UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 5 to FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
CEVA INTERNATIONAL, INC.
(Name of Small Business Issuer in its charter)
Nevada ________22-3113236__________
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
75-77 North Bridge Street, Somerville, New Jersey 08876
(Address of principal executive offices) (Zip Code)
(908) 429-0030
(Issuer's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
--------------- ------------------------
None None
----- -----
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
(Title of Class)
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
A. BUSINESS DEVELOPMENT
1. FORM AND YEAR OF ORGANIZATION
CEVA International, Inc. (the "Company") was founded as a New
Jersey corporation in 1991 for the purpose of engaging in the environmental
services business in Central and Eastern Europe (the "CEE"). Since its
inception, the Company's founder, Herbert G. Case, Jr., its current President
and Chief Executive Officer, has spent most of his time living and working in
the CEE, residing in Budapest, Hungary. During this period through the date
hereof, Mr. Case has devoted his full time to establishing the business
operations of the Company. In 1998, the Company was reincorporated in the State
of Delaware.
On March 29, 1999, the Company and Oro Bueno, Inc., a Nevada
corporation, entered into an Agreement and Plan of Merger, pursuant to which the
shareholders of the Company were offered the opportunity to exchange their
Company common shares for common shares of Oro Bueno, Inc. On May 10, 1999, the
Company merged with Oro Bueno, Inc., as a result of which the shareholders of
the Company exchanged their holdings for approximately 77% of the common shares
of Oro Bueno, Inc. with the remaining balance of such shares, or approximately
23%, being retained by the shareholders of Oro Bueno, Inc. As part of that
merger, Oro Bueno, Inc. changed its name to CEVA International, Inc. and the
Delaware corporation was dissolved. Currently, therefore, the Company is
incorporated under the laws of the State of Nevada.
The principal offices of the Company are located at 75-77 North Bridge
Street, Somerville, New Jersey 08876. Whenever we refer to "Company" or use the
terms "we", "us" or "our" in this report, we are referring to CEVA
International, Inc.
2. PROPOSED CORPORATE STRUCTURE
Our Company is currently composed of CEVA International, Inc., a Nevada
corporation with its principal offices located in New Jersey, a Czech affiliate
and a Hungarian subsidiary. We are currently forming a Romanian corporation for
purposes of a joint venture. See, "The Company's Position in the Market -
Romania" below. Our Hungarian subsidiary, CEVA Hungary Ltd, was previously 50%
owned by Hungarian partners although our Company was and remains the managing
shareholder. As of June 30, 2000, all of the three Hungarian equity owners had
exchanged their respective ownership interests in our Hungarian subsidiary for
common shares in our Company. Dr. Andras Toth, Mr. Tamas Sonkoly and Mr. Janos
Soos exchanged their 5%, 30% and 15% respective equity ownership interests in
our Hungarian subsidiary for100,000, 600,000 and 300,000 common shares of our
Company, respectively.
Our Czech affiliate is owned 40% by our Czech nationals partners and 60% by
Herbert G. Case, Jr., our President and Chief Executive Officer: see, "Certain
Relationships and Related Transactions" below. We have executed and delivered
legal agreements to form a joint venture in the Country of Romania with a
worldwide cement manufacturing company, Holderbank Cement, to be operated and
managed by a Romania limited liability company in which we shall own 49% and
Holderbank Cement, 51%.
2
Our Company's organization structure is based around a combination of
in-country, locally recruited managers with their expertise tied to their
respective business functions. Dennis Konnick, a United States citizen, has
recently been hired as our Operations Director who has relocated to Ploiesti,
Romania. Another United States national, Mr. Stephen Soley, has signed an
employment agreement, effective September 1, 2000 and has been hired as the
chief executive officer of CEVA Hungary, Ltd. Mr. Soley resides in Budapest,
Hungary and operates out of our subsidiary's offices there. Tom Nail, also a
United States citizen, has been rendering part-time, consulting services to us,
has not yet been hired by our Company as a full-time employee and has agreed
verbally to consider accepting the position of Regulatory & Technical Affairs
Director if we offer it to him this year. Mr. James Atkins, a UK Chartered
Accountant became the Company's Chief Financial Officer, effective June 1, 2000,
pursuant to an Employment Agreement of that date, and is based in Budapest,
Hungary. Although we seek to fill certain positions and that certain personnel
will occupy more than one position, the main features of this structure
incorporate the following business priorities: Although we seek to fill certain
positions and that certain personnel will occupy more than one position, the
main features of this structure incorporate the following business priorities:
--------------------
Board of Directors
--------------------
--------------------
Chief Executive
Officer
--------------------
EXECUTIVE COMMITTEE Herbert Case
--------------------
---------------- ------------------ ------------------ -------------------
Operations Regulatory & Finance Business
Director Technical Director Developoment
Affairs Director Director
----------------- ------------------- ------------------ -------------------
Dennis Konnick Tom Nail James Atkins Mihai Maracineanu
----------------- ------------------- ----------------- -------------------
- ---------------- ---------------- -------------------- ------------------ -------------------
Country Director Project Managers Compliance Officer Chief Accountant
Hungary Hungary Hungary Hungary Hungary
- ---------------- ---------------- -------------------- ------------------
Stephen Soley Jozsef Lazlo Stephen Soley Diana Pacsorasz
- ---------------- ----------------- ------------------- --------------------
- ---------------- ----------------- ------------------- --------------------
Country Director Project Managers Compliance Officer Chief Accountant
Romania Romania Romania Romania Romania
- ---------------- ----------------- ------------------- --------------------
Mihai Maracineanu Marios Bica Mihai Maracineanu Diana Pacsorasz
- ---------------- ----------------- ------------------- -------------------
- ---------------- ----------------- ------------------- ------------------
Country Director Project Manager Compliance Officer Chief Accountant
Czech Republic Czech Republic Czech Republic Czech Republic Czech Republic
- ---------------- ----------------- ------------------- --------------------
Jiri Rott Petr Raab Jiri Rott Pavel Farsky
A. Cetkovsky
- ---------------- ------------------ ------------------- ------------------
3
- Country Directors oversee local office operations, manage local
cultural/political issues
- Project Managers oversee their in-country projects throughout the
region
Herbert G. Case, Jr.: President and Chief Executive Officer
Our Company, CEVA International, Inc., was founded in 1991 by Herbert G. Case,
Jr., age 56, our current President and Chief Executive Officer. He has been
responsible for strategy, business development, negotiating with financial
institutions and the overall management of our Company. With more than 30 years
of experience in environmental companies, Mr. Case has a wide network of
relationships in the world of environmental business. In the United States, Mr.
Case was one of the principal parties who assisted in the establishment of the
alternative derived fuel market as replacement fuel for cement kilns during the
1970's and 1980's. Mr. Case serves as a full-time employee of CEVA
International, Inc. without a written employment agreement and resides for most
of the year in Budapest, Hungary.
Stephen Soley: Chief Executive Officer of our Hungarian Subsidiary,CEVA Hungary
Pursuant to the Employment Agreement, dated September 1, 2000, Mr. Stephen
Soley, age 60, was hired as the new Chief Executive Officer of our Hungarian
subsidiary, CEVA Hungary, Ltd. Prior to joining the Company and since June,
1997, Mr. Soley was the Commercial Director of Owens-Illinois' Hungarian
operation, located in Oroshaza, Hungary, and was in charge of all commercial,
development and logistics functions. Prior to that assignment, Mr. Soley was the
Director of Business Development, Central and Eastern Europe, for Owens Corning
International and was based in Toledo, Ohio. Fluent in Hungarian, Mr. Soley has
a bachelor of science degree in physics and a Masters of Business Administration
degree from Ohio State University.
Jiri Rott: Managing Director of our Czech Republic Affiliate, CEVATech
The Company's Czech affiliate, CEVATech, has been managed by Mr. Jiri Rott since
1992. Mr. Herbert G. Case, Jr., the founder and majority shareholder of our
Company, currently owns 60% of CEVATech, 40% of which is owned by Mr. Jiri Rott
and one other Czech national. Mr. Case is in the process of transferring his
ownership interest to our Company and is negotiating with Mr. Rott and the other
minority stockholder of CEVATech to exchange their ownership interests in
CEVATech for a certain amount of the common shares of our Company. Mr. Rott, 50
years of age, holds a Master of Science degree from the Faculty of Chemistry of
Silicates Technology, Czechoslovak Academy of Sciences. He has over 25 years
experience in Research and Development, particularly in cement production
technology and environmental protection management. The Czech affiliate is
focusing on providing consulting services and targeting to sell alternative fuel
technology and product to the cement industry. Mr. Rott serves as a full-time
employee of CEVATech without a written employment agreement at our Prague
offices.
4
Mihai Maracineanu: Managing Director of our Romanian Subsidiary
(in Organization)
The Company's Romanian subsidiary, in organization, will be managed by Mr.
Mihai Maracineanu. Mr. Maracineanu, 46 years of age, has 23 years of experience
in international trade in the energy sector and holds a Masters of Science
degree in Economics. Mr. Maracineanu has been managing our Romanian businesses
since 1996. Mr. Maracineanu has served as an independent contractor to CEVA
International, Inc. and has verbally agreed to accept appointment as Director of
Business Development of CEVA International, Inc. and General Manager of our
Romania subsidiary once it is established, anticipated to be in the fourth
quarter of the current fiscal year ending December 31, 2000. Mr. Maracineanu
resides in Bucharest, Romania and works out of our offices in that City.
