facility,
and anticipates no further costs related to it.
CERTAIN EVENTS
The Company is party to the following matters. In all matters listed,
Management's response has been and will be to vigorously contest the cases.
The first matter is entitled, Clean Earth Recycling Inc. v. James Sullivan
and KBF. The action was filed in the Supreme Court of New York, Columbia County,
on July 9, 1998. The Complaint was originally filed against James Sullivan (an
employee of the Company) only and an Amended Complaint was subsequently filed
naming the Company as a defendant. The Amended Complaint seeks compensatory and
punitive damages, attorney's fees and costs of suit. The Amended Complaint also
seeks to prevent Sullivan and the Company from doing business with, soliciting
or contacting any customers or vendors who were customers or vendors of Clean
Earth at the time of Sullivan's employment. The Company filed a Verified Answer
to the Verified Complaint and a Verified Answer to the Amended Verified
Complaint with Counterclaims and served discovery upon Plaintiff's attorney. The
Counterclaims seek compensatory and punitive damages. Discovery is ongoing and
counsel is unable to evaluate the probability of an unfavorable outcome or range
of potential impact at this time.
The second matter is entitled, KBF Pollution Management, Inc. v. EPS
Environmental, Inc. d/b/a Solucorp Industries, Inc. and Joe Kemprowski v.
Lawrence Kreisler, et al. The action was filed in the Superior Court of New
Jersey, Law Division, Passaic County on October 7, 1998. The Complaint seeks
compensatory and punitive damages, attorney's fees and costs. Defendants filed
an Answer to the Complaint with Counterclaims and a Third-Party Complaint
seeking compensatory and punitive damages, attorney's fees and costs. Discovery
is ongoing and counsel is unable to evaluate the probability of an unfavorable
outcome or range of potential impact at this time.
The third matter is entitled Passaic Valley Sewage Commissioners v.
American Metals Recovery Corp. The action was filed in the Superior Court of New
Jersey, Chancery Division, Essex County on April 23, 1999 against the Company's
wholly owned subsidiary. The Compliant arises from alleged administrative
deficiencies and seeks declarations against the defendant as well as
administrative remedies, civil penalties, attorney's fees and costs. The Company
filed an Answer to the Complaint and served discovery. Discovery is ongoing and
counsel is unable to evaluate the probability of an unfavorable outcome or range
of potential impact at this time.
The Company is also involved in various collection matters in which the
Company is seeking payment for services rendered.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During 1999, the directors and officers of the Company reported numerous
transactions on Form 4 with the timely filing of relevant transactions on Form
5.
9
<PAGE>
ITEM 4. DESCRIPTION OF PROPERTY
On December 1, 1997, the Company began the relocation of its corporate
offices, laboratory and operational facility to a 60,000 square foot building in
Paterson, New Jersey. The new lease terms, which include a purchase option, are
for $1,218,600 base rent to be paid monthly over six years commencing December
1997. Currently, all of the Company's waste recovery operations are conducted
from the New Jersey facility.
The Company's New York facility was located in a leased building in North
Lindenhurst, New York. The Company occupied approximately 30,000 square feet of
space, of the 68,000 square foot building. The Company occupied the building
until November 19, 1998 and closure of the facility was accepted by New York
State Department of Environmental Conservation in February 1999.
10
<PAGE>
ITEM 5. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of Dec 31, 1999, certain information
concerning stock ownership by all persons known by the company to own
beneficially 5% or more of the outstanding shares of the Company's Common Stock,
each director, and all officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Name
and Address of Amount and Percentage
Beneficial Nature of of Outstanding
Holder or Identity of Group Beneficial Ownership Stock
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Kathi Kreisler 13,901,953 17.85%
14 Maria Drive (1)(2)
Sparta, NJ 07871
Lawrence Kreisler 15,255,370 19.61%
14 Maria Drive (1)(3)
Sparta, NJ 07871
Steven Lewen 2,607,258 3.70%
10 Cabriolet Lane (4)
Melville, NY 11747
Kevin Kreisler 2,594,028 3.61%
14 Maria Drive (5)
Sparta, NJ 07871
Joseph J. Casuccio, Jr., CPA 3,464,906 4.83%
7 North Equestrian Court (6)
Hauppauge, New York 11789
James Sonageri 2,055,000 2.89%
2 Strawberry Lane (7)
Upper Saddle River, NJ 07458
All Officers & Directors 39,878,515 41.90%
as a group seven persons.
Kreisler Family as A Group 31,751,351 35.56%
(8)
</TABLE>
1) Mr. and Ms.Kreisler each disclaim beneficial ownership of the shares of
Common Stock owned by the other.
2) Includes 10,489,278 shares of exercisable options for Common Stock.
3) Includes 8,892,778 shares of exercisable options for Common Stock.
4) Includes 1,302,258 shares of exercisable options for Common Stock.
5) Includes 2,594,028 shares of exercisable options for Common Stock.
6) Includes 2,584,800 shares of exercisable options for Common Stock.
7) Includes 2,005,000 shares of exercisable options for Common Stock.
8) Includes stock and options held by Lawrence M. Kreisler, Kathi A. Kreisler,
Kevin E. Kreisler and Scott C. Kreisler.
11
<PAGE>
ITEM 6. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
IDENTIFICATION OF DIRECTORS
<TABLE>
<CAPTION>
Capacities
Period Served in which currently
Name Age as Director serving
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lawrence Kreisler 53 Since 1984 Chairman
President
Kathi Kreisler 49 Since 1984 Vice President
Secretary, Treasurer
Director
Kevin Kreisler 27 Since July 1998 Vice President
Director
Stephen Lewen 47 Since January 1998 Director
Joseph J. Casuccio, Jr., CPA 48 Since January 1998 Chief Financial Officer
Vice President
Director
James Sonageri, Esq. 43 Since January 2000 General Counsel
Vice President
Director
</TABLE>
Lawrence M. Kreisler, President of the Company, is a Co-founder of the
Company and has been its Chairman of the Board and a Director since March 1984.
Mr. Kreisler invented the technology with which the Company transacts its
principal businesses (See "Patents and Proprietary Information"). He served as
Vice President, Secretary and Treasurer from March 1984 through December 1994.
In January 1995, Mr. Kreisler accepted the Board nomination to serve as
President of the Company. From 1973 to 1984 Mr. Kreisler managed pollution
treatment systems for several companies in the metal finishing industries. Mr.
Kreisler is the husband of Kathi Kreisler, Vice President, Secretary, Treasurer
and a director of the Company. He is the father of Kevin Kreisler, Vice
President and a director of the Company.
Kathi Kreisler is a Co-founder of the Company and served as its President
from 1984 through December 1994. She has been a Director since March 1984. In
January 1995, Ms. Kreisler became Vice President, Secretary and Treasurer of the
Company. From 1979 to 1984, Ms. Kreisler was a principal in Kreisler Bags
(subsequently incorporated as Kreisler Bags and Filtration, Inc., which name was
subsequently changed to KBF Pollution Management, Inc.). Ms. Kreisler is the
wife of Lawrence Kreisler, President and Chairman of the Board of the Company.
She is the mother of Kevin Kreisler, a Vice President and a director of the
Company.
Kevin Kreisler has been Vice President since January 1998 and director
since July 1998. Mr. Kreisler has continuously worked for the Company in various
part and full time capacities since 1990. He has also worked as a law clerk for
several law firms and clinics during his tenure at law school (September 1995 to
December 1997). Mr. Kreisler is a graduate of Rutgers University College of
Engineering (B.S., Civil and Environmental Engineering, 1994), Rutgers
University Graduate School of Management (M.B.A., 1995), and Rutgers University
School of Law (J.D., 1997). Mr. K. Kreisler is admitted to practice law in New
Jersey and the United States District Courts for the District of New Jersey. He
is the son of Lawrence Kreisler, President and Chairman of the Board of the
Company, and Kathi Kreisler, a Vice President, Secretary, Treasurer and a
director of the Company.
Joseph J. Casuccio, Jr., CPA has served as a Chief Financial Officer of the
Company since July 1998, and as Vice-President and director since January 1998.
Since 1985, Mr. Casuccio has been a partner at Werblin, Casuccio & Moses, a
public accounting firm, which provides accounting services to the Company (See
"Certain Relationships and Related Transactions"). Mr. Casuccio is a graduate of
Suffolk County Community College and Long Island University.
12
<PAGE>
ITEM 6. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS (CONT.)
IDENTIFICATION OF DIRECTORS (Continued)
Dr. Lewen has been a physician, and a member of Suffolk Opthamology
Associates, P.C. in Bayshore, New York. Dr. Lewen is a graduate of Cornell
University, Columbia University and Chicago Medical School.
James Sonageri, Esq., is admitted to practice law in New Jersey, New York
and the United States District Courts for the District of New Jersey, the
Southern and Eastern Districts of New York, and the United States Supreme Court.
He earned his J.D. degree from The John Marshall School where he was a member of
the Law Review and the Gavel Society and received his B.S. degree in accounting
from Fairleigh Dickinson University. He is a member of the New Jersey State and
New York State Bar Associations and a former member of the Board of Trustees of
the Criminal Law Section of the New Jersey State Bar Association. By appointment
of the Superior Court of New Jersey, Mr. Sonageri serves as a mediator in the
Chancery Mediation Program. He is a Master in the C. Willard Heckel Inn of
Court, which is sponsored by Rutgers School of Law. He serves on the New Jersey
Publications Advisory Committee for Lawyers Cooperative Publishing. He has
appeared as an expert guest commentator on Court TV for both civil and criminal
cases. Mr. Sonageri served as a Special Assistant United States Attorney in the
United States Attorney's Office for the District of New Jersey and as the
Supervisor of the White Collar Crime Unit in the Union County Prosecutor's
Office.
The Directors of the Company are elected at the annual meeting of
stockholders, and serve until the next annual meeting of stockholders. The
Company's executive officers are appointed by and serve at the discretion of the
Board of Directors, subject to the terms and conditions of the employment
agreements described below. There are no arrangements or understandings between
any of the Directors of the Company and any other person pursuant to which such
person was selected as a Director of the Company.
At the May 12, 1999 Annual Shareholders meeting the following persons were
elected to the Board of Directors for the year 1999: Lawrence M. Kreisler, Kathi
Kreisler, Joseph J. Casuccio, Jr., CPA Kevin Kreisler, Steven Lewen and
Frederick Eisenbud, Esq. In June 1999, Mr. Eisenbud resigned from the Board. In
January 2000, the Board of Directors elected James Sonageri, Esq. to succeed
Frederick Eisenbud for the remainder of his term.
IDENTIFICATION OF EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Current Office Held
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lawrence Kreisler 53 Chairman, President
Kathi Kreisler 49 Vice President, Secretary, Treasurer
Kevin Kreisler 27 Vice President
Joseph J. Casuccio Jr. 48 Vice President, Chief Financial Officer
James Sonageri, Esq. 43 Vice President, General Counsel
</TABLE>
Each person selected to become an executive officer has consented to act as
such and there are no arrangements or understandings between the executive
officers or any other persons pursuant to which he or she was or is to be
selected as an officer.
For a description of the backgrounds of Ms. Kathi Kreisler, Mr. Lawrence
Kreisler, Kevin Kreisler, Esq., Mr. Joseph J. Casuccio, Jr. and Jim Sonageri,
Esq., see Identification of Directors.
The information in the above tables is based in part upon information
furnished by the respective persons listed above, and, in part, upon records of
the Company.
13
<PAGE>
ITEM 7. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation paid or accrued by the Company during the fiscal year ended
December 31, 1999 to or on behalf of the Company's President and the other named
executive officers of the Company (hereinafter referred to as the "named
executive officers") for services rendered in all capacities to the Company
whose total aggregate salary and bonus exceeded $100,000:
<TABLE>
<CAPTION>
===========================================================================================================================
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
------------------- ------------
Name and Principal Salary ($) Bonus ($) Other Annual Awards, All Other
Position Year Compensation Options/SARs Compensation
- ---------------------- -------------- ---------------- ------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Kathi A. Kreisler 1999 $80,000 - - 100,000 -
Vice President 1998 $65,267 - - 7,500,000 -
- ---------------------------------------------------------------------------------------------------------------------------
1997 $3,500 - - 500,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Lawrence Kreisler, 1999 $165,000 - - 100,000 -
President 1998 $167,791 - - 5,400,000 -
- ---------------------------------------------------------------------------------------------------------------------------
1997 $152,503 - - - -
- ---------------------------------------------------------------------------------------------------------------------------
James Sonageri 1999 $5,200 - - 1,875,000 -
Vice President
Gen. Counsel
- ---------------------------------------------------------------------------------------------------------------------------
Joseph J. Casuccio 1999 $5,200 - - 1,856,250 -
Jr. Vice President
Chief Financial Officer
- ---------------------------------------------------------------------------------------------------------------------------
Kevin Kreisler 1999 $50,000 - - 12,944,028 -
Vice President
1998 $30,000 - - - -
===========================================================================================================================
</TABLE>
There were stock options granted to the named executive officers during
1997, 1998 and 1999. (See "Stock Options" for further information.)
The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1999 with respect to the
Company's named executive officers. No stock appreciation rights were exercised
or outstanding during such fiscal year.
14
<PAGE>
ITEM 7. EXECUTIVE COMPENSATION (CONTINUED)
<TABLE>
<CAPTION>
==================================================================================================================================
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
- ----------------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Value Number of Securities in-the-Money Options at FY-End
Realized Underlying Unexercised Market Price of shares at
Market Options at Fiscal Year-End FY-End ($) less exercise
Shares price at (#) price
- ------------------------------- acquired FY End ------------------------------------ ---------------------------------
Name on Exercise Exercisable Unexercisable Exercisable Unexercisable
exercise less
(#) exercise
price)
- ------------------------------- ------------ -------------- --------------- -------------------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Kathi Kreisler 0 N/A 10,489,278 - $323,508 N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Lawrence Kreisler 0 N/A 8,892,778 - $458,493 N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Kevin E. Kreisler 0 N/A 2,594,028 11,500,000 $115,500 0
- ----------------------------------------------------------------------------------------------------------------------------------
Joseph Casuccio 0 N/A 2,584,800 - $112,131 N/A
- ----------------------------------------------------------------------------------------------------------------------------------
James Sonageri 0 N/A 2,005,000 - $51,800 N/A
==================================================================================================================================
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Lawrence M.
Kreisler, as the Chairman of the Board and President of the Company, on November
7, 1997 (the "Lawrence Kreisler Employment Agreement"). The Lawrence Kreisler
Employment Agreement provides for a five-year term and shall be extended
automatically each day for an additional day so that the remaining term of this
agreement will be five years at all times. Either party may, by written notice,
fix the term of the Lawrence Kreisler Employment Agreement at five years without
additional extension and would then end on a date five years from the date of
notice. Pursuant to the Lawrence Kreisler Employment Agreement, Mr. Kreisler's
annual base salary shall be $165,000, with annual cost of living adjustments.
Mr. Kreisler is entitled to receive an annual bonus equal to 6% of the Company's
annual net income before taxes, reimbursement of business related expenses, use
of a Company automobile and participation in any employee benefits provided to
all employees of the Company. The Company shall contribute 6% of the base weekly
salary to Lawrence Kreisler's 401(k) savings plan.
Lawrence Kreisler's employment may be terminated by the Company at any time
for cause (as defined in the Lawrence Kreisler Employment Agreement) and his
employment may be terminated at any time by the mutual consent of the Board of
Directors and Mr. Kreisler. If Mr. Kreisler is terminated by the Company for
cause, the Company is obligated to pay him all amounts due under the Lawrence
Kreisler Employment Agreement, which have accrued but are unpaid as of the date
of termination. The Lawrence Kreisler Employment Agreement also includes
non-competition provisions which prevent Mr. Kreisler, during the term of the
agreement, from participating, directly or indirectly, in the ownership,
control, management or employ of any business entities other than the Company
without the prior written consent of the Board of Directors.
In January 1998, the Company issued 400,000 stock options to Lawrence
Kreisler for past services rendered as a result of voluntarily reducing his
salary. Each of these stock options is convertible into one share of common
stock at $0.40 per share, for a period of ten (10) years from the date of
issuance. These options were revised in 1999 as described below under "Stock
Options."
15
<PAGE>
ITEM 7. EXECUTIVE COMPENSATION (CONTINUED)
EMPLOYMENT AGREEMENTS (Continued)
The Company entered into an employment agreement with Kathi Kreisler, as
Vice President, Secretary and Treasurer, on November 7, 1997 (the "Kathi
Kreisler Employment Agreement"), which provides for a five-year term from the
date signed and shall be extended automatically each day for an additional day
so that the remaining term of this agreement will be five years at all times.
Either party may, by written notice, fix the term of the Kathi Kreisler
Employment Agreement at five years without additional extension and would then
end on a date five years from the date of notice. Pursuant to this agreement,
Ms. K. Kreisler shall receive an annual base salary of $80,000, with cost of
living adjustments. Ms. K. Kreisler is entitled to receive an annual bonus equal
to 4% of the Company's annual net income before taxes, reimbursement of business
related expenses, use of a Company automobile and participation in any employee
benefits provided to all employees of the Company. The Company shall contribute
6% of the base weekly salary to Ms. Kreisler's 401(k) savings plan.
Kathi Kreisler's employment may be terminated by the Company at any time
for cause (as defined in the Kathi Kreisler Employment Agreement) and her
employment may be terminated at any time by the mutual consent of the Board of
Directors and Ms. Kreisler. If Ms. Kreisler is terminated by the Company for
cause, the Company is obligated to pay her all amounts due under the Kathi
Kreisler Employment Agreement, which have accrued but are unpaid as of the date
of termination. The Kathi Kreisler Employment Agreement also includes
non-competition provisions, which prevent Ms. Kreisler, during the term of the
agreement, from participating, directly or indirectly, in the ownership,
control, management or employ of any business entities other than the Company
without the prior written consent of the Board of Directors.
Kathi Kreisler voluntarily lowered the amount of her 1997 salary to $3,500,
her 1996 salary to $8,325.00, her 1995 salary to $2,153, her 1994 salary to
$20,000 and deferred all 401(k) payments. In January 1998, the Company issued
Ms. Kreisler 7,500,000 stock options, each convertible to one share of common
stock, at $0.40 per share for a period of ten (10) years from the date of
issuance for past services rendered. These options were revised in 1999 as
described below under "Stock Options."
The terms of the Mr. Kevin Kreisler's employment agreement for 1999
included an annual base salary of $80,000, with an automatic 10% annual
increase. Mr. Kevin Kreisler will be entitled to an annual bonus equal to 3% of
the Company's net income before taxes, reimbursement of business expenses, use
of a Company automobile and participation in any employee benefits provided to
all employees of the Company.
The terms of Mr. Casuccio's employment agreement with the Company for 1999
were an annual salary of $5,200 and the issuance of performance based stock
options, as further described in "Stock Options", below. The agreement is
negotiated annually.
The terms of Mr. Sonageri's employment agreement with the Company for 1999
were an annual salary of $5,200 and the issuance of performance based stock
options, as further described in "Stock Options", below. The agreement is
negotiated annually.
These employment agreements provide for option issuance in lieu of salary
on an as needed basis to cover cash payment shortfalls against the agreed upon
annual salaries and incentive stock options. These issues are further described
in "Stock Options," below.
16
<PAGE>
ITEM 7. EXECUTIVE COMPENSATION (CONTINUED)
STOCK OPTIONS
The following is a schedule of options granted in 1998 and 1999. For an
accounting of the total options outstanding on December 31, 1999, see Note 14 of
the Company's 1999 Financial Statements, attached hereto.
In 1998, the Company issued, for unpaid prior years salaries, to Kathi
Kreisler and Lawrence Kreisler 7,500,000 and 400,000 options respectively. The
options are exercisable for a period of ten years, at $0.40 per share, equal to
the market value at grant date. Mr. Lawrence Kreisler was also issued 5,000,000
options for new patent technology, (See Patents and Proprietary Information).
The options are exercisable for a period of ten years at $0.20 per share, equal
to the market value at grant date. These options were revised in 1999 as
described under "Stock Options."
In 1998 the Company issued to unrelated third parties, 2,775,000 options
for the debt financing for the facility expansion project. The options are
exercisable for a period of five years and exercisable at $0.15-$0.21 per share,
equal to the market value at grant date. These options were rescinded in 1999.
In 1998 the Company issued to unrelated third parties, in payment of
services rendered in connection to various consulting services, 325,000 options
were issue exercisable for a period of five years, at $0.20 per share, equal to
the grant date.
In 1998 the Company issued to unrelated third parties, in payment of
services rendered in connection with facility construction, 812,000 options
issue exercisable for a period of ten years at $0.10 - $0.21 per share, with a
market value of a lesser amount at grant date.
In 1998, in connection with previously reported capital raises, the Company
issued 2,695,000 options to an investment banking institution exercisable for a
period of five years, at $0.15-$0.25 per share, with a market value of
$0.25-$0.32 at grant date. These options were renegotiated upon the termination
by the Company of the investment banking institution's relationship with the
Company. On September 8, 1998, the former warrants were replaced with new
warrants to purchase a total of 1,500,000 shares at $0.15 and 250,000 shares of
restricted stock. The warrants and the underlying shares are exercisable between
September 8, 1998 and August 30, 2003 and are callable by the Company at $0.01
per option.
During 1999 the company issued 26,862,919 options, called 857,680 options,
canceled 2,775,000 options, and reduced other outstanding options by 1,900,000.
The result was a net increase in the outstanding options of 18,912,919. Of
these, 11,500,000 options vest upon performance based benchmarks as the Company
achieves increased revenue to $28,000,000 per annum. These options are further
described below.
17
<PAGE>
ITEM 7. EXECUTIVE COMPENSATION (CONTINUED).