Dennis Konnick: Operations Director, CEVA International, Inc. and Subsidiaries
Dennis Konnick, age 53, was hired as the Operations Director for CEVA
International, Inc. and all of our subsidiaries on June 1, 2000. Mr. Konnick's
duties will include the development and implementation of technologies utilized
in the environmental services business in the United States over the last 30
years, the start-up, staffing, and training operating personnel of the Company's
projects throughout Central and Eastern Europe. Dennis Konnick is a graduate of
the Merchant Marine Academy at Kings Point, New York, with a marine (mechanical)
engineering degree. Prior to joining our Company, Mr. Konnick was employed as
the General Manager of Operations for Puralube, Inc. Mr. Konnick has over 25
years experience in operations, incineration, hazardous waste burning and
handling systems, combustion of refuse and refuse derived fuels, waste oil
collection processing, and consumption as fuel. Mr.Konnick resides in Ploiesti,
Romania and works out of our office there.
James Atkins: Chief Financial Officer, CEVA International, Inc.and Subsidiaries
Mr. Akins, age 32, has been hired as the Chief Financial Officer for the Company
and its subsidiaries effective June 1, 2000. His duties will include assisting
in developing the Company's strategic plan, business development, contract
negotiations, assist management in the day-to-day financial operations of our
businesses, including compliance with U.S. accounting and reporting standards
and U.S. federal securities laws disclosure requirements, management information
systems, risk management and management control systems, raising capital, and
banking relationships.
James Atkins is a Chartered Accountant in the United Kingdom with extensive
experience in the environmental sector businesses in the European Union and
Eastern and Central Europe. He trained with Arthur Andersen in the United
Kingdom and worked for two years with Waste Management International PLC in the
United Kingdom and Germany. In 1995, Mr. Atkins moved to Hungary where he worked
as a manager with Deloitte & Touche's Financial Advisory Services Group in
Budapest. In 1998 he established Rochester Financial Advisory, which provides
corporate finance advisory services to environmental companies in Hungary and
Central Europe. Mr. Atkins resides in Budapest and works out of our offices
there.
5
Diana Pacsorasz: Chief Accountant for our Hungarian Subsidiary, CEVA Hungary
and Romania
Prior to being hired by the Company in January, 2000, Diana Pacsorasz was
employed as an analyst for KPMG in Budapest, Hungary. Ms. Pacsorasz, age 30,
provides support services for the Chief Financial Officer and is currently
assisting in the implementation of financial systems at all of our subsidiaries'
locations. Ms. Pacsorasz resides in Budapest and works out of our offices there.
Jozsef Laszlo: Project Manager for our Hungarian Subsidiary, CEVA Hungary
Jozsef Laszlo, 47 years of age, has been working for our Hungarian
subsidiary, CEVA Hungary since 1995. Mr. Laszlo is a certified Mechanical
Engineer as well as a certified Economics Engineer and speaks fluent German and
Russian. Mr. Laszlo is a resident of Budapest, Hungary and works out of our
offices there.
Thomas Nail: Consultant
Tom Nail, age 41, serves as a consultant to the Company for his work on our
various projects in Central and Eastern Europe. Mr. Nail is the sole principal
of Green Environmental Services Inc., based in Louisville, Tennessee, and
provides environmental and safety consulting services. Prior to establishing his
own firm in 1995, Mr. Nail was the Waste Fuels Manager for the Dixie Cement
Company located in Knoxville, Tennessee since August of 1990. Mr. Nail has a
bachelor of science degree in chemistry and is a candidate in the Masters Degree
Program at Butler University located in Indianapolis, Indiana.
Pavel Farsky: Chief Accountant for our Czech Republic Affiliate
Mr. Pavel, age 40, serves as the chief accountant for our Czech affiliate.
Mr. Farsky holds a Masters Degree in Economics from the Prague School of
Economics and is licensed as a tax advisor and certified accountant in the Czech
Republic.
Green Globe, LLC: our LTTD partner in Central and Eastern Europe
Our LTTD technology partner, Green Globe LLC, is owned and managed by Mr.
David Green. Mr. Green, 49 years of age, provides the LTTD technology and full
service support to our Central and Eastern European soil remediation projects.
Mr. Green has over 25 years of experience in the environmental sector and
operations of LTTD technology equipment. Our Company contracted with Mr. Green
in 1997 to supply LTTD technology to Central and Eastern Europe. Mr. Green is
the President and Chief Executive Officer of Phoenix Soil, LLC, a leading
operator of LTTD equipment in the United States.
B. BUSINESS OF ISSUER
We are engaged in the business of providing technology and services to
public and private clients in Central and Eastern Europe in the alternative
energy and environmental reclamation industries.
6
1. PRINCIPAL PRODUCTS AND SERVICES AND THEIR MARKET
Remediation of Hydrocarbon Contamination.
We recover energy contained in petroleum wastes by processing high
concentrations of hydrocarbons into Alternative Fuel ("AF"). "Alternative Fuel"
or "AF" is the recycled fuel we produce by processing petroleum wastes into a
liquid or solid fuel replacement for use in industrial furnaces and boilers ,
cement kilns and utilities. The AF is used as a partial replacement for the
primary energy source. Our AF business utilizes petroleum waste generated by
heavy industries such as the petroleum refining (by-products filter cake, oily
filter media, separator waste, sludge, acid tar, slop and waste oil, tank rail
bottoms), steel (coal tar bottoms), and other industries, including; chemical
(solvents, chemical tars) mining (coal tars), manufactured gas and
pharmaceutical industries. "Sludge" is a thick liquid waste product that
resembles black mud or paste; "Acid Tar" is the oily waste generated by the
specialty petroleum refining industry and contains a significant concentration
of sulfuric acid, and; "Tank Rail Bottoms" are the oily, thick mud-cake like
materials that solidify on the bottom of railroad tank cars that transport crude
oil, petroleum and refinery waste: we recycle sludge, acid tar and tank rail
bottoms by mixing these wastes with other compounds such as coal to make
alternative fuels.
Heavy industries often contaminate soil and other solid mixtures with
hydrocarbons in ways where the energy content cannot be directly recovered.
"Hydrocarbons" are organic, natural materials that contain the elements hydrogen
and carbon that are found in oil and oil products and that produce heat energy
when used in fuels. When we are contracted to clean these soils, we employ a
technology known as "Low Temperature Thermal Desorption" ("LTTD"), a soil
remediation process. The LTTD cleans soils contaminated with hydrocarbons by
using heat to physically separate petroleum hydrocarbons from excavated soils.
The LTTD is designed to heat soils in a rotary drum to temperatures sufficient
to cause constituents to volatilize and physically separate from the soil. Sites
where these sorts of contamination can be found are often next to or closely
located near the sites of wastes processed for AF.
The Alternative Fuel Process
Alternative Fuel technology is used to clean up pollutants by converting them
into a reusable fuel form. The alternative fuel ("AF") is derived from either
the "liquefaction" or "solidification" of residual petroleum and oily wastes and
by-products. "Liquefaction" is a process which we employ by using specialized
equipment to "liquefy" and melt various solid wastes through heating, grinding
and blending with additives to produce an homogenized alternative fuel.
"Solidification" is a process of making non-solid materials compact and
consistent in characteristics for use as AF.
Technology
The Company's liquefaction process was developed in the United States to
rejuvenate solidified coal tar. Liquefying the solidified tar enables this
material to be utilized as raw materials or as supplementary fuel. The liquefied
material can be re-used in waste fuel recycling programs in cement kilns and
other industrial furnaces. Using the technology of liquefaction helps eliminate
land disposal-related liability and increases useable/saleable tar product
volume, resulting in environmental and economic benefits. The liquid fuel is
referred to as "liquid AF", or alternative fuel. Solidification processes were
developed to prepare AF into a form to replace coal in large industrial boilers,
power plants and cement kilns.
7
End Use
According to the 1992 Portland Cement Association's publication "A Sensible
Solution-Putting Waste to Work", both liquefied and solidified waste derived
fuels can be utilized in cement kilns. The use of cement kilns to recycle
hazardous industrial wastes has become an important component of environmentally
acceptable handling procedures in the Western world. The use of hazardous waste
derived fuels in cement kilns affords many specific economic benefits, including
the
- reduction in energy cost
- reduction in the need for capital investment in centralized
waste management sites
- preservation of natural resources
Competitive Technologies
AF is principally considered a clean-up technology which is an alternative to
other forms of disposal or remediation. The fact that a valuable by-product is
created is important economically because it reduces the net cost of the clean
up. For example, CEVA Hungary, under its past and current contracts with MOL
Rt., Hungarian Oil & Gas Company ("MOL"), receives a service or tipping fee per
metric ton of waste processed by our equipment. This provides(i) a disposal
outlet for MOL's generated wastes; (ii) a supply of wastes that we process into
AF meeting MOL's prearranged specifications, and; (iii) usable waste-derived
fuel that we can provide MOL and other energy users. If MOL or other waste
generators were required to just dispose of these wastes in either landfills or
through incineration, discussed below, they would be forced to pay significant
charges for this removal and disposal while at the same time, not recover any
fuel value. By recycling waste into AF, a certain portion of the waste is used
internally to replace traditional fuels such as heavy oil to operate its power
plants. Heavy oil costs in Hungary currently average approximately $100 per
metric ton. Contracting for our AF services permits MOL to reduce its disposal
liabilities and recover fuel, a combined service that saves MOL money and
replaces fossil fuels with recovered by-product material.