STOCK OPTIONS (Continued)
Directors and Officers
12,944,028 options were granted to Kevin Kreisler during 1999, 11,500,000
options are incentive options, which vest gradually with performance based
benchmarks as the Company achieves increased revenue to $28,000,000 per annum in
accordance with the following schedule:
<TABLE>
<CAPTION>
Annual Revenue Option
Target Shares
($mil) Vesting
-------------- ---------
<S> <C> <C>
$ 3.750 1,150,000
4.688 1,150,000
5.859 1,150,000
7.324 1,150,000
9.155 1,150,000
11.444 1,150,000
14.305 1,150,000
17.881 1,150,000
22.351 1,150,000
27.940 1,150,000
----------
11,500,000
==========
</TABLE>
These options are exercisable for a period of ten years, at $.21 per share,
equal to the market value at grant date. They vest after 9.5 years regardless of
the foregoing benchmarks, provided Mr. K. Kreisler continues as an employee
until that time.
444,028 options were granted to Mr. K. Kreisler for the salary differential
between the contractual salary and the amount paid in cash, for services from
January 1, 1998 through December 31, 1999. 1,000,000 options were granted as a
bonus for the development of a management, investor, supplier and advisor
network during the same period. The options are exercisable for a period of five
years, at $.22 per share, equal to 110% of the market value at grant date.
950,000 options were granted to the Company's Directors during 1999.
400,000 of these options were for 1998 service and 550,000 options were for 1999
service. The 1998 service options are exercisable for a period of ten years, at
$.40 per share, equal to the market value at grant date. The 1999 service
options issued to members of the Kreisler family are exercisable over a period
of five years, at $0.22 per share, equal to 110% of market value at grant date.
The balance of the 1999 service options are exercisable at $.20 per share, equal
to the market value at grant date.
18
<PAGE>
ITEM 7. EXECUTIVE COMPENSATION (CONTINUED).
STOCK OPTIONS (Continued)
Directors and Officers (Continued)
3,531,250 options were granted to officers of the Company during 1999. Of
these, 1,656,250 options were granted to the Company's CFO, 250,000 options for
1998 service and 1,406,250 for 1999 service, in addition to $5,200 of cash
salary and 1,875,000 options were granted to the Company's general counsel for
1999 service, in addition to $5,200 of cash salary. The options are exercisable
for a period of ten years, at $0.19 per share, equal to the market value at
grant date.
Other Options Granted
3,299,775 options were granted to unrelated third parties during 1999, in
connection with the Company's New World project (Note 1). The options are
exercisable for a period of ten years, at between $0.10 and $0.16 per share.
1,038,000 options were granted to unrelated third parties during 1999, to
arrange for debt financing for the New World project (Note 1). The options are
exercisable for a period of ten years, at $0.10 per share.
5,099,866 options were granted to various employees during 1999. These
options were granted to numerous management positions including plant manager,
regulatory compliance officer, telemarketing manager, facility development
manager, and marketing development manager. The options are exercisable for a
period of ten years, at $0.19 - $0.26 per share.
Options Called, Exercised, Canceled and Reduced
In 1999 the Company called certain options which became callable during the
year. 857,680 options were not exercised and were repurchased by the Company for
$0.0001 per share. 842,320 options were exercised at between $0.15 and $0.25 per
share. 1,500,000 options were exercised at $0.10 per share. The Company canceled
2,775,000 options for nonperformance, which were granted during 1998.
The Company reduced 7,900,000 options held by Kathi Kreisler (7,500,000)
and Larry Kreisler (400,000) by 1,900,000 shares, or from 7,900,000, to
6,000,000, in exchange for a reduced exercise price, from $0.40 to $0.25 per
shares subject to a one year lock up. The reduced exercise price exceeded the
market price on the day of the reduction.
19
<PAGE>
ITEM 7. EXECUTIVE COMPENSATION (CONTINUED).
STOCK OPTION PLAN
In May of 1999 the shareholders of the Company approved and adopted the KBF
1998 Stock Option Plan (the "ISO Plan"). The Plan superceded and replaced the
Company's 1994 plan, under which no options were issued. The Plan covers
50,000,000 shares of the Company's Common Stock , pursuant to which employees,
including officers of the Company are eligible to receive incentive stock
options as defined under the Internal Revenue Code of 1986, as amended. In
addition, non-qualified stock options may be granted under the Plan to employees
and consultants. Under the ISO Plan, options may be granted at not less than
100% (110% in the case of 10% shareholders) of the fair market value (100% of
the closing bid price on the date of grant) of the Company's Common Stock on the
date of grant. Options granted under the ISO Plan must be exercised within ten
years from the date of grant (five years, in the case of 10% shareholders). The
optionee may not transfer any option except by will or by the laws of descent
and distribution. Options granted under the ISO Plan must be exercised within
three months after termination of employment for any reason other than death or
disability, and within one year after termination due to death or disability,
unless extended by the Board of Directors. The Board of Directors of the Company
has the power to impose additional limitations, conditions and restrictions in
connection with the grant of any option. Stock covered under the Plan has been
registered with the Securities and Exchange on Form S-8. As of the date of this
report, 4,654,966 options have been issued under this plan..
ITEM 8. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1996, a new company was formed to service the transportation needs
of the Company. The new company, Metal Recovery Transportation Corp. is owned
solely by Lawrence Kreisler. (See "Certain Relationships and Related
Transactions.") Metal Recovery Transportation Corporation was formed without any
financial assistance from KBF. Metal Recovery Transportation has permits in New
York, New Jersey, Connecticut, Rhode Island, Massachusetts and New Hampshire.
Metal Recovery Transportation Corp. billed the company $276,792, and $286,919 in
1998 and 1999 respectively. Metal Recovery Transportation Corp. has operated at
virtually break-even levels since inception and, as such, Management believes
that the Company is benefiting from favorable pricing as compared to those which
could be obtained from unrelated parties.
In November 1997, the Company executed a License Agreement with Lawrence
Kreisler, President of the Company. Mr. Kreisler granted the Company a
worldwide, exclusive license to Mr. Kreisler's Patent Rights that are defined as
"The Selective Separation Technology" for the purpose of resource recovery of
industrial metal bearing waste." (See "Description of Business - Patents and
Proprietary Information"). The license applies to any improvements or related
inventions. The Company may assign or sub-license the License with prior written
consent which shall not be unreasonably withheld. Mr. Kreisler shall receive
$10,000 for all prior use of the technology and a royalty fee based on a per
gallon rate which differs according to the type and quantity of material
processed. The License Agreement has a minimum 15-year term after which time
changes to 5-year evergreen term. In accordance with the license agreement, the
condition upon which royalty payments begin to accrue has not yet been satisfied
by the Company. Accordingly, no royalty payments have been made or accrued. The
Company provided no financial support for any improvements or related inventions
to Mr. Kreisler's processes which might or have resulted in additional patents
being issued to Mr. Kreisler.
Joseph J. Casuccio, Jr., CPA, Chief Financial Officer, Vice President and a
director of the Company, is a partner of the accounting firm, Werblin, Casuccio
& Moses, which firm is the internal accountant for the Company. (See
"Management.")
ITEM 9. DESCRIPTION OF SECURITIES
QUALIFICATION: The following statements constitute brief summaries of the
Company's Certificate of Incorporation and Bylaws, as amended. Such summaries do
not purport to be complete and are qualified in their entirety by reference to
the full text of the Certificate of Incorporation and Bylaws.
COMMON STOCK: The Company's articles of incorporation authorize it to issue up
to 500,000,000 shares of Common Stock, $0.00001 par value per share. All
outstanding shares of Common Stock are legally issued, fully-paid and
non-assessable.
20
<PAGE>
ITEM 9. DESCRIPTION OF SECURITIES (CONTINUED).
LIQUIDATION RIGHTS: Upon liquidation or dissolution, each outstanding share of
Common Stock will be entitled to share equally in the assets of the Company
legally available for distribution to shareholders after the payment of all
debts and other liabilities.
DIVIDEND RIGHTS: There are no limitations or restrictions upon the rights of the
Board of Directors to declare dividends out of any funds legally available
therefore. The Company has not paid dividends to date and it is not anticipated
that any dividends will be paid in the foreseeable future. The Board of
Directors initially may follow a policy of retaining earnings, if any, to
finance the future growth of the Company. Accordingly, future dividends, if any,
will depend upon, among other considerations, the Company's need for working
capital and its financial conditions at the time.
VOTING RIGHTS: Shares of Common Stock are not redeemable, have no conversion
rights and carry no preemptive or other rights to subscribe to or purchase
additional shares of Common Stock in the event of a subsequent offering.
TRANSFER AGENT: The Company's transfer agent is American Stock Transfer & Trust.
21
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's Common Stock trades on the over the counter bulletin board
maintained by the NASD under the symbol "KBFP."
The following table sets forth, for the periods indicated, the range of
high and low closing bid prices for the Company's Common Stock as reported by
the National Association of Securities Dealers composite feed or other qualified
inter-dealer quotation medium and obtained from the National Quotation Bureau,
LLC.
<TABLE>
<CAPTION>
High Low
- -------------------------------------------------------------------------------------------------
1996
<S> <C> <C>
FIRST QUARTER 0.23 0.19
SECOND QUARTER 0.25 0.20
THIRD QUARTER 0.38 0.23
FOURTH QUARTER 0.38 0.19
1997
FIRST QUARTER 0.25 0.09
SECOND QUARTER 0.17 0.08
THIRD QUARTER 0.25 0.13
FOURTH QUARTER 0.40 0.16
1998
FIRST QUARTER 0.74 0.29
SECOND QUARTER 0.49 0.32
THIRD QUARTER 0.39 0.20
FOURTH QUARTER 0.23 0.15
1999
FIRST QUARTER 0.18 0.39
SECOND QUARTER 0.23 0.35
THIRD QUARTER 0.18 0.35
FOURTH QUARTER 0.20 0.31
- -------------------------------------------------------------------------------------------------
Titles of Class Approximate number of holders
of record as of March 30, 2000
- -------------------------------------------------------------------------------------------------
</TABLE>
Common Stock, .00001 par value 2,260
THE NUMBER OF HOLDERS DOES NOT GIVE EFFECT TO BENEFICIAL OWNERSHIP OF SHARES
HELD IN THE STREET NAME OF STOCK BROKERAGE HOUSES OR CLEARING AGENTS AND DOES
NOT NECESSARILY REFLECT THE ACTUAL OWNERSHIP OF THE SHARES.
DIVIDENDS
The Company has never paid a cash dividend on its Common Stock and
Management has no present intention of paying dividends in the foreseeable
future. The policy of the Company is to retain earnings and utilize the funds
for Company operations. Future dividend policy will be determined by the Board
of Directors based on the Company's earnings, financial condition, capital
requirements and other existing conditions.
22
<PAGE>
ITEM 2. LEGAL PROCEEDINGS
The Company is party to the following matters. In all matters listed,
Management's response has been and will be to vigorously contest the cases.