According to our internal business assessment performed by CEVA management, the
existing technologies that compete with our AF processing technology include:
Hazardous waste landfill: There is limited capacity in
Central and Eastern Europe; because of their generally remote
locations, landfills require transportation and handling resulting in
costs and expenses in the $200 per ton range for disposal.
Incineration: There are only a limited number of incinerators
in Central and Eastern Europe; because of this limited capacity and the
generally remote location of these incinerators, transportation and
handling costs make incinerator disposition an expensive alternative,
costing in the range of between $500 to $1,000 per ton.
8
The Alternative Fuel Market
Central and Eastern Europe has vast reserves of coal-chemical and petroleum
tars, and residues generated by the coke, steel, manufactured gas and oil
refining industries. We can obtain these tars, convert them to alternative fuel
and sell them as a fuel to select energy users at acceptable levels of
environmental contamination.
Generation side: Remediation is primarily compliance-driven and covers
industries such as the petroleum refining, steel, coal and chemical industries
that produce hydrocarbon residues that need to be treated.
An analysis of the top 100 Central European companies shows that 44 are
potential customers since they are operating in industries that create the type
of hazardous waste we process.
User side: Use of alternative fuels by cement kilns, powerplants and industrial
boilers as a source of cheaper energy. This business is driven by customary
commercial considerations.
The Need for Remediation
In Hungary and in the Czech Republic, the market is compliance driven, while in
Romania it is commercially driven.
Hungary
The AF, or alternative fuel business depends on the existing stock and on-going
generation of tars and similar materials (e.g. waste oils). To date, we have
identified acid and non-acid tars located at MOL Rt. Hungarian Oil and Gas
Company ("MOL") sites, which represent a potential 5 to 10- year supply of AF
materials. This estimate is based on waste inventories examined during visits
made by CEVA Hungary's management to two MOL sites: Csepel Island and
Nyirbogdany, Hungary. We have equipment at these two locations to process
certain quantities of waste into AF. In addition, we have current user outlets
for the sale of certain quantities of the processed AF. The following chart
shows (i) by site location, the MOL waste inventories we will process; (ii) the
waste percentage represented in the final processed AF ton for each of the two
inventories; (iii) the annual AF tonnage we can currently ship to users; (iv)
the approximate annual amount of MOL waste inventory quantities to be processed
based upon our AF sales outlets and; (v) the projected life span of these MOL
inventories at the current rate of user demand:
9
- --------------------- ------------------- ------------------- ------------------- ------------------- -------------------
CEVA Equipment Crude Tar in Crude Tar Content Current User Annual Use of Life of
(currently Storage of Finished AF Outlets for Crude Tar Inventories Based
installed at MOL (Inventory) Finished AF Inventories on Demand
sites)
- --------------------- ------------------- ------------------- ------------------- ------------------- -------------------
- --------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Csepel Island Approx. 65,000 65,000 tons = 35% 20,000 7000 (35%) + 9.3 yrs.
tons of 185,715 tons tons per year or 13,000 (additives)
of Solid AF "tpy"
- --------------------- ------------------- ------------------- ------------------- ------------------- -------------------
- --------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Nyirbogdany Approx. 25,000 25,000 tons = 50% 4200 tpy 2100 tpy (50%) + 11.9 yrs.
tons of 50,000 tons of (additives)
Liquid AF
- --------------------- ------------------- ------------------- ------------------- ------------------- -------------------
- --------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Total 90,000 tons* 90,000 tons = 24,200 tpy 9100 tpy 9.9 yrs.
235,715 tons of AF
- --------------------- ------------------- ------------------- ------------------- ------------------- -------------------
*See, MOL, Rt., Hungarian Oil & Gas Company's publication, "Health, Safety and
Environment, 1999", page 22, which reports its waste inventories at
"...approximately 100,000 metric tons", and MOL's commitment to find technical
solutions to treat the waste.
Czech Republic
The management of CEVA has identified acid and non-acid tars located at the
Ostramo and Paramo oil refineries, which, as well, represent a potential
multi-year supply of AF materials, based on visits to these sites, the
capacities of equipment similar to what we use in Hungary to process the AF and
the anticipated and projected volume to be consumed by AF users. The estimates
of these waste inventories were made by our Director of our Czech affiliate,
Jiri Rott. Mr. Rott, an expert in Alternative Fuel and cement production
technologies, has a Master of Sciences degree from the Czechoslovak Academy of
Sciences.
Romania
Acid and non-acid tars located at the refineries on or adjacent to the Ploiesti
and Campinu regions, represent, according to estimations made by our Country
Director in Romania, Mihai Maracineanu, with the assistance of our consultant,
Thomas Nail as a result of site visits, a potential 30 year supply of AF
materials. This is based on supplying our contracted cement partner, S.C.
CIMUS S.A., with 50,000 tons per year of AF.
10
The levels of AF materials are shown in the following table, as determined by
our management's internal calculations:
----------------------- ----------------------------------------------------------- ------------------------------
Country Potential Supply Potential
Annual Production
(In Tons) (In Tons)
----------------------- ----------------------------------------------------------- ------------------------------
Hungary MOL (acid tar) 100,000 - 160,000 2,000
MOL (non-acid tar) 100,000 52,000 - 90,000
Total 200,000 - 260,000 54,000 - 92,000
----------------------- ----------------------------------------------------------- ------------------------------
Czech Republic Refineries Mixed
Total 300,000
50,000
----------------------- ----------------------------------------------------------- ------------------------------
Romania Refineries (acid tar) 600,000 - 850,000 100,000
Refineries (non-acid tar) 600,000 100,000
Total 1,200,000 - 1,450,000 200,000
----------------------- ----------------------------------------------------------- ------------------------------
The Demand for Remediation
Generation Side
In Central and Eastern Europe, acid tar remediation has priority over non-acid
tar and other waste-oil remediation efforts, which are considered of secondary
importance currently. In Hungary and the Czech Republic, legislation will compel
generators to clean up their acid tars within the next 5-10 years. (The Budapest
Sun, March 19-25, 1998). The main generators of acid tar wastes are refineries
for example, MOL, Ceska Rafinerska, and Romanian National Oil Company.
Identified stocks of acid tar wastes range from 100-600 thousand tons per
country. New acid tar generation ranges from near zero in Hungary to about 60
thousand tons annually in Romania. Other tars have been and continue to be
generated by the steel and chemical industries.
User Side
Our AF processing is a cost-efficient tar remediation technology. Cement kilns
are the ideal users for waste-derived fuel: Article, "A Sensible
Solution-Putting Waste to Work", The Portland Cement Association, 1992. This
fact is underscored since the possible fuel to AF replacement rate is very high
(50-100%), and cement plants typically have high levels of fuel consumption, up
to 80,000 tons of total fuel annually: The length of the kiln in cement plants
allows for complete hydrocarbon combustion. There are 5-10 cement producers per
country. Most of these have been purchased by Western European strategic
investors.
Industrial boilers can also support some smaller volume AF usage, up to 10,000
tons per client annually.
Power plants are also possible AF users at lower replacement rates. Quality of
AF must be high and ideally power plants require the use of fluidized beds to
burn solid AF.
11
Competition
Tar Remediation
There is limited direct competition with our remediation business in the
Countries of Hungary, the Czech Republic and Romania. The AF business is
relatively complex in comparison to burning at incinerators or simply
transporting to landfills. Our AF business requires matching AF materials
sources and supplies with AF end-users; we must also process the AF materials
and then transport them to the user. Our AF business has a two-sided benefit:
mitigating contamination while recovering their energy potential by processing
into alternative fuel. Our competitors who simply burn tars at incinerators,
which generate additional wastes (ash, emissions), are more capital intensive,
and expensive. Landfills are the least desirable of alternatives, since
materials are simply "stored" underground and will always remain as a future
liability and ongoing environmental risk. In addition, fees are charged without
regard to beneficial reuse and they tend to be some distance from the waste
generators, presenting additional transportation costs. In Central and Eastern
Europe, land is a valuable commodity and its use as a landfill site will forever
restrict and limit the development and use of such lands.
Alternative Fuel Usage
Our AF business' largest competitive threats are fuel oil, coal and gas supplies
and their respective prices. Fuel users may be reluctant to switch fuels to an
alternative fuel with which they are not familiar. Alternative fuels must be
significantly discounted (currently 40% in Hungary based on our experience) in
order to induce switching. At low oil or coal prices, alternative fuel can be
less competitive in commercial markets.
Other alternative sources of fuel used by cement plants and industrial boilers
include tires, plastic and solvents, require processing and collection with
costs in excess of economic benefits created at the user side.
"Tipping fees", a monetary charge, usually assessed on a per waste ton basis for
treatment or disposal, and government subsidies, as in the West, will balance
this inequity as the region's infrastructure develops.
Barriers to Entry
Our AF business market segment is characterized by high barriers to entry.
As in the case of soil remediation, these include
Credibility: the technical nature and complexity of the business requires
credibility and a track record. As time goes on, our business track record
becomes stronger, making it harder for latecomers to compete.
Permits: By being first in the market, we set the standards for permitting,
cutting off market access for competitors with inferior technology.
12
Client Relationship: The business is based on long-term relationships with
clients, and the operations and assets of the service provider become integrated
with those of the client. This increases the cost of switching away from the
incumbent supplier.
The Company's Position in the Market
Hungary
We completed a remediation processing facility at Nyirbogdany, a Hungarian site
owned by MOL, RT., Hungarian Oil and Gas Company ("MOL") pursuant to our
original agreement with MOL, dated September 1, 1997. At this site, we convert
material into a liquid AF fuel. The Company has constructed a processing
facility jointly with MOL at the Nyirbogdany site. We completed a
trial-processing project in 1997 with MOL that successfully produced
approximately 30,000 tons of AF solid fuel. Our original agreement with MOL
expired on June 30, 2000 and was extended by amendment, dated July 25, 2000,
which permits us to not only continue to process MOL's wastes Nyirbogdany but
also at its Csepel Island site and contains a target contract completion date of
April 15, 2001. We are currently processing approximately 500 metric tons of MOL
waste per month into AF. We are now working jointly with MOL to obtain permits
for cement kilns, and other outlets so that we can supply them with our
processed AF solid and liquid fuel, and speed up the disposal process.
During May, 2000 and further to our agreement with MOL, our Hungarian
subsidiary, CEVA Hungary, jointly with Heidelberger Cement in Vacs, Hungary,
successfully obtained a permit to supply their cement kilns with solid and
liquid AF from MOL.
Approximately 50% and 90% of our business was done for MOL during 1998
and during 1999, and 100% through the first quarter of 2000, respectively. MOL
Rt., Hungarian Oil and Gas Company is one of Hungary's largest companies, and is
traded on the Budapest Stock Exchange. Revenue for 1999 was $3.2 billion with
net income, before special deductions, of $287 million. They operate five
manufacturing facilities in Hungary and approximately 400 gas stations
throughout the country. MOL has adopted a strong environmental compliance policy
and we have been working with them since 1995 to implement cost effective,
environmentally sound, proven US technologies to solve certain of their waste
problems. Because of MOL's leadership in this field in Hungary, our management
has chosen to focus on this long term potential with a highly motivated and
financially stable partner to introduce advanced US technologies.
Romania
We have a contract with S.C. CIMUS S.A., a cement company located in Campulung,
Romania ("CIMUS"), to process and supply supplemental fuels derived from
refinery wastes. We have installed our AF processing equipment at the cement
plant. The contract, dated August, 1998, is exclusive and runs for a 20-year
period and requires that we supply its kilns with a targeted minimum 1,800 tons
of alternative fuel per month ( the "CIMUS Contract"). We shall be paid fees on
a monthly basis based upon the heat value of the alternative fuel and the cement
plant's fuel savings costs as well as a fixed fee per month for technology and
equipment, after January 1, 2000. As of June 30, 2000, we have processed a
limited amount AF on a trial basis and expect to begin processing and supplying
the Alternative Fuel under the terms of this contract on or about March 1, 2001.
13
In September, 1998, CEVA and S.C. CIMUS S.A. signed an agreement with the
Petrobrazi S.A. refinery to start processing certain oily wastes. Total acid and
non-acid tar wastes at this refinery are estimated at approximately 200,000
tons. We completed a technical study and trial, processing a test amount of the
wastes into alternative fuel and are now negotiating a contract to install
additional processing equipment and utilize all of this refinery's waste as AF
for the Romanian-based alternative fuel-processing program. The proposed
contract, expected to be executed within the next 60 days, will give us the
right to process certain Petrobrazi's refinery waste for a 10 year period,
during which we will be paid a fee for each ton of waste processed with a target
daily quantity of 200 metric tons ( the "Petrobrazi Contract").
We entered into an exclusive 10 year contract with the VEGA S.A. refinery
("VEGA") in 1997 to remove that refinery's waste materials for use in our
alternative fuel program. At the time, this refinery was state-owned, and has
since been sold to a private company through Romania's privatization program.
Recently, the new owners have advised us of their intent to start the joint
program to start processing its wastes. On August 1, 2000, we executed a new
contract with VEGA to process certain refinery wastes at its site on an
exclusive basis for a term of 5 years (the "VEGA Contract"). We will be paid a
fee based upon each ton of VEGA waste processed with a daily processing target
waste quantity amount of 200 metric tons. In addition, we have proposals with
four other refineries in the region to remove and process their wastes into AF.
We submitted a preliminary proposal in October, 1999 to supply AF to LaFarge
Romcim, the largest cement producer in Romania. To date, we have not yet
received either confirmation that our proposal was accepted or notice that it
was rejected.
In December, 1999, CIMUS was purchased by "Holderbank Cement", a global
cement company which owns two other cement facilities in Romania. On May 24,
2000, we signed an agreement with Holderbank Cement to jointly develop a
regional AF processing facility to produce fuel and raw material replacements to
Holderbank Cement's plants in Romania (the "Holderbank Joint Venture"). As part
of this transaction, we agreed to contribute all of our rights and interests in
the CIMUS Contract and the VEGA Contract to this joint venture. We are forming a
Dutch corporation to be the entity that will operate the business of the joint
venture. Profits earned under the Holderbank Joint Venture are to be allocated
pursuant to our respective equity ownership interests, 51% to Holderbank Cement
and 49% to our Company, during the joint venture term.
Approximately 10% of our business revenues generated in 1998 and 1999,
continuing through the first quarter of 2000 were derived from our CIMUS
Contract.
Czech Republic
We are in preliminary talks with Cementworks Prachovice, a Czech cement plant
and intend to negotiate the installation of our AF equipment to be installed at
the site of waste lagoons. We are also in discussions with various refineries
and power plants in the Czech Republic with respect to supplying alternative
fuels. Through relationships with other Czech engineering and design firms we
are submitting proposals for future cooperation in the field of lagoon
remediation and sludge processing outside the Czech Republic.
14
SOIL REMEDIATION BUSINESS LINE
The Soil Remediation Process
Central and Eastern Europe has large quantities of contaminated soil, which need
to be cleaned. Contaminated soil is found principally in heavy industries
including oil and gas refineries, railways, energy plants, mining sites, as well
as in and around former Soviet military bases.
The LTTD Technology
We have selected a technology known as "low temperature thermal desorption"
("LTTD") as the method to clean contaminated soil in this marketplace. This
technology has been developed by Astec, Industries, Inc. of Chattanooga,
Tennessee, a leading manufacturer of LTTD equipment, and has been selected by
our management to be the preferred solution for treating moderate to heavily
contaminated soils. We determined that in the Hungarian market that the costs
(developed with Astec and our technology partner, Green Globe, LLC) were more
efficient for destroying the types of contaminants found in the soils of Central
and Eastern Europe, which contaminants include a high percentage of high
boiling, long chain heavy petroleum residues and tars. The LTTD system was
introduced to the United States market in 1989 and has proved to be a popular
method of removing light and heavy refinery and hydrocarbon wastes from all
types of soil. Contaminant destruction efficiencies in the afterburners of these
units are greater than 99.99% according to methods prescribed by United States
Environmental Protection Agency stack tests performed on equipment manufactured
by Astec Industries, Inc. Decontaminated soil retains its physical properties
and ability to support biological activity.
An LTTD unit of equipment contains several large compartments where at one end,
contaminated soil is fed into the unit on conveyor belts and is heated in
various enclosed chambers; once treated, the "clean" soil is deposited at the
other end of the unit. The LTTD equipment heats the soil to temperatures ranging
from 90 to 320 degrees Centigrade (200-600 degrees Fahrenheit) to vaporize the
petroleum, physically separating it from the soil. The vapor stream is then
captured and sent to the afterburner where it is thermally destroyed.
The LTTD technology itself is not a "rocket science" but only about five known
companies manufacture LTTD equipment. The operation of the LTTD machine requires
experience. Astec Industries, Inc. estimates that a one or two year learning
period is required for efficiently operating a thermal desorber. We agree with
Astec's assessment after having witnessed the operation of this equipment by
Green Globe, LLC, our LTTD technology partner.