The first matter is entitled, Clean Earth Recycling Inc. v. James Sullivan
and KBF. The action was filed in the Supreme Court of New York, Columbia County,
on July 9, 1998. The Complaint was originally filed against James Sullivan only
and an Amended Complaint was subsequently filed naming the Company as a
defendant. The Amended Complaint seeks compensatory and punitive damages,
attorney's fees and costs of suit. The Amended Complaint also seeks to prevent
Sullivan (an employee of the Company) and the Company from doing business with,
soliciting or contacting any customers or vendors who were customers or vendors
of Clean Earth at the time of Sullivan's employment. The Company filed a
Verified Answer to the Verified Complaint and a Verified Answer to the Amended
Verified Complaint with Counterclaims and served discovery upon Plaintiff's
attorney. The Counterclaims seek compensatory and punitive damages. Discovery is
ongoing and counsel is unable to evaluate the probability of an unfavorable
outcome or range of potential impact at this time.
The second matter is entitled, KBF Pollution Management, Inc. v. EPS
Environmental, Inc. d/b/a Solucorp Industries, Inc. and Joe Kemprowski v.
Lawrence Kreisler, et al. The action was filed in the Superior Court of New
Jersey, Law Division, Passaic County on October 7, 1998. The Complaint seeks
compensatory and punitive damages, attorney's fees and costs. Defendants filed
an Answer to the Complaint with Counterclaims and a Third-Party Complaint
seeking compensatory and punitive damages, attorney's fees and costs. Discovery
is ongoing and counsel is unable to evaluate the probability of an unfavorable
outcome or range of potential impact at this time.
The third matter is entitled Passaic Valley Sewage Commissioners v.
American Metals Recovery Corp. The action was filed in the Superior Court of New
Jersey, Chancery Division, Essex County on April 23, 1999 against the Company's
wholly owned subsidiary. The Compliant arises from alleged administrative
deficiencies and seeks declarations against the defendant as well as
administrative remedies, civil penalties, attorney's fees and costs. The Company
filed an Answer to the Complaint and served discovery. Discovery is ongoing and
counsel is unable to evaluate the probability of an unfavorable outcome or range
of potential impact at this time.
The Company is also involved in various collection matters in which the
Company is seeking payment for services rendered.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
NONE.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
Commencing July 1999, the Company offered 1,750,000 shares of common stock
at $0.20 per share. In the first quarter of 2000, the Company offered 1,400,000
shares of common stock at $0.25 per share. These offerings were made pursuant to
an exemption from registration under Section 4(2). The were no underwriters used
in connection with these offerings and the Company retained the entirety of
these proceeds.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
INDEMNIFICATION: The Company shall indemnify to the fullest extent permitted by,
and in the manner permissible under the laws of the State of New York, any
person made, or threatened to be made, a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he is or was a director or officer of the Company, or served any other
enterprise as director, officer or employee at the request of the Company. The
Board of Directors, in its discretion, shall have the power on behalf of the
Company to indemnify any person, other than a director or officer, made a party
to any action, suit or proceeding by reason of the fact that he/she is or was an
employee of the Company. Insofar as indemnification for liabilities arising
under the Act may be permitted to directors, officers and controlling persons of
the Company, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act, and is therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the
23
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS (CONTINUED).
Company in the successful defense of any action, suit or proceedings) is
asserted by such director, officer or controlling person in connection with any
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by its is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.
INDEMNIFICATION OF OFFICERS OR PERSONS CONTROLLING THE CORPORATION FOR
LIABILITIES ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, IS HELD TO BE
AGAINST PUBLIC POLICY BY THE SECURITIES AND EXCHANGE COMMISSION, AND IS THEREFOR
UNENFORCEABLE.
PART F/S
The following financial statements required by Item 310 of Regulation S-B are
furnished below:
1. Independent Auditor's Report;
2. Balance Sheet as of December 31, 1999 (audited) and December 31, 1998
(audited)
3. Statements of Income for the periods: January 1, 1998 to December 31,
1998 (audited) and January 1, 1999 to December 31, 1999 (audited);
4. Statements of Cash Flows for the periods: January 1, 1998 to December
31, 1998 (audited) and January 1, 1999 to December 31, 1999 (audited);
5. Statement of Changes in Stockholders Equity for the period January 1,
1998 to December 31, 1999 (audited);
6. Notes to Financial Statements; and,
7. Financial data schedule-December 31, 1999 - Exhibit 27
24
<PAGE>
PART III
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following financial statements are included in Part II, Item
8 and are attached hereto as Exhibit A:
i) Balance Sheets
a) December 31, 1999
b) December 31, 1998
ii) Statements of Income Years Ended
a) December 31, 1999
b) December 31, 1998
iii) Statements of Stockholders' Equity
a) January 1, 1998 to December 31, 1999.
iv) Statements of Cash Flow Years Ended
a) December 31, 1998
b) December 31, 1999
v) Notes to Financial Statements
(b) Reports on Form 8-K.
i) None.
(c) Exhibits.
Exhibit
Number Description
10.1* - Lease/purchase agreement between the Company and Wasco
Funding Co. dated March 24, 1993.
10.2* - Employment Agreement between the Company and Lawrence
Kreisler dated October 15, 1992.
10.3* - Employment Agreement between the Company and Kathi
Kreisler dated October 15, 1992
10.4** - Amended Lease/purchase agreement between the Company
and Wasco Funding Co. dated March 25,1994.
10.5***** - Stipulation, dated June 26, 1997, between the Company
and John Spollen, Receiver f/b/o Apple Bank for Savings
10.6*** - 1998 Stock Option Plan
10.7 - License Agreement as and between Lawrence M. Kreisler
and the Company
10.8 - License Agreement as and between the Company and
Solucorp Industries
27 - Financial Data Schedule
- --------
* Incorporated by reference to the exhibit of the same title in the annual
report on Form 10-K for the fiscal year ended December 31, 1992 (File
No. 33-20954).
** Incorporated by reference to the exhibit of the same title in the annual
report on Form 10-K for the fiscal year ended December 31, 1993 (File
No. 33-20954).
*** Incorporated by reference to the exhibit of the same title in the
Registration Statement on Form S-8 (File No. 333-69011).
**** Incorporated by reference to the exhibit of the same title in the
Registration Statement on Form 10-SB, as amended filed December 24, 1998
(File No. 000-24841).
***** Incorporated by reference to the exhibit of the same title in the annual
report on Form 10-K for the fiscal year ended December 31, 1997 (File
No. 033-20954).
25
<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.
(Registrant) KBF POLLUTION MANAGEMENT, INC.
-------------------------------------------------------
By (Signature and Title LAWRENCE KREISLER
--------------------------------------------
LAWRENCE KREISLER, PRESIDENT
Date: March 31, 2000
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.
By (Signature and Title LAWRENCE KREISLER
--------------------------------------------
LAWRENCE KREISLER, CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER,
PRESIDENT,
DIRECTOR
Date: March 31, 2000
By (Signature and Title JOSEPH J. CASUCCIO, JR.
--------------------------------------------
JOSEPH J. CASUCCIO, JR., CHIEF FINANCIAL OFFICER
VICE PRESIDENT,
DIRECTOR
(ALSO CHIEF ACCOUNTING OFFICER)
Date March 31, 2000
By (Signature and Title KATHI KREISLER
--------------------------------------------
KATHI KREISLER, CHIEF ADMINISTRATIVE OFFICER
VICE PRESIDENT,
SECRETARY, TREASURER,
DIRECTOR
Date March 31, 2000
By (Signature and Title KEVIN KREISLER
--------------------------------------------
KEVIN KREISLER, VICE PRESIDENT,
DIRECTOR
Date March 31, 2000
<PAGE>
KBF POLLUTION MANAGEMENT, INC. AND SUBSIDIARIES
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND DECEMBER 31, 1998
<PAGE>
KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT...................................................3
BALANCE SHEET................................................................4-5
STATEMENT OF INCOME............................................................6
STATEMENT OF STOCKHOLDERS' EQUITY..............................................7
STATEMENT OF CASH FLOWS......................................................8-9
NOTES TO FINANCIAL STATEMENTS..............................................10-27
2
<PAGE>
KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
FINANCIAL STATEMENTS
Irving Handel & Co. Tel: 516-295-9290
CERTIFIED PUBLIC ACCOUNTANTS Fax 516-295-9298
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Stockholders
of KBF Pollution Management, Inc.
We have audited the accompanying balance sheet of KBF Pollution Management,
Inc. as of December 31, 1999 and 1998, and the related statement of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KBF Pollution Management,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Irving Handel & Co.
March 28, 2000
Woodmere, NY 11598
3
<PAGE>
KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
FINANCIAL STATEMENTS
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
12/31/99 12/31/98
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 344,598 $ 300,213
Cash - Restricted 0 27,500
Marketable Securities 0 86,591
Accounts Receivable (Net of allowance 440,992 421,411
for doubtful accounts of $34,011 and $31,183)
Other Receivables 76,275 0
Inventories 20,682 12,707
Prepaid Expendable Supplies 11,102 13,821
Other Prepaid Expenses 6,971 11,854
---------- ----------
Total Current Assets 900,620 874,097
FIXED ASSETS:
Property, Equipment & Improvements
(Net of Accumulated Depreciation &
Amortization of $1,685,944 and $1,371,641) 3,741,762 1,923,229
Leased Property under Capital Lease Obligations
(Net of Accumulated Depreciation &
Amortization of $312,970 nd $287,226) 422,007 88,527
Non-Expendable Stock, Parts & Drums 139,146 137,768
---------- ----------
Total Fixed Assets, Net 4,302,915 2,149,524
OTHER ASSETS:
Security Deposits 42,634 2,844
Other Receivable 0 350,820
License/Patent (Net of Accumulated Amortization
of $2,000 and $1,000) 25,578 13,922
Capitalized Permit Costs 53,542 47,279
Deferred Financing Costs 236,402 47,070
---------- ----------
Total Other Assets 358,156 461,935
---------- ----------
TOTAL ASSETS $5,561,691 $3,485,556
========== ==========
</TABLE>
See accompanying notes and accountant's report.
4
<PAGE>
KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
FINANCIAL STATEMENTS
BALANCE SHEET
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
12/31/99 12/31/98
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable - Trade $741,621 $383,367
Accrued Expenses 40,675 191,509
Taxes Withheld & Accrued 4,580 5,801
Deposit Payable 0 40,000
Officer's Loans 30,648 0
Current Portion Of Long-Term Debt 225,000 0
Current Portion of Capital Lease Obligations 127,369 67,768
------------ ------------
Total Current Liabilities 1,169,893 688,445
LONG-TERM LIABILITIES:
Long-Term Debt (Net of Current Portion) 1,125,000 0
Capital Lease Obligations (Net of Current Portion) 268,737 160,085
------------ ------------
Total Long-Term Liabilities 1,393,737 160,085
STOCKHOLDERS' EQUITY:
Com. Stock par Value .00001 per Share
Authorized - 500,000,000 Shares Issued
And Outstanding
December 31, 1999 - 69,213,236 692
December 31, 1998 - 64,034,660 640
Capital in Excess of Par Value 8,125,503 6,367,040
Retained Earnings (Deficit) (5,128,134) (3,730,654)
------------ ------------
Total Stockholders' Equity 2,998,061 2,637,026
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,561,691 $ 3,485,556
============ ============
</TABLE>
See accompanying notes and accountant's report.