Service Agreement with Green Globe, LLC
We partnered with a United States based LTTD operator, Green Globe, LLC, ("Green
Globe") for soil decontamination projects in Central and Eastern Europe. Green
Globe is owned by David Green a United States citizen whose main operations are
based in Waterbury, Connecticut. In the Fall of 1997, we entered into a contract
with Green Globe pursuant to the general terms of which, we agreed to give Green
Globe all soil decontamination projects generated through our business
relationships in Central and Eastern Europe. Green Globe agreed to provide,
transport, install an LTTD equipment unit in the region and train our local
workforce to operate the unit. After accounting for direct costs (which include
transportation, insurance, duties, labor and operational costs as well as the
equipment lease payments described below) profits generated are to be shared
15
equally between Green Globe and us. In order to reduce importation and tariff
charges, Green Globe and our Hungarian subsidiary, CEVA Hungary Kft entered into
a lease agreement for the LTTD units, requiring quarterly lease payments. In
connection with these agreements, Green Globe transported and installed a large
LTTD unit to Budapest, Hungary, in preparation to begin a soil decontamination
project commissioned by a City of Budapest, municipal district governmental
authority known as District XVIII. Our Hungarian subsidiary was awarded a
contract to treat approximately 24,000 cubic meters of soil and 2,900 cubic
meters of heavy oil for the price of approximately $1,485,000. Green Globe and
our Hungarian subsidiary's management team completed this phase of the project
in December, 1998. Although the District XVIII municipal government has paid
approximately $1,000,000 of the contract amount, it has failed to pay the
remaining approximate $1,000,000 balance due us for completion of the project.
After months of meetings with representatives of the District XVIII government,
during which no claims against us for non-performance or other set-offs were
made, we have been forced to commence a legal proceeding against the District
XVIII municipal government to collect payments under the contract. Since we are
not aware of any legitimate claims District XVIII has in connection with this
contract, we expect to obtain a judgment awarding all the monies due under the
contract, plus interest, and possibly damages resulting to our business because
of District XVIII's failure to abide by the agreement. Since District XVIII has
failed to make the above identified contract payments, the equipment rental
payments due from CEVA Hungary to Green Globe, LLC have not been made. See,
"RISKS RELATED TO THE BUSINESS" - "The District XVIII Litigation" and "Potential
Liabilities to Our LTTD Partner - Green Globe, LLC" as well as Item 8 - Legal
Proceedings, below.
Applicability and Limitations
The target contaminant groups for an LTTD system are oil and other organic
compounds (hydrocarbons). Such compounds are generated by the petroleum
refining, chemical, railroads, mining industries and governmental organizations,
such as the military, airports, and state-owned dumpsites.
The low temperature desorption processes are best suited for removal of organics
from soil, sand, gravel, or rock fractions. The high-absorption capacity of clay
decreases the partitioning of organics to the vapor phase.
According to our LTTD technology partner, Green Globe, LLC, the following
factors may limit the applicability and effectiveness of the LTTD technology and
process:
- there are specific feed size and materials handling requirements
that can impact applicability or cost at specific sites.
- high moisture content of the soil decreases capacity of
the LTTD equipment unit.
- highly abrasive feed potentially can damage the LTTD equipment.
- heavy metals in the decontaminated soil may produce a treated solid
residue that requires stabilization and further treatment.
16
Competitive Technologies
There are other technologies that compete with our LTTD equipment technology for
the treatment of contaminated soil. These competitive technologies include
bioremediation, soil washing, transportation and deposit at landfills and the
burning of contaminated soils at incinerators. However, according to our LTTD
technology partner, Green Globe, LLC, and our management's internal review, each
of these competitive technologies has some disadvantages:
- Bioremediation, although not as capital intensive as the
requirements to put an LTTD equipment unit in operation,
is a very time consuming process that does not always
work. In addition, bioremediation is recognized throughout
the world as effective to treat lightly contaminated soil
and requires a large operating area and space. According
to our local managers, bioremediation costs are in the
approximate range of $35 to $45 a ton.
- - "Soil washing" is another widely used technology in Western Europe. Soil
washing is an effective technology to clean soils contaminated with heavy
metals. However, soil washing is an expensive process and generally does
not neutralize oil and gas residue or hydrocarbon contamination.
- - Another soil remediation technique is to simply transport
these soils to a hazardous waste landfill. However, there
are very few licensed and permitted hazardous waste
landfills in Central and Eastern Europe. For example, the
Country of Hungary has only one hazardous waste landfill
in Aszod, operated by Pyrus/Rumpold and it has an annual
capacity of approximately 5,000 tons. This method to
"store" contaminated soil is very expensive, with prices
according to local market information in the approximate
range of $200 a ton.
- - Another method to dispose of decontaminated soil is to
burn it in incinerators. Incineration is the most
expensive process to treat contaminated soil. Because of
its high cost, incineration is primarily used to treat the
more hazardous types of wastes. There is a very limited
capacity for incinerator disposal in Central and Eastern
Europe, with standard costs in the range of $500 to $1,000
a ton for treatment, according to market prices by Dorog
incinerator in Hungary and local in country CEVA managers.
Our price range is between $45 to $95 per ton. More importantly, LTTD technology
will process difficult to process materials, such as coal tar, heavy oils and
various refinery tars in soils which cannot be efficiently removed by
bioremediation. Further LTTD technology is designed to meet US EPA emissions
standards. The cleanup is final and easily quantifiable and actual stack
emissions tests between October - December 1998 performed by Krona Kft. for
Hungarian Environmental Authorities demonstrated that the unit in Hungary met
Hungarian and European standards. It takes an average of 12 minutes to clean one
ton of soil.
17
The Soil Remediation Market
Our LTTD technology to clean soils can be used primarily for soils contaminated
directly by private industry, government owned lands and the transportation
industry. Sites where these sorts of contamination can be found include oil
refineries, steel manufacturers, oil pipelines, utilities, chemical
manufacturing plants or disposal areas, contaminated marine sediments, disposal
wells, electroplating/metal finishing shops, fire fighting training areas,
hangars/aircraft maintenance areas, landfills, leaking, collection and system
sanitary lines, leaking storage tanks, oxidation ponds/lagoons and vehicle
maintenance areas.
The market for the cleaning of contaminated soil is driven by legislation, which
either provides direct government funding or compels companies to finance their
own clean-up efforts. Driven by ever-stricter environmental clean-up legislation
as the countries of Central and Eastern Europe seek to join the European Common
Market, demand to meet EU environmental standards is expected to cost all 12 EU
applicants $123 billion. (The Wall Street Journal Europe, December 13, 1999).
We are in frequent discussions with representatives of MOL and expect to begin
soil decontamination projects at their facilities. We expect to either transport
MOL's contaminated soil to the current site where Green Globe's LTTD equipment
unit is now located, or to relocate this LTTD equipment to a MOL site in the
near future.
In Romania, our principal activities there have been to organize a supply of oil
and gas wastes for processing into alternative fuel for utilization in cement
plants and other power generating operations that require large amounts of
energy. As oil and gas residues are removed from the surface of soil storage
basins, a large soil cleaning need will emerge in Romania. Economic Factors and
a lack of legal enforcement laws and regulations, however, suggest that the
Country of Romania is still a few years away from enacting legislation that
would drive soil clean-up projects.
Hungary and Czech Republic
Our investigation of the soil cleaning markets in the Countries of Hungary and
the Czech Republic indicates a sufficient demand to support at least one LTTD
equipment unit in each of these countries.
Romania
In the Country of Romania, it is estimated by the Ploiesti local environmental
agency office (Serban Ionescu Homoriceanu Director, letter dated February 17,
1998) that there is currently over 6,000 hectares of soil that requires clean up
or remediation in Prahova County. However, due to lack of funding, at the
government level, weak legislative and enforcement initiatives, effecting the
budgeting and clean-up programs at the private enterprise level, the current
"demand" for soil remediation is behind that of Hungary. Our current business
plan does not include the installation of an LTTD equipment unit into Romania
until 2001; however, the demand and this market is expected to intensify as the
economy of Romania evolves. The December, 1999 formal invitation to enter the
process for accession into the European Common Market will accelerate the demand
for environmental compliance with the Union's standards and our services.
18
Identified contaminated soil quantities are summarized in the following table,
prepared in a June 1998 internal business assessment by our management:
----------------------- ----------------------------------------------------------- ------------------------------
Countries Estimated Soil Remediation Quantity Estimated
Annual Increases
(In Tons) (In Tons)
----------------------- ----------------------------------------------------------- ------------------------------
Hungary Refineries/RR1 1,500,000
Other2 2,000,000
Total 3,500,000 50,0001
----------------------- ----------------------------------------------------------- ------------------------------
Czech Republic Unipetrol1 1,200,000
Other3 3,800,000
Total 5,000,000 75,0001
----------------------- ----------------------------------------------------------- ------------------------------
Romania Oil refineries 480,000,000
Other4 20,000,000
Total Unknown
500,000,000
----------------------- ----------------------------------------------------------- ------------------------------
1. Internal management estimates by Country Directors and consultant
Kalman Morvay, March 1998. Mr. Morvay currently serves as the Deputy
Secretary for EU Accession with the Hungarian National Ministry for the
Environment; during the years 1999 and 1998, Mr. Morvay worked as an
independent consultant; prior to that period, Mr. Morvay was the
Managing Director of the Hungarian firm PORR Environmental Technique
Hungary Kft., an Austrian waste management controlled firm.
2. In Hungary includes chemical plants, steel industry, military sites and
state owned dumps
3. In Czech Republic includes railways, steel industry, chemical industry,
automobile industry, mining, military sites
4. In Romania includes railways, mining, steel, and automobile industry
Economic Barriers to Entry Into the LTTD Soil Remediation Business
The LTTD segment of the soil remediation market is characterized by high
barriers to entry. These barriers include:
Service Provider Credibility: Environmental service clients
often do not feel confident in their understanding of the dimensions of
contamination, remediation, and residual risks, but believe them to be
substantial; therefore, clients will tend to seek service providers in
whom they have confidence for the particular challenge and technology
involved. It takes time and track record to build such credibility.