5
<PAGE>
KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
FINANCIAL STATEMENTS
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/99 12/31/98
----------- -----------
<S> <C> <C>
REVENUES: $ 2,858,424 $ 3,078,567
Less:
Cost of Operations 2,129,519 1,438,639
----------- -----------
Gross Profit 728,905 1,639,928
Less:
General and Administrative Expenses
Research & Development 1,269,124 1,108,474
Selling Expenses 220,539 0
Bad Debt - Solucorp 248,339 144,253
350,820 0
----------- -----------
Operating Income (Loss) (1,359,917) 387,201
OTHER INCOME (EXPENSES)
Interest Income 2,418 31,035
Interest Expense (22,466) (25,740)
Unrealized Loss on Available for Sale Securities (86,591) (373,430)
----------- -----------
Income (Loss) before Provision for Income Tax (1,466,556) 19,066
Less: Income Tax Provision (69,077) 5,887
----------- -----------
NET INCOME (LOSS) $(1,397,479) $ 13,179
=========== ===========
Other Comprehensive Income (Loss) 0 0
----------- -----------
COMPREHENSIVE INCOME (LOSS) $(1,397,479) $ 13,179
=========== ===========
EARNINGS PER COMMON SHARE:
Basic $ (0.0202) $ 0.0001
=========== ===========
Diluted $ (0.0202) $ 0.0001
=========== ===========
</TABLE>
See accompanying notes and accountant's report.
6
<PAGE>
KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
FINANCIAL STATEMENTS
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
JANUARY 1, 1998 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
(PAR VALUE $.00001) CAPITAL IN RETAINED
SHARES AMOUNT EXCESS EARNINGS TOTAL
OF PAR (DEFICIT)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 49,112,690 $ 491 $ 4,871,362 $(3,743,839) $ 1,128,014
Common Stock issued 14,921,970 149 1,415,356 0 1,415,505
Options Granted 0 0 538,814 0 538,814
Rounding 0 0 0 6 6
Underwriting Costs 0 0 (458,492) 0 (458,492)
NET INCOME for the Year Ended December 31, 1998 0 0 0 13,179 13,179
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 64,034,660 640 6,367,040 (3,730,654) 2,637,026
Common Stock issued 5,178,576 52 989,673 0 989,725
Options Granted 0 0 768,790 768,790
Rounding 0 0 0 (1) (1)
NET LOSS for the Year Ended December 31, 1999 0 0 0 (1,397,479) (1,397,479)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1999 69,213,236 $ 692 $ 8,125,503 $(5,128,134) $ 2,998,061
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes and accountant's report.
7
<PAGE>
KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/99 12/31/98
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from Customers $ 2,698,689 $ 2,092,548
Cash Paid to Suppliers and Employees (2,829,887) (1,662,180)
Interest and Dividends Received 2,418 31,035
Interest Paid (22,966) (25,955)
Income Taxes Paid (7,459) (4,068)
----------- -----------
Net Cash Provided (Used) by Operating Activities (159,205) 431,380
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Patent and Permits (12,813) (3,021)
Release of Restricted Cash 27,500 0
Cash Purchases of Equipment (1,787,122) (1,241,738)
Proceeds from Sale of Equipment 24,000 0
----------- -----------
Net Cash Provided (Used) in Investing Activities (1,748,435) (1,244,759)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Sale of Stock and Warrants 646,347 1,028,305
Proceeds from Debt Financing 1,350,000 0
Loans from Officers 30,648 0
Underwriting Costs 0 (75,400)
Repayment of Long-Term Debt and Capital Lease
Obligations (74,971) (63,956)
----------- -----------
Net Cash Provided (Used) by Financing Activities 1,952,024 888,949
----------- -----------
NET INCREASE (DECREASE) IN CASH 44,384 75,570
CASH at Beginning of Year 300,213 224,643
----------- -----------
CASH at End of Year $ 344,597 $ 300,213
=========== ===========
</TABLE>
See accompanying notes and accountant's report.
8
<PAGE>
KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
FINANCIAL STATEMENTS
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/99 12/31/98
----------- -----------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET
CASH FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $(1,397,479) $ 13,179
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 344,616 360,392
Amortization 1,000 164
Loss on KBF-LI Assets 22,759 0
Expenses Paid in Stock/Options 181,255 59,923
Bad Debts (Solucorp - $350,820) 374,931 4,401
Unrealized Loss on Available for Sale Securities 86,591 373,430
(Solucorp)
(Increase) Decrease in:
Trade Accounts Receivable (83,460) (135,199)
Other Receivables (76,276) (810,841)
Inventories (6,633) (612)
Prepaid Expenses & Deposits (34,908) 186,744
Increase (Decrease) in:
Accounts Payable 511,201 206,710
Withholding Taxes Payable (919) (6,072)
Deposit Payable 0 40,000
Accrued Expenses (81,883) 139,161
----------- -----------
$ (159,205) $ 431,380
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common Stock and Options issued for the payment of accounts payable and accrued
expenses. $ 68,333 $ 244,700
Common Stock issued for the payment of notes payable. $ 0 $ 60,000
Common Stock received for the payment of other receivables. $ 0 $ 500,000
Common Stock and Options issued for the payment of
underwriting costs, financing costs equipment and expenses. $ 1,112,166 $ 320,722
</TABLE>
See accompanying notes and accountant's report.
9
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - BUSINESS DESCRIPTION
KBF Pollution Management, Inc. (the "Company") was incorporated in the
State of New York on March 15, 1984, with an initial authorized capitalization
of 200 shares of No Par Common capital stock, which was later increased to
500,000,000 shares of 0.00001 Par Value Common stock. On May 6, 1997, Gryphon
Industries, Inc., American Metals Recovery Corp., and New World Recycling, Inc.
(formerly AMR, Inc.) (the Subsidiaries) were formed pursuant to the laws of the
State of Nevada. In the third quarter of 1998, the Company formed KBF-LI, Inc.
The Company, through American Metals Recovery, Corp.,("AMRC") a wholly
owned subsidiary, is actively engaged in the environmental services business as
a wastewater metal recovery facility specializing in the recycling of hazardous
and non-hazardous metal bearing wastes and commodity manufacturing. It operates
an in-house industrial laboratory to support the recycling process and
performance of research and development. The Company also provides waste
handling equipment and compliance support service to their customers. The
Company operates predominately in the Northeast region.
New World Recycling, Inc. (formerly AMR, Inc.) ("New World") became active
in 1998 when KBF incurred capitalized costs to initiate debt financing, which
were exchanged for stock, thereby making it a wholly owned subsidiary of KBF.
Throughout 1999 New World purchased and constructed equipment, which will be
utilized in an expansion project set to begin operations in 2000.
KBF-LI, Inc. ("KBF-LI"), exchanged stock with KBF for the remaining assets
at the Long Island, New York facility, thereby making it a wholly owned
subsidiary of KBF. These assets were subsequently sold or abandoned. Operations
on Long Island have now ceased, and the corporation is inactive.
Gryphon Industries, Inc. is inactive and available for future use.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Environmental Services
Recovery service revenues are recognized and invoiced as such services are
completed.
Non-Expendable Stock, Parts, and Drums
Non-expendable stock, parts, and drums represent an imprest supply of items
which generally have a life of one year or less. The level of this supply is
adjusted as a function of the company's sales volume. Replacements are expensed
as incurred. The value of these assets at each balance sheet date is not
materially different than the depreciated cost of the individual assets on hand
on that date.
License Agreements
The license agreement with Solucorp (see Note 9) contained an initial
license fee of $500,000, this fee then being recognized over the life of the
initial license term. At the date the license was terminated, September 30,1999,
the Company was relieved of all obligations under it, and all remaining deferred
amounts were recognized as revenue (see Note 3).
Inventories
Inventories are valued at the lower of average cost or market, using the
FIFO method.
10
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and Amortization
Property and equipment are depreciated for financial reporting and tax
purposes using the straight line method over the estimated useful lives of the
assets. Leasehold improvements are removable and are amortized over their useful
lives. Useful lives are estimated between 5 and 10 years. The license is being
amortized over 10 years.
Use of Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. These
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
Recent Pronouncements
The Company has complied with all recent pronouncements, which have
effective dates preceding the dates relating to these financial statements. All
pronouncements with effective dates subsequent to the dates relating to these
financial statements, had they been in effect, would have had no impact on these
financial statements.
Earnings per Share
In accordance with SFAS No. 128, the Company computes basic and fully
diluted earnings (loss) per share on a daily weighted average basis, as
described in Note 17.
Prior Period Statements
The 1998 financial statements may have been reclassified to conform with
current year's classifications.
NOTE 3. MARKETABLE SECURITIES.
In conjunction with the license agreement discussed in Notes 7 & 9 the
Company received restricted (pursuant to Rule 144) common shares of Solucorp
Industries, Ltd. as payment against a license fee due the Company. The Company
has filed suit against Solucorp Industries, Ltd. (see Note 18). The Company has
presented these securities herein as available-for-sale securities, adjusted to
market value. As of December 31, 1998, since trading of these shares had been
suspended, market value was determined to be the closest gray market price per
share at December 31, 1998, less a 25% lack of marketability discount. Because
the Rule 144 restriction was to expire on May 21, 1999, within twelve months of
the balance sheet date, and the shares could then, under certain circumstances,
be sold even though restricted, the securities were presented as current assets.