Market Access, Economies of Scale, and the First Mover
Advantage: For LTTD, the number of potential customers in the medium
term is few, perhaps as few as two major customers each in Hungary and
the Czech Republic, and not more than five per country. The rated
capacity of one LTTD line is up to 300,000 tons per year, which is
estimated to be equal to 80% of the annual demand projected for LTTD's
market segment in Hungary, according to the Business Assessment
performed for CEVA.
19
Therefore, an investment in an LTTD line can only be justified
by strong existing or prospective relationships with one or two key
customers. However, given that the investment is made based upon such
relationships, the capacity of the unit will probably preclude another
such unit from being installed in the country, providing a possibly
insurmountable first mover advantage for this market segment. This
follows the US example, in which LTTD lines tend to enjoy a regional
monopoly.
Permits: In order to provide environmental services, specific
technologies, and in order to handle, process, dispose of and transport
wastes and, as with an LTTD equipment unit, generate stack emissions, a
business operator is required to obtain various permits in the Central
and Eastern European countries. Often, these permits require months to
obtain and, in the case of final permits, may require years to obtain.
Obtaining permits requires a local presence and familiarity with the
national and regional written and unwritten rules of the permitting
process. "First movers" have a potential market advantage: since a
first mover is often the first person or business to proceed through a
country's new permitting process, the first mover can set the
permitting standard. If the first mover takes advantage of this
development stage permit processing, it can set "high technological
standards" or the type of technology it intends to employ for
remediation in the target country. We have undergone permitting
processes in Hungary and in the Country of Romania as the "first
mover". We, together with our partner, Green Globe, LLC, obtained the
first permit ever issued for LTTD technology by Hungarian authorities.
Similarly, we were the first mover in the permit process with respect
to the installation and operation of AF processing and feed equipment
now situated at the CIMUS cement plant in Campulung, Romania. As a
result of these initiatives by us, other competitors desiring to
install an LTTD equipment unit in Hungary, will more than likely have
to meet the technological standards that are contained in our existing
operating permits. These permits as has happened in the United States
environmental markets, tend to become a significant "asset" of the
environmental firm or business.
Experience: Due to the evolution of the general, including soil,
remediation markets in Western Europe, the LTTD technology is not a
widely used in Western Europe as in the United States. European
environmental companies are, by and large, less familiar with the LTTD
technology, and it will take some time for the LTTD technology to be
recognized and utilized in Western Europe to the level it is in the
United States. The same may be said for Central and Eastern Europe: it
will take several successful projects and their results to be
distributed before this technology gains wide approval. The successful
LTTD technology treatment of the Budapest municipal District XVIII
project by us and Green Globe has aided the recognition of our LTTD
technology as a viable remediation technology.
In the United States, LTTD technology is widely recognized and has
established itself as the industry standard for the soil remediation
market segment treatable by this technology. As with the introduction
of any new technology, our presence in the Hungarian soil remediation
market for the past several years facilitate our identifying market
opportunities: Because the utilization of this LTTD technology requires
"staying power" , this time and capital commitment has discouraged
other United States environmental enterprises from attempting to
penetrate, so far, these markets in Central and Eastern Europe.
20
Competition
Hungary
According to our CEVA Hungary management, Korte Kft. can be considered as our
main competitor in the Hungarian market for refinery services. Korte Kft. has
wide scale operations and resources ranging from site auditing, groundwater
cleaning, environmental technology engineering and sludge dewatering
technologies.
The next key competitor is Pyrus the operator of the country's largest landfill.
Pyrus has recently acquired PORR Ktm a biological soil remediation Company.
Currently, no other enterprise in Hungary other than our Company provides AF and
or LTTD technology services.
The following table, published in The Budapest Business Journal article
entitled, "Environmental Services", February 2 - 8, 1998 shows some of our
competitors in Hungary:
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
Technology 1997 Revenue No. Of Years Est. Major Clients Contracts (%)
(in Thousands Employees in Hungary Gov't/
$U.S.) Private Sect.
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
Dorog Incineration
(Sarp
Industries)
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
Pyrus Landfill 3,650 65 1952 Teraszol, Netta, 25/75
Titania, Ikarusz,
Oroshazo Glass
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
Elgoscar Intl Biological 2,392 53 1991 TVK, MAV, 58/42
Treatment Malev, KTLM,
APV Rt.
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
Bekes Dren 1,750 16 1993 MOL 70/30
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
RWE Hungary 1,250 38 1993 Zwack Unicum, 0/100
Emasz, Matav,
McDonalds,
Colgate, KTM
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
BGT Hungaria Biological 600 7 1992 10/90
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
Intonviro Biological 480 6 1991 MOL, GE, Ganz, 20/80
APV Rt,
Hungaro-camion
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
PORR Kim 5 1995 KTM, Va-Elin 60/40
(PYRUS) AG, MAV, BKV,
APV Rt.
- --------------------- -------------------- ------------------ --------------- ------------- ----------------------- ---------------
21
Although these and other companies represent competition, they also are
potential partners. We may compete with these companies to become the lead or
general contractor in a clean-up project. However, even if not the lead or
general contractor, we may still serve as a subcontractor, bringing our LTTD
technology to the project.
Czech Republic
There is only limited information available about our existing competitors in
the Czech Republic. Some competitors have shown interest in thermal remediation
as the preferred technology to clean and remediate soil. Based on management's
knowledge, these competitors include Watco, (a hazardous waste subsidiary of the
Belgian utility, Tractabel, which is owned by Suez-Lyonnaise des Eaux), and
Thermo Eurotek (a Dutch subsidiary of the United States technology group, Thermo
Electron). Watco has installed a small soil thermal treatment unit in Ostrava at
the Karolina industrial site clean up
There are several foreign competitors in the Czech environmental market. Among
the most aggressive are German companies (Rumpold and RWE Entsorgung) and an
Austrian company (A.S.A.), all of which are mainly focusing on the municipal
solid waste markets.
Romania
There is only limited information available about competitors in Romania. We are
aware of Rhone Poulenc which has established an office and begun investigation
of the groundwater contamination in the Ploiesti region. Septos, Ltd., a
Polish/French enterprise, has initiated a preliminary review of using refinery
wastes as secondary fuel, and AVR, a Dutch and partially state-owned
incinerator, has offered disposal services to Romanian refineries.
Our Position in the Soil Remediation Market
Hungary
District XVIII. We completed a soil remediation project in December, 1998
pursuant to a contract with a municipal Department of the City of Budapest known
as District XVIII. We cleaned approximately 24,000 cubic meters of soil at a
price of approximately $45 per ton, with a total contract price of approximately
$1,485,000. Notwithstanding the successful completion of this project, District
XVIII failed to pay to us the remaining balance of approximately $1,000,000 due
on this project. As a result, we began a lawsuit against District XVIII in the
Hungarian courts to collect this amount due us in addition to damages: see,
"RISKS RELATED TO THE BUSINESS" - "The District XVIII Litigation" and "Potential
Liabilities to Our LTTD Partner - Green Globe, L.L.C." as well as Item 8-Legal
Proceedings. Currently, we are negotiating with the potential buyer of the
District XVIII site and the Environmental Inspectorate for the Central Danube
Valley to complete the cleanup of the property and to remediate approximately
60,000 tons of soil.. If successful, we will also be permitted to accept at the
District XVIII LTTD positioned site third party soils through December 31, 2001.
During this period we plan to process petroleum contaminated soils from MOL,
Budapest Power, MAV, the Hungarian State owned railroad, former Soviet military
sites and various generators.
22
Czech Republic
South Bohemia: In November, 1998, our Czech affiliate, CEVATech, signed a letter
of intent with the Center for Chemical Safety (the "SCHB"), one of the leading
environmental services contractors in the Czech Republic, for cooperation and
subcontracting in two major projects in South Bohemia. In the tender process for
clean-up at the South Bohemian Wood site, CEVATech was one of the two remaining
bidders, and the only one offering the preferred thermal remediation technology.
The results of this tender were announced and the initial award went to ASA. The
project would have involved treating 92,000 tons of material at a price of
approximately $50 per ton. The work has not yet begun and CEVATech is in
discussions with ASA to serve as a subcontractor to remediate the soil with our
LTTD equipment technology.
In another project, the South Bohemian Gas Manufacturer is issuing a tender for
soil remediation in 2000. This project would involve the treatment of
approximately 30,000 tons at various sites.
CUSTOMERS AND OPPORTUNITIES
Our soil remediation business is primarily applicable to hydrocarbon
contamination caused by the petrochemical, chemical, transportation and utility
industries.
Our tar remediation business is applicable to the wastes generated by the
petroleum refining (by-products, filter cake, oily filter media, separator
waste, sludge, acid tar, slop and waste oil, tank bottoms), steel (coal tar
bottoms), chemical (solvents, chemical tars) mining (coal tars), manufactured
gas and pharmaceutical industries. The processed alternative fuel ("AF") can be
used by cement kilns, power plants and other industrial boilers as a cheaper
source of energy.