Based on the foregoing and in conjunction with FAS 115 & 130, these securities
were presented at a fair market value of $86,591 and the unrealized loss was
presented as a loss in the current period, as management had determined that the
decline in value was other than temporary. As of December 31, 1999, based upon
events transpiring during 1999, the Company now believes that these securities
are worthless and they have been presented herein with a zero value. The loss of
$86,591 is presented as a loss in the current period, as Management believes
that the loss is permanent. The chart below describes the foregoing:
<TABLE>
<CAPTION>
SOLUCORP INDUSTRIES, LTD: 12/31/99 12/31/98
-------- --------
<S> <C> <C>
Shares Owned 183,262 183,262
Quoted Price 0 .63
------- -------
Quoted Value 0 115,455
Lack of Marketability Discount 0 28,864
------- -------
Fair Value presented herein 0 86,591
======= =======
</TABLE>
11
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 4 - INVENTORIES
Inventories are comprised of the following major categories:
<TABLE>
<CAPTION>
12/31/99 12/31/98
-------- --------
<S> <C> <C>
Shipping Supplies $ 2,857 $ 2,857
Reagents 17,825 9,850
------- -------
$20,682 $12,707
======= =======
</TABLE>
NOTE 5 - OTHER PREPAID EXPENSES
The items included in other prepaid expenses are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Prepaid Professional Fees $ 2,500 $ 0
Prepaid Insurance 660 11,854
Prepaid Miscellaneous 3,811 0
------- -------
Total Prepaid Expenses $ 6,971 $11,854
======= =======
</TABLE>
12
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 6 - FIXED ASSETS
Fixed assets are categorized and listed below:
<TABLE>
<CAPTION>
Balance Additions Retirements Balance
Property, Equipment & Improvements at 12/31/98 1999 1999 at 12/31/99
- ---------------------------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Facility $ 2,858,069 $ 2,310,335 181,171 $ 4,987,233
Office Equipment, Computers
& Furnishings 104,307 0 0 104,307
Manufactured Equipment Leased Out 72,999 0 0 72,999
Equipment 210,329 1,776 0 212,105
Leasehold Improvements 49,166 1,896 0 51,062
--------- ----------- ----------- ---------
SUB TOTAL 3,294,870 $ 2,314,007 $ 181,171 5,427,706
=========== ===========
Less: Accumulated Depreciation
and Amortization (1,371,641) (1,685,944)
----------- -----------
NET $ 1,923,229 $ 3,741,762
=========== ===========
Property, Equipment & Improvements
Leased Equipment Under Capital Leases
Office Equipment & Furniture $ 44,927 $ 0 $ 0 $ 44,927
Equipment 330,826 359,224 0 690,050
----------- ----------- ----------- -----------
SUB TOTAL 375,753 $ 359,224 $ 0 734,977
=========== ===========
Less: Accumulated Amortization (287,226) (312,970)
----------- -----------
NET $ 88,527 $ 422,007
=========== ===========
</TABLE>
Depreciation charged to operations, which includes amortization of capital
lease obligations, was $344,616 and $360,392 for the years ended December 31,
1999 and 1998, respectively. Lease equipment secures the related capital lease
obligations. Equipment acquired for the facility expansion, costing $2,275,563
is collateral for the long-term debt described in Note 12.
NOTE 7 - OTHER RECEIVABLES
In conjunction with the license agreement discussed in Notes 3 & 9, the
Company accrued minimum royalties of $750,000 which were due on December 31,
1999. This amount represents the prorated (six out of twenty-four months)
minimum royalty of $3,000,000 for the for the first two years of the contract.
As of December 31, 1998, this receivable and the related revenue had been
presented in the financial statements at present value with related interest
earned to date. As of December 31, 1998, the Company considered all information
available at that time concerning Solucorp Industries, Ltd. and presented the
receivable and the related revenue net of an allowance for doubtful accounts as
detailed below:
13
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 7 - OTHER RECEIVABLES (CONTINUED)
<TABLE>
<S> <C>
Minimum Royalty $ 750,000
Discount to Present Value (107,753)
---------
Present Value of Minimum Royalty 642,247
Interest Earned through December 31, 1999 29,697
---------
Total Other Receivable & Revenue
Before Allowance 671,944
Allowance for Doubtful Accounts (321,124)
---------
Total Other Receivable Presented
And Revenue Reflected Herein $ 350,820
=========
</TABLE>
Based upon events transpiring during 1999, the Company believes that
collection of the foregoing receivable is now remote. Therefore, the Company has
presented the foregoing as a bad debt during the current period.
NOTE 8 - PATENTS AND INTELLECTUAL PROPERTIES
In June 1995, the Company's President, Lawrence Kreisler, submitted a
patent application on the "Selective Separation Technology" process currently
being used by the Company. Mr. Kreisler had developed this process prior to the
formation of KBF Pollution Management, Inc. On February 3, 1998, the US Patent
and Trademark Office issued a Notice of Allowance for this patent. The United
States Patent and Trademark Office has issued two patents on the technology
(U.S. Pat. Nos.: 5,753,125; 5,908,559) and additional applications for letters
patent are currently pending. Under a licensing agreement with Mr. Kreisler, the
Company is utilizing the patents in its operations. The agreement calls for
royalty payments commencing when the Company has processed in excess of 1.5
million gallons of chargeable waste in a given year. There is no royalty due on
the first 1.5 million gallons per annum. At that point, royalties are paid at
rates beginning at $0.10 per gallon and decreasing to $0.03 per gallon at a
processing rate of 6,050,000 annually. Based on the current level of processing,
no royalties were paid or accrued.
NOTE 9 - LICENSE AGREEMENT
L. KREISLER
In June 1998, the Company filed for patent protection on four new
technologies developed by Lawrence M. Kreisler, which the Company has been and
is presently using. Pursuant to the terms of Mr. L. Kreisler's license agreement
with the Company, Mr. L. Kreisler is to receive a license fee for the Company's
right to use each technology. Mr. L. Kreisler was issued a total of 5,000,000
options in lieu of cash for this fee (Note 14).
SOLUCORP INDUSTRIES, LTD.
In March 1998, the Company signed a license agreement with Solucorp
Industries, Ltd., for the utilization of the Company's patented process. The
terms of the agreement called for an initial license fee of $500,000, plus an
additional license fee of $.0005 per processed gallon. The agreement also
required royalty payments of 50% of gross per gallon receipts, not to be less
than $3 million at the end of the first two years and $2 million by the end of
each year thereafter. The agreement was for a five-year term, with automatic
five-year continuous renewal. The payment as against the initial fee described
in Note 3 was recognized as income in 1998, on the statement of income, in
revenue from normal operation.
On September 30, 1998, the Company terminated the license agreement and
sued Solucorp Industries, Ltd. for breach of contract and fraud damages (see
Note 18). While the license agreement has been terminated, the partial payment
against the initial license fee was recognized as revenue, during 1998, as the
fee was non-refundable. As of December 31, 1999, the Company determined that the
receipt of cash from the consideration (restricted common stock) received and
the royalty receivable was remote. Therefore, these amounts were written off in
1999 (see Notes 3 and 7).
14
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 10 - CAPITALIZED PERMIT COSTS
The Company has incurred costs as part of the application process required
to obtain a storage permit and certain other valuable permits. These costs will
be amortized over the life of the permits upon the commencement of operations
under each permit. Certain permit costs related to the Company's former facility
in New York were transferred to KBF-LI. They were included in the assets sold
and/or abandoned at the New York operation.
NOTE 11 - ACCRUED EXPENSES
Accrued expenses are broken down into categories as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Insurance $ 15,686 $ 25,409
Utilities 3,000 3,000
Professional Fees 4,000 25,250
Facility Equipment 0 100,476
Other Accrued Expenses 17,989 37,374
-------- --------
$ 40,675 $191,509
======== ========
</TABLE>
NOTE 12 - LONG-TERM DEBT
During 1999, the Company extended notes payable to twelve (12) private
individuals. The obligations are due twenty-four months from the commencement of
New World operations. Principal and interest payments are will be due in amounts
equal to 44% of the net pretax profit of New World. Interest is computed at 6.5%
per annum. The notes also provide for conversion to the Company's restricted
common stock, at the market rate on conversion date, less a 25% lack of
marketability discount, of any balance of the obligations remaining at the end
of the twenty-four month period. The notes also contain a business-unit-specific
profit participation component for the lenders, after the notes have been
satisfied, which totals 27% of the business-unit-specific profit. The
obligations are secured by New World's equipment.
<TABLE>
<CAPTION>
12/31/99 12/31/98
---------- ----------
<S> <C> <C>
Total Long-Term Debt $1,350,000 0
Less: Current Portion 225,000 0
---------- ----------
Long-Term Portion $1,125,000 $ 0
========== ==========
</TABLE>
NOTE 13 - LEASES
CAPITAL LEASE OBLIGATIONS
The Company leases equipment with lease terms expiring through August 2002.
Future minimum payments under capital leases with initial terms of one year or
more consisted of the following at December 31, 1999:
<TABLE>
<S> <C>
2000 $ 173,032
2001 154,919
2002 72,181
2003 53,340
Thereafter 35,560
---------
Total minimum lease payments 489,032
Amounts representing interest (92,926)
---------
Present value of net minimum
lease payments remaining 396,106
Less: Current portion 127,369
---------
Long-Term Portion $ 268,737
=========
</TABLE>
15
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
On all capital leases, the equipment under lease is pledged toward the lease
obligation.
OPERATING LEASES
The Company maintains its corporate offices at its facility located in Paterson,
New Jersey. The lease terms, which include a purchase option, provide for the
base rent to be paid monthly over six years commencing December 1997. The lease
obligations are as follows:
<TABLE>
<S> <C>
2000 $200,500
2001 208,600
2002 213,550
2003 201,300
Thereafter 0
--------
$823,950
========
</TABLE>
NOTE 14 - STOCKHOLDERS' EQUITY
INCENTIVE STOCK PLAN
In May of 1999 the shareholders of the Company approved and adopted the KBF
1998 Stock Option Plan (the "ISO Plan"). The Plan superceded and replaced the
Company's 1994 plan, under which no options were issued. The Plan covers
50,000,000 shares of the Company's Common Stock , pursuant to which employees,
including officers of the Company are eligible to receive incentive stock
options as defined under the Internal Revenue Code of 1986, as amended. In
addition, non-qualified stock options may be granted under the Plan to employees
and consultants. Under the ISO Plan, options may be granted at not less than
100% (110% in the case of 10% shareholders) of the fair market value (100% of
the closing bid price on the date of grant) of the Company's Common Stock on the
date of grant. Options granted under the ISO Plan must be exercised within ten
years from the date of grant (five years, in the case of 10% shareholders). The
optionee may not transfer any option except by will or by the laws of descent
and distribution. Options granted under the ISO Plan must be exercised within
three months after termination of employment for any reason other than death or
disability, and within one year after termination due to death or disability,
unless extended by the Board of Directors. The Board of Directors of the Company
has the power to impose additional limitations, conditions and restrictions in
connection with the grant of any option. Stock covered under the Plan has been
registered with the Securities and Exchange on Form S-8. As of the date of this
report, 4,654,966 options have been issued under this Plan.
STOCK OPTIONS
In 1998, the Company issued, for unpaid prior years salaries, Kathi
Kreisler and Lawrence Kreisler 7,500,000 and 400,000 options respectively. The
options exercisable for a period of ten years, exercisable at $0.40 per share,
equal to the market value at grant date. Mr. Lawrence Kreisler was issued
5,000,000 options for new patent technology, (See Patents and Proprietary
Information). The options are exercisable for a period of ten years, exercisable
at $0.20 per share, equal to the market value at grant date. These options were
revised in 1999 as described below.
In 1998 the Company issued to unrelated third parties, 2,775,000 options
for the debt financing for the facility expansion project. The options are
exercisable for a period of five years and exercisable at $0.15-$0.21 per share,
equal to the market value at grant date.
In 1998 the Company issued to unrelated third parties, in payment of
services rendered for various consulting services, 325,000 options exercisable
for a period of five years at $0.20 per share, equal to market value at the
grant date.
In 1998 the Company issued to unrelated third parties, in payment of
services rendered in connection with
16
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (Continued)
facility construction, 812,000 options were issued exercisable for a period of
ten years at $0.10 - $0.21 per share, with a market value of a lesser amount at
grant date.