23
The following table lists our actual and potential customers. A review of the
top 100 companies in Central and Eastern Europe reveals approximately 44 of
which are candidates to be our customers:
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
Business Actual Prospective Customers - Potential Customers - Opportunities
Line Customers in Discussion
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
Hungary
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
LTTD Budapest Power Rt. MOL Hungarocamion, BKV (transport), Malev
MAV (airline). TVK (chemicals), Ganz, Lehel, GE
Budapest Chemical Works Tungsraum, RABA (mfg). Chemical plants, Gas
stations
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
AF MOL Vac Cement DAM (steel works), Dunaferr (steel works),
Labattan, Hejocsaba, Beremend, Belapatfalva,
Sajobabony, Tiszavasvar, Mosonmagyarovar
(cement plants)
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
Czech
Republic
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
LTTD None Regional gasworks, Unipetrol (Chemopoetroll,
South Bohemia Wood Ceska Rafinerska, Kaucuk, Benzina), Moravske
Company naftove doly (petroleum), Ceske produktovody a
South Bohemia Gasworks ropovdy (pipeline), OKD (mining, Chemapol,
Deza (chemicals, Ceska aerolinie, Skoda Pizen
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
AF Ostramo refinery Koramo refinery, Tisova, Hodonin, Porici,
Paramo refinery Ledvice (power plants), Ceskomoravsky Cement,
Prahovice cement Prachovice Cement
Chemopetrol
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
Romania
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
LTTD None Petrobrazi and Vega Refinerie RENEL (power generator)
Petrotel, Astra, Steaua, Petrobrazi, Vega,
Arpechim,
Rafo-Onesti, Darmanesti (refineries), miolia
Supiacu de Barcau
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
AF Petrobrazi refinery Vega refinery Romcim, Romcif, Moldocine, Casial cement
CIMUS Cement plant Astra refinery plants.
Petrotel refinery
Arpechim refinery
Steaua refinery
- ------------------- ------------------------------- ------------------------------- -----------------------------------------------
24
The following is a brief summary of some of the companies in Central and Eastern
Europe who may have specific waste management problems and whose remediation
falls within our scope of services, according to an internal study performed for
us from information supplied by CEVA Hungary management:
Hungary
MOL: MOL is the largest oil and gas company in Hungary. According to MOL's
"Health, Safety and Enviornment 1999" Annual Report, compliance with
environmental liabilities that result from past activities will cost HUF 25.7
billion, requiring an investment of HUF 19.2 billion in net present value
(approximately USD 64 million).
Other Hungarian prospective customers include TVK, a major chemical producer;
MAV, the Hungarian state-owned railway company, and; Dunaferr, a large steel
manuracturer.
Czech Republic
Industrial companies represent the majority of end-users for hazardous waste
management and disposal equipment and services. The most important end-users are
chemical companies, iron works, the paper and pulp industry, and coal power
plants.
According to a March, 1998 publication by the U.S. & Foreign Commercial Section,
American Embassy, Prague, Czech Republic, total Czech waste generation is
approximately 90 million tons annually, consisting of 39 million tons of
industrial waste, 13 million tons of waste originating from energy generating
processes, 5 million tons of waste generated by mining activities, 6.5 million
tons of agriculture and forestry activity, 2.5 million tons of urban waste, 24
million tons of other waste, including approximately 8.1 million tons of toxic
and noxious waste.
Other Large Industrial Companies
Chemical, iron processing and mining companies operate their own landfills,
which historically have not complied with environmental regulations.
State Owned Dump Sites
There are a number of dump sites that have been abandoned by former state-owned
companies. These dump sites had not been regulated and were used as the dumping
grounds for industrial wastes were dumped. Currently, the type and extent of the
wastes deposited in and around these dump sites is unknown. The State, or the
government of the Czech Republic, is active and is expected to continue to be
active in the oversight and clean-up initiatives, providing necessary financial
resources and determining the extent and parameters for remediation. There are
two major governmental sources of environmental project financing: the Czech
National Privatization Fund and the State Environmental Fund.
25
Romania
In Romania, the petrochemical industry represents the main focus for
environmental concerns. The history of the Romanian petroleum sector goes back
more than 140 years; current oil production is estimated to be approximately 6.5
million tons per year*. Prospective customers are SNP Petrom SA, an integrated
company which operates all existing oil fields, some gas fields, two refineries
and an oil product distribution system including 500 gas stations, as well as
Renel, a power generating company, Petrotel, Astra, Steaua, Petrobrazi, Vega,
Arpechim, Rafo-Onesti and Darmanesti refineries.
Other:
In 1998, OAO Lukoil Holding, Russia's second largest oil producer, acquired a
51% stake in Petrotel, another Romanian oil producer, for approximately $300
million, according to an article in Budapest Business Journal, February 16 - 22
1998, up to $30 million will be invested in environment protection projects" by
Petrotel, Similarly, following the acquisition of S.C. VEGA, another Romanian
refinery, the acquiring Romanian oil services company, ROMPETROL S.A. is
planning up to $8 million for the cleanup of lagoons and soil with CEVA (April
2000 proposal from Rompetrol to EBRD by Cantemir Mambet).
- ------
*Publication, "Black Sea Embassy Review: Romania", September, 1999, published
by The Black Sea Regional Energy Centre, Sofia,
Bulgaria.
26
GOVERNMENT REGULATION AND ENFORCEMENT
REGIONAL OVERVIEW*
The Czech Republic, Hungary and Poland have joined the OECD, with Slovakia and
Slovenia expected to follow in the near future. These countries, with the
exception of Slovakia, have also been invited to negotiations to join the
European Common Market, with membership envisaged as early as 2002. Thus, the
harmonization of domestic structures and legislation with those of the European
Union is considered a high priority.
Each of the countries has enacted comprehensive environmental legislation. Their
regulatory systems are currently undergoing changes mainly related to:
- harmonizing and integrating domestic environmental legislation with
that of the European Common Market.
- improving the environmental regulatory framework by eliminating
gaps and removing inconsistencies.
- enacting specific pieces of legislation (e.g. waste management acts).
Domestic environmental legislative initiatives include the approximately 200
pieces of European Common Market legislation, which will have to be adopted by
the countries in Central and Eastern Europe seeking membership. According to
1997 estimates, the cost to bring all ten "accession" countries of Central and
Eastern Europe into compliance with the environmental regulations of the
European Common Market is estimated to be in the range of $100 to $130 billion.
Enforcement measures continue to be inconsistent. Enforcement policies mainly
rely on monetary penalties, but also include environmental standards,
restrictions, and permitting systems. Additionally, enforcement policies are
often implemented by local governments without coordination at the national
level, which results in considerable differences in both requirements and levels
of enforcement. Also, with the rapid growth in the number of small and
medium-sized enterprises, compliance monitoring is often difficult.
The main environmental policy instrument applied to this industry is the permit
system, which includes fee payments for the permitting process and the
assessment of fines for non-compliance. Generally, the collected environmental
fees and fines are earmarked for environmental purposes, and comprise the
sources for the major part of the revenues of state environmental funds and for
municipal, environmental protection budgets.
Generally, all the surveyed countries of Central and Eastern Europe have
established three levels of environmental administration:
- -----------
*Information in this "REGIONAL OVERVIEW" section has been obtained from the
publication "Environmental Technology Market: Regional Overview", Part I,
December, 1997 Central and Eastern Europe, the Regional Environmental Center,
Szentendre, Hungary.
27
- national level ministries, (e.g. Ministry of Environment, or
other ministries with environmental related duties).
- regional level (county, provincial) environmental departments
under the control of regional authorities, inspection bodies,
water management boards, and the like.
- municipal level departments created and supervised by local
authorities.
Hungary
Regulations
Hungary has one of the most advanced systems of environmental management in
Central and Eastern Europe.
The most significant piece of environmental legislation is the Act No. L111 of
1995 of the General Rules of Environmental Protection. This is a framework for
their environmental law, containing the fundamental principles and basic legal
institutions related to the environment. The Act formulates the legal basis of
the liability for environmental damages. The Act sets forth the responsibilities
of the government, municipalities, citizens and companies.
Key elements include:
- Hungarian law requires companies to remediate contaminated
company-owned land and stored waste. The laws are considered fairly
strong and are stricter than in some countries of Western Europe.
- Laws and regulations are becoming more stringent because of the
Country's movement towards full membership in the European Common
Market. In this regard, the Hungarian government plans to fully conform
its environmental laws, rules and regulations to those of the European
Common
Market by 2002.
- In some privatization transactions, environmental clean-up
responsibility was made a part of the primary agreements.
Enforcement
At the top of the Hungarian state environmental hierarchy is the Ministry of
Environment and Regional Policy. This ministry is responsible for the drafting
of environmental legislation and its implementation and administration.
There are 12 regional environmental inspectorates in Hungary with separate
environmental administrative authority at the regional level. These
inspectorates are subordinate to the Chief Environmental Inspectorate, the
authority at the national level, and works under the supervision of the Ministry
of Environment and Regional Policy.