In 1998, in connection with previously reported capital raises, the Company
issued 2,695,000 options to an investment banking institution exercisable period
for a of five years at $0.15-$0.25 per share with market value of $0.25-$0.32 at
grant date. These options were renegotiated upon the termination by the Company
of the investment banking institution's relationship with the Company. On
September 8, 1998, the former warrants were replaced with new warrants to
purchase a total of 1,500,000 shares at $0.15 and 250,000 shares of restricted
stock. The warrants and the underlying shares are exercisable at between
September 8, 1998 and August 30, 2003 and are callable by the Company at $0.01
per option.
During 1999 the company issued 26,862,919 options, called 857,680 options,
canceled 2,775,000 options, and reduced other outstanding options by 1,900,000.
The result was in a net increase in the outstanding options of 18,912,919. Of
these, 11,500,000 options vest upon performance based benchmarks as the Company
achieves increased revenue to $28,000,000 per annum. These options are further
described below.
Directors and Officers
12,944,028 options were granted to Kevin Kreisler during 1999, 11,500,000
options are incentive options, which vest gradually with performance based
benchmarks as the Company achieves increased revenue to $28,000,000 per annum in
accordance with the following schedule:
<TABLE>
<CAPTION>
Annual Revenue Option
Target Shares
($mil) Vesting
-------------- -------
<S> <C>
$ 3.750 1,150,000
4.688 1,150,000
5.859 1,150,000
7.324 1,150,000
9.155 1,150,000
11.444 1,150,000
14.305 1,150,000
17.881 1,150,000
22.351 1,150,000
27.940 1,150,000
----------
11,500,000
==========
</TABLE>
These options are exercisable for a period of ten years, at $.21 per share,
equal to the market value at grant date. They vest after 9.5 years regardless of
the foregoing benchmarks, provided Mr. K. Kreisler continues as an employee
until that time.
444,028 options were granted to Mr. K. Kreisler for the salary differential
between the contractual salary and the amount paid in cash, for services from
January 1, 1998 through December 31, 1999. 1,000,000 options were granted as a
bonus for the development of a management, investor, supplier and advisor
network during the same
17
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (Continued)
period. The options are exercisable for a period of five years, at $.22 per
share, equal to 110% of the market value at grant date.
In accordance with FAS 123, the Company elected to value these employee
options at their intrinsic value, as set forth in ARB No. 25, of zero, for
Financial Statement purposes. The options were valued utilizing the
Black-Scholes option model in the alternate presentation below, using cliff
vesting were applicable.
950,000 options were granted to the Company's Directors during 1999.
400,000 of these options were for 1998 service and 550,000 options were for 1999
service. The 1998 service options are exercisable for a period of ten years, at
$.40 per share, equal to the market value at grant date. The 1999 service
options issued to members of the Kreisler family are exercisable over a period
of five years, at $0.22 per share, equal to 110% of market value at grant date.
The balance of the 1999 service options are exercisable at $.20 per share, equal
to the market value at grant date.
Options granted to outside directors were valued utilizing the
Black-Scholes option model and included in the Financial Statements presented
herein at $104,905, in general and administrative expenses.
In accordance with FAS 123, the Company elected to value the employee
directors options at their intrinsic value, as set forth in ARB No. 25, of zero,
for Financial Statement purposes. The options were valued utilizing the
Black-Scholes option model in the alternate presentation below.
3,531,250 options were granted to officers of the Company during 1999. Of
these, 1,656,250 options were granted to the Company's CFO, 250,000 options for
1998 service and 1,406,250 for 1999 service, in addition to $5,200 of cash
salary and 1,875,000 options were granted to the Company's general counsel for
1999 service, in addition to $5,200 of cash salary. The options are exercisable
for a period of ten years, at $0.19 per share, equal to the market value at
grant date.
In accordance with FAS 123, the Company elected to value these options at
their intrinsic value, as set forth in ARB No. 25, of zero, for Financial
Statement purposes. The options were valued utilizing the Black-Scholes option
model in the alternate presentation below.
OTHER OPTIONS GRANTED
3,299,775 options were granted to unrelated third parties during 1999, in
connection with the Company's New World project (Note 1). The options are
exercisable for a period of ten years, at between $0.10 and $0.16 per share.
In accordance with FASB 123 these options were valued utilizing the
Black-Scholes option model, or the amount invoiced by the vendor, and included
in the Financial Statements presented herein at $397,412 as Fixed Assets, and
$41,542 as Permit Costs.
1,038,000 options were granted to unrelated third parties during 1999, to
arrange for debt financing for the New World project (Note 1). The options are
exercisable for a period of ten years, at $0.10 per share.
In accordance with FASB 123 these options were valued utilizing the
Black-Scholes option model and included in the Financial Statements presented
herein at $189,331 as Deferred Financing Costs (Note 5).
5,099,866 options were granted to various employees during 1999. These
options were granted to numerous management positions including plant manager,
regulatory compliance officer, telemarketing manager, facility development
manager, and marketing development manager. The options are exercisable for a
period of ten years, at $0.19 - $0.26 per share.
In accordance with FAS 123, the Company elected to value these options at
their intrinsic value, as set forth in ARB No. 25, of zero, for Financial
Statement purposes. The options were valued utilizing the Black-Scholes option
model in the alternate presentation below.
18
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
Options Called, Exercised, Canceled and Reduced
In 1999 the Company called certain options which became callable during the
year. 857,680 options were not exercised and were repurchased by the Company for
$0.0001 per share. 842,320 options were exercised at between $0.15 and $0.25 per
share. 1,500,000 options were exercised at $0.10 per share. The Company canceled
2,775,000 options for nonperformance, which were granted during 1998.
The Company reduced 7,900,000 options held by Kathi Kreisler (7,500,000)
and Larry Kreisler (400,000) by 1,900,000 shares, or from 7,900,000, to
6,000,000, in exchange for a reduced exercise price, from $0.40 to $0.25 per
share, subject to a one year lock up. The reduced exercise price exceeded the
market price on the day of the reduction.
ADDITIONAL DISCLOSURE UNDER SFAS 123
The effect of applying SFAS No. 123 on 1999 and 1998 pro forma net loss, as
stated below, is not necessarily representative of the effects on reported net
income (loss) for future years, due to, among other things, the vesting period
of the stock options and the fair value of additional stock options in future
years. Had compensation cost for the Company's stock option grants to employees
been determined based upon fair value at the grant date, consistent with the
methodology prescribed under SFAS No. 123, the Company's net income (loss) in
1999 and 1998 would have been ($3,599,456) and ($3,088,651) or ($.05) per share
for both years. The fair value of options granted during 1999 and 1998 ranged
from $.16 - $.37, and $.14- $.37, respectively, on the date of the grant, using
the Black-Scholes option-pricing model, with the following assumptions: no
dividend yield, volatility of 122.6% for 1999 and 102.6% for 1998, and a
risk-free interest rate of 6% for 1999 and 5.4% for 1998. A summary of the stock
option activity is as follows:
CHANGES IN OUTSTANDING OPTIONS:
<TABLE>
<CAPTION>
Number of Shares: Weighted Average Price:
----------------- -----------------------
<S> <C> <C>
Balance at January 1, 1998 20,207,621 $ .10
Options Granted 19,507,000 .27
---------- ------
Balance at December 31, 1998 39,714,621 .19
Options Granted 26,862,919 .20
Options Exercised (2,342,320) .12
Options Eliminated (called/canceled) (3,632,680) .17
Options Modified (1,900,000) .25
---------- ------
Balance at December 31, 1999 58,702,540 .19
========== ======
Options Exercisable at December 31, 1999 47,077,540 .18
========== ======
</TABLE>
19
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)
ADDITIONAL DISCLOSURE UNDER SFAS 123 (Continued)
CHANGES IN OUTSTANDING OPTIONS (Continued):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING: OPTIONS EXERCISABLE:
---------------------------------- ----------------------------------
Range of Exercise Shares Outstanding Weighted Weighted Average Number Weighted Average
Prices 12/31/99 Average Exercise Price Exercisable Exercise Price
Remaining Life 12/31/99
<S> <C> <C> <C> <C> <C>
$.00 - .10 21,889,866 7.28 years $ .10 21,889,866 $ .10
.11 - .20 13,493,646 8.64 years .19 13,493,646 .19
.21 - .30 22,919,028 8.13 years .23 11,294,028 .25
.31 - .40 400,000 8.00 years .40 400,000 .40
---------- ---------- ---------- -------- ---------- -------
$.00 - .40 58,702,540 7.93 years .19 47,077,540 .18
========== ========== ========== ======== ========== =======
</TABLE>
NOTE 15 - GENERAL & ADMINISTRATIVE EXPENSES
The following is a list of the major general & administrative categories:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Professional Fees $ 196,381 $ 158,459
Salaries 390,774 350,464
Directors Fees 140,505 0
Allocated Payroll Costs 80,938 81,291
Insurance 84,235 95,334
Other General & Administrative Expenses 376,291 422,926
---------- ----------
Total General & Administrative Costs $1,269,124 $1,108,474
========== ==========
</TABLE>
20
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 16 - INCOME TAXES
Temporary differences and carryforwards which give rise to deferred tax assets
are as follows:
Deferred Tax Assets:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net Operating Loss Carry Forward $ 1,609,482 $ 1,213,547
Unrealized Loss on Available for Sale Securities 460,021 0
Allowance for Doubtful Accounts 11,564 10,602
----------- -----------
2,081,067 1,224,149
Valuation Allowance 2,081,067 1,224,149
----------- -----------
Deferred Tax Assets $ 0 $ 0
=========== ===========
Change in Valuation Allowance $ (856,918) $ (129,951)
=========== ===========
The benefit for income taxes is as follows: 1999 1998
----------- -----------
Current:
Federal $ 0 $ 0
State (69,077) 5,887
Deferred:
Federal 0 0
State 0 0
----------- -----------
Total $ (69,077) $ 5,887
=========== ===========
</TABLE>
21
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 16 - INCOME TAXES (CONTINUED)
At December 31, 1999 the Company's operating loss carry forward expires as
follows:
<TABLE>
<CAPTION>
FEDERAL NEW YORK NEW JERSEY
<S> <C> <C> <C>
December 31, 2002 $ 173,891 $ 168,891 $ 0
2003 120,270 115,270 0
2004 318,761 313,761 0
2005 116,490 111,490 0
2006 0 0 0
2007 279,456 274,456 0
2008 705,626 700,626 0
2009 850,743 845,743 0
2010 348,301 343,301 0
2011 445,228 439,341 0
2012 207,635 207,301 0
2013 1,167,371 0 0
TOTAL AVAILABLE $4,733,772 $3,520,180 $ 0
</TABLE>
NOTE 17- EARNINGS PER SHARE
<TABLE>
<CAPTION>
Common Stock Outstanding: 1999 1998
------ ----
<S> <C> <C>
Beginning of Year 64,034,660 49,112,690
End of Year 69,213,236 64,034,660
Issued during the year 5,178,576 13,072,053
Weighted Average number of outstanding shares 65,213,236 57,026,019
</TABLE>
Shares issuable under various stock options are excluded from the weighted
average number of shares on the assumption that their effect is non-diluting.
NOTE 18 - COMMITMENTS & CONTINGENCIES
LEGAL MATTERS
The Company is party to the following matters. In all matters listed,
Management's response has been and will be to vigorously contest the cases.
The first matter is entitled, Clean Earth Recycling Inc. v. James Sullivan
and KBF. The action was filed in the Supreme Court of New York, Columbia County,
on July 9, 1998. The Complaint was originally filed against James Sullivan only
and an Amended Complaint was subsequently filed naming the Company as a
defendant. The Amended Complaint seeks compensatory and punitive damages,
attorney's fees and costs of suit. The Amended Complaint also seeks to prevent
Sullivan (an employee of the Company) and the Company from doing business with,
soliciting or contacting any customers or vendors who were customers or vendors
of Clean Earth at the time of Sullivan's employment. The Company filed a
Verified Answer to the Verified Complaint and a Verified Answer to
22
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 18. COMMITMENTS & CONTINGENCIES (CONTINUED)
LEGAL MATTERS (Continued)
the Amended Verified Complaint with Counterclaims and served discovery upon
Plaintiff's attorney. The Counterclaims seek compensatory and punitive damages.
Discovery is ongoing and counsel is unable to evaluate the probability of an
unfavorable outcome or range of potential impact at this time.
The second matter is entitled, KBF Pollution Management, Inc. v. EPS
Environmental, Inc. d/b/a Solucorp Industries, Inc. and Joe Kemprowski v.
Lawrence Kreisler, et al. The action was filed in the Superior Court of New
Jersey, Law Division, Passaic County on October 7, 1998. The Complaint seeks
compensatory and punitive damages, attorney's fees and costs. Defendants filed
an Answer to the Complaint with Counterclaims and a Third-Party Complaint
seeking compensatory and punitive damages, attorney's fees and costs. Discovery
is ongoing and counsel is unable to evaluate the probability of an unfavorable
outcome or range of potential impact at this time.
The third matter is entitled Passaic Valley Sewage Commissioners v.
American Metals Recovery Corp. The action was filed in the Superior Court of New
Jersey, Chancery Division, Essex County on April 23, 1999 against the Company's
wholly owned subsidiary. The Compliant arises from alleged administrative
deficiencies and seeks declarations against the defendant as well as
administrative remedies, civil penalties, attorney's fees and costs. The Company
filed an Answer to the Complaint and served discovery. Discovery is ongoing and
counsel is unable to evaluate the probability of an unfavorable outcome or range
of potential impact at this time.
The Company is also involved in various collection matters in which the
Company is seeking payment for services rendered.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Lawrence M.
Kreisler, as the Chairman of the Board and President of the Company, on November
7, 1997 (the "Lawrence Kreisler Employment Agreement"). The Lawrence Kreisler
Employment Agreement provides for a five-year term and shall be extended
automatically each day for an additional day so that the remaining term of this
agreement will be five years at all times. Either party may, by written notice,
fix the term of the Lawrence Kreisler Employment Agreement at five years without
additional extension and would then end on a date five years from the date of
notice. Pursuant to the Lawrence Kreisler Employment Agreement, Mr. Kreisler's
annual base salary shall be $165,000, with annual cost of living adjustments.
Mr. Kreisler is entitled to receive an annual bonus equal to 6% of the Company's
annual net income before taxes, reimbursement of business related expenses, use
of a Company automobile and participation in any employee benefits provided to
all employees of the Company. The Company shall contribute 6% of the base weekly
salary to Lawrence Kreisler's 401(k) savings plan.
Lawrence Kreisler's employment may be terminated by the Company at any time
for cause (as defined in the Lawrence Kreisler Employment Agreement) and his
employment may be terminated at any time by the mutual consent of the Board of
Directors and Mr. Kreisler. If Mr. Kreisler is terminated by the Company for
cause, the Company is obligated to pay him all amounts due under the Lawrence
Kreisler Employment Agreement, which have accrued but are unpaid as of the date
of termination. The Lawrence Kreisler Employment Agreement also includes
non-competition provisions which prevent Mr. Kreisler, during the term of the
agreement, from participating, directly or indirectly, in the ownership,
control, management or employ of any business entities other than the Company
without the prior written consent of the Board of Directors.
In January 1998, the Company issued 400,000 stock options to Lawrence
Kreisler for past services rendered as a result of voluntarily reducing his
salary. Each of these stock options is convertible into one share of common
stock at $0.40 per share, for a period of ten (10) years from the date of
issuance. These options were revised in 1999 as described below in Note 14.
23
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 18. COMMITMENTS & CONTINGENCIES (CONTINUED)
Employment Agreements (Continued)
The Company entered into an employment agreement with Kathi Kreisler, as
Vice President, Secretary and Treasurer, on November 7, 1997 (the "Kathi
Kreisler Employment Agreement"), which provides for a five-year term from the
date signed and shall be extended automatically each day for an additional day
so that the remaining term of this agreement will be five years at all times.
Either party may, by written notice, fix the term of the Kathi Kreisler
Employment Agreement at five years without additional extension and would then
end on a date five years from the date of notice. Pursuant to this agreement,
Ms. K. Kreisler shall receive an annual base salary of $80,000, with cost of
living adjustments. Ms. K. Kreisler is entitled to receive an annual bonus equal
to 4% of the Company's annual net income before taxes, reimbursement of business
related expenses, use of a Company automobile and participation in any employee
benefits provided to all employees of the Company. The Company shall contribute
6% of the base weekly salary to Ms. Kreisler's 401(k) savings plan.
Kathi Kreisler's employment may be terminated by the Company at any time
for cause (as defined in the Kathi Kreisler Employment Agreement) and her
employment may be terminated at any time by the mutual consent of the Board of
Directors and Ms. Kreisler. If Ms. Kreisler is terminated by the Company for
cause, the Company is obligated to pay her all amounts due under the Kathi
Kreisler Employment Agreement, which have accrued but are unpaid as of the date
of termination. The Kathi Kreisler Employment Agreement also includes
non-competition provisions, which prevent Ms. Kreisler, during the term of the
agreement, from participating, directly or indirectly, in the ownership,
control, management or employ of any business entities other than the Company
without the prior written consent of the Board of Directors.
Kathi Kreisler voluntarily lowered the amount of her 1997 salary to $3,500,
her 1996 salary to $8,325.00, her 1995 salary to $2,153, her 1994 salary to
$20,000 and deferred all 401(k) payments. In January 1998, the Company issued
Ms. Kreisler 7,500,000 stock options, each convertible to one share of common
stock, at $0.40 per share for a period of ten (10) years from the date of
issuance for past services rendered. These options were revised in 1999 as
described in Note 14.
The terms of the Mr. Kevin Kreisler's employment agreement for 1999
included an annual base salary of $80,000, with an automatic 10% annual
increase. Mr. Kevin Kreisler will be entitled to an annual bonus equal to 3% of
the Company's net income before taxes, reimbursement of business expenses, use
of a Company automobile and participation in any employee benefits provided to
all employees of the Company.
The terms of Mr. Casuccio's employment agreement with the Company for 1999
were an annual salary of $5,200 and the issuance of performance based stock
options, as further described in Note 14 below. The agreement is negotiated
annually.
The terms of Mr. Sonageri's employment agreement with the Company for 1999
were an annual salary of $5,200 and the issuance of performance based stock
options, as further described in Note 14 below. The agreement is negotiated
annually.
These employment agreements provide for option issuance in lieu of salary
on an as needed basis to cover cash payment shortfalls against the agreed upon
annual salaries and incentive stock options. These issues are further described
in Note 14.
24
<PAGE>
EXHIBIT A - KBF POLLUTION MANAGEMENT, INC., AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 19 - EMPLOYMENT CONTRACT COMPENSATION
Kathi Kreisler and Larry Kreisler have voluntarily agreed to payment of
certain compensation due to them under their employment contracts in the form of
stock options. In 1996 and 1997, Kathi Kreisler received $8,325 and $3,500 in
compensation, respectively, agreeing to receive the balance of the compensation
she was entitled to under the existing contract in the form of stock options.
In 1998, Kathi Kreisler was granted 7,500,000 options and Lawrence Kreisler
was granted 400,000 options to purchase shares of common stock for unpaid wages
from March 1993 through December 1998. These options are further discussed in
Note 14.
In 1999, Kevin Kreisler was granted 444,028 options to purchase shares, to
cover cash payroll shortfalls, of common stock, as further described in Note 14.
NOTE 20 - CASH RESTRICTED
As a requirement with respect to the Company's Long Island Part 373(b)
permit application, the Company had to establish an irrevocable letter of credit
with a commercial bank for $27,500. The Certificate of Deposit was being held as
collateral for the letter of credit, and was required to remain on deposit at
the commercial bank which issued the letter of credit. The account was released
in 1999.
NOTE 21 - SUBSEQUENT EVENTS
Subsequent to December 31, 1999 through March 27, 2000, the Company issued
4,608,542 shares of common stock: 2,918,667 for the exercise of outstanding
options, 1,400,000 for private placements, and 289,875 shares for services
rendered to the Company. The Company received $609,611 for the foregoing issues
of common stock.
The Company entered into employment agreements with Chief Financial Officer
and General Counsel for the year 2000, which included a total of 3,375,000
ten-year, performance based stock options, exercisable at $0.21 per share (the
market value at the date of grant).
NOTE 22- RELATED PARTY TRANSACTIONS
The Company has the following related party transactions:
1) Metal Recovery Transportation, Corp. ("MRTC") entered into an agreement
with the Company to service all of the Company's transportation needs. MRTC
assumes all liability associated with these services and provides the services
to the Company at rates below the prevailing market rates.
2) Lawrence Kreisler, President and Chairman of KBF loaned the Company
$30,648 during 1999. The balance owed to Mr. Kreisler at December 31, 1999 is
$30,648.
3) Certain members of the Board of Directors and advisors to the Company
loaned the Company $60,000 in prior years. The Company issued stock in repayment
of this loan in 1998.
NOTE 23 - RETIREMENT PLAN
The Company maintains a retirement plan pursuant to Section 401(k) of the
Internal Revenue Code for substantially all employees. The Company elected to
contribute $17,329 during 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements dated December 31, 1999 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 344,598
<SECURITIES> 0
<RECEIVABLES> 551,278
<ALLOWANCES> (34,011)
<INVENTORY> 20,682
<CURRENT-ASSETS> 900,620
<PP&E> 6,301,829
<DEPRECIATION> (1,998,914)
<TOTAL-ASSETS> 5,561,691
<CURRENT-LIABILITIES> 1,169,893
<BONDS> 0
0
0
<COMMON> 692
<OTHER-SE> 2,997,370
<TOTAL-LIABILITY-AND-EQUITY> 5,561,691
<SALES> 2,858,424
<TOTAL-REVENUES> 2,858,424
<CGS> 2,129,519
<TOTAL-COSTS> 2,129,519
<OTHER-EXPENSES> 2,088,822
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,466
<INCOME-PRETAX> (1,466,556)
<INCOME-TAX> (69,077)
<INCOME-CONTINUING> (1,397,479)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,397,479)
<EPS-BASIC> (.020)
<EPS-DILUTED> (.020)
</TABLE>