With respect to local environmental issues, especially waste management issues,
municipalities have retained a certain amount of administrative power, defined
by Act No. LXV of 1990 on Municipalities and under the respective environmental
laws:
28
- Local Environmental Inspectorates are responsible for enforcement.
They have the power to mandate and require companies to clean-up
environmental problems under their control and have the power to
conduct inspections.
- Any company which fails to comply with environmental requirements
is now subject to fines.
- With the increase in environmental regulation
oversight, waste removal "load"charges are expected to
develop during the year 2000.
- Charges for products that contain waste are expected to develop as
a regulatory measure to further incentivize companies to comply
with applicable environmental laws and regulations.
- Potential legal measures include the suspension of operations in
the event of environmental non-compliance with penalties and
prison sentences as further available enforcement measures.
- Substantial private as well as public companies are
increasingly responsive to environmental issues because of
their developing high visibility.
Czech Republic
Regulations
The Czech Republic has relatively strong environmental laws, similar to those
found in Hungary. The new waste law, effective, on January 1, 1998, was
structured to harmonize Czech standards with those of the European Common
Market.
Enforcement
Governmental enforcement measures including mandatory clean-ups have begun at
Czech companies.
Romania
Regulations
The environmental laws in Romania remain generally weak. Romania was formally
invited to begin the process for accession into the European Common Market,
which will force the adoption of environmental legislation to meet the European
standards.
Enforcement
Enforcement of environmental regulations remains sporadic, although we believe
that the more substantial Romanian enterprises are beginning to address
contamination problems on a specific basis due to privatization.
29
ENVIRONMENTAL EXPENDITURES
A major change is expected (and in Hungary already taking place) in the
financing of environmental projects: the prior funding mechanism for
environmental projects was provided by state and municipal budgets is now
decreasing while businesses are increasing their budgetary contributions to
environmental projects.
At present, our ability to secure the necessary financing for environmental
projects is one of our major problems. Countries in Central and Eastern Europe
generally have six sources of funds on which to draw to support environmental
investments. These sources are state and regional budgets, extra-budgetary
funds, investments of commercial enterprises, commercial credit, foreign
investments and foreign assistance programs.
For Central and European countries, environmental spending will have to increase
from present typical levels of 1% to over 2% of their gross domestic production
("GDP") to meet the environmental clean-up requirements.of the European Common
Market.: "It is expected that in actual numbers, environmental expenditures will
grow at the rate of between 6% and 12% annually": "Environmental Technology
Market: Regional Overview", Part I, December, 1997 Central and Eastern Europe,
the Regional Environmental Centre, Szentendre, Hungary.
The following table summarizes annual environmental expenditures by country in
the region (1995), Table 1.1: TOTAL ENVIRONMENTAL EXPENDITURES IN 1995*:
======================================== ------------------------------------- =====================================
Country Expenditure Share of GDP
(in millions $ U.S.)
======================================== ------------------------------------- =====================================
Czech Republic 1,185 2.6%
======================================== ------------------------------------- =====================================
Hungary 385 1.1%
======================================== ------------------------------------- =====================================
Poland 1,308 1.1%
======================================== ------------------------------------- =====================================
Slovakia 232 1.0%
======================================== ===================================== =====================================
Slovenia 150 0.8%
======================================== ===================================== =====================================
*"Environmental Technology Market: Regional Overview", Part I, December, 1997
Central and Eastern Europe, the Regional EnvironmentalCentre, Szentendre,
Hungary.
State Environmental Funds
All surveyed countries have established national environmental protection funds
to provide non-budgetary revenue earmarked for environmental projects. The
rationale behind the establishment of the funds was to ensure a steady flow of
the significant amounts of money needed for environmental protection. The
dominant share of these funds' revenues come from outside national budgets, so
that the protection of the environment does not directly compete for limited
resources with other social programs.
30
The resources of state funds can account for a significant proportion of a
country's environmental spending. State environmental funds' main activities are
to provide financial support for investments, usually through loans offered with
preferential conditions. Other forms of support include grants, subsidies to
bank credits, equity involvement and others. The form of financing available
from these funds depend on the project type, the investor, and the financing
institution.
LONG TERM STRATEGY
Our business is likely to develop along a path from being a provider of specific
technologies to being a broad-based environmental services company within the
hazardous waste sector.
We have identified two major environmental problems in Central and Eastern
Europe and have selected two proven technologies which we have imported from the
United States which we believe can efficiently and competitively provide a
solution to environmental problems. The two principal problems are soil
contamination by hydrocarbons and the generation of hydrocarbon waste products
from the oil refinery and other businesses. Our solutions are low temperature
thermal desorption ("LTTD") and the processing and manufacturing of alternative
fuels from these waste products ("AF").
Our management which is responsible for implementing these technologies in
Central and Eastern Europe have an aggregate of five decades of experience with
these technologies in the United States.
Our business goals over the coming three to five years is to develop a number of
valuable assets through the successful implementation of these technologies:
- Develop a strong reputation and track record of
successful, competitive and efficient service to blue
chip companies.
- Establish long term commercial relationships with blue chip companies
in the key, environmentally sensitive sectors.
- Develop familiarity with the authorities and key decision makers
across the region.
- Acquire a detailed understanding of permitting procedures across the
region
- Gain access to subsidized financing from PHARE, World Bank, and other
sources
- Develop a vast network of contacts across the very fragmented
environmental services sector in the region
- Gain a detailed knowledge of the environmental problems and policies
of those companies.
- Gain a detailed knowledge of the competitive environment within
other slices of the environmental services sector.
- Develop experience at managing complex, multi-technology clean-up
projects
- Develop experience at managing projects across a range of countries
in the region
31
We are an environmental services and not a technology Company. This means that
we provide and execute solutions for companies and governmental bodies with
environmental problems. Our current focus on using our LTTD technology and AF
processing technologies does not preclude us from using other technologies at
times when it may be appropriate. It is expected that through the current two
service lines, we can rapidly establish an important reputation from which we
can leverage our entree into other services and solutions. Once our LTTD and AF
business lines mature, we expect opportunities to expand as discussed below.
Geographical Expansion
The markets in the different countries of Central and Eastern Europe are at
different stages of maturity and are developing at different rates. As the
characteristics of the Czech or Hungarian markets begin to mature, the Balkans,
Slovakia or Romania are expected to develop and the wealth of experience we have
gained in the Hungarian and Czech markets can be reapplied in this next
generation of projects. Next, over the horizon, we expect that the countries of
Bulgaria and the Ukraine to develop environmental markets for our services.
We have learned that the differences in language, legislation and logistical
barriers limit the potential for regional synergies and our business plan does
not anticipate implementation of such synergies or strategy. We expect that our
experience and know-how can be successfully transferred and that our in-country
business partners monitoring their respective markets will permit us to enter
new countries at the right time to take advantage of these opportunities as they
arise.
Following the Oil and Gas Trail
Our AF business focuses initially on the large oil and gas companies whose large
production facilities and deep pockets present a logical market entry point. Our
business will, over time, we believe, begin to penetrate further down the
petrochemical industry ladder. We anticipate serving the chemical industry,
pharmaceutical manufacturers, paint shops, repair shops and gas stations.
We are likely to become a service provider for the waste oil and solvent
collection businesses which are developing in Hungary. As it occurred in the
United States marketplace, the development and attainment of AF processing
capacity will be a key collection repository for waste solvents. The waste fuels
will be blended and sold to the cement industry. We intend to develop a large AF
processing capacity and a reliable service, so that we are in a position to
potentially become a preferred supplier of AF to cement kilns and other users,
providing us with long term supply contracts. The generation of waste solvents
is an on-going business cycle and can be expected to endure as long as the
petrochemical industry continues its dominant role in industrial processes.
32
From Technology Provider to Solutions Provider
Our track record and experience should accelerate over the next few years, as
well as the wealth of other strategic intangible assets discussed above. These
intangibles will enable us to move from being a provider of specific
technologies to a provider of environmental solutions.
The environmental services industry is fragmented in Central and Eastern Europe,
with numerous small, undercapitalized, technology providers. A strategy of
selective acquisitions and joint ventures represents an attractive business
opportunity for us. Such acquisitions can probably be made at very competitive
valuations, acquired, perhaps, with our equity securities and then incorporated
into our group. We will provide a conduit for applications of the acquired
technologies in other markets, utilizing the local presence of the businesses
acquired as a conduit to the local markets. Other less capital intensive ways of
accessing technology can come through simply subcontracting, technology
partnerships or joint ventures. As a result, we can access a portfolio of
solutions and can act as the main contractor in remediation and clean-up
projects, pollution prevention engineering, infra-structural projects, and the
like. Ultimately, we intend to position ourselves as project management
providers.
Employees
As of the date hereof, we employed 20 full-time employees and 7 part-time
employees. We hire independent contractors on an "as needed" basis only. We have
no collective bargaining agreements with our employees. We believe that our
employee relationships are satisfactory. We expect to hire additional employees
based on our future growth rate.
Key Personnel
Our success depends to a material and significant extent on the services of
Herbert G. Case, Jr., our President and Chief Executive Officer as well as our
ability to attract and retain additional key personnel with the skills necessary
to manage our existing business and strategic plans. The loss of Mr. Case or
other key personnel could have a material adverse effect on our business,
results of operations, liquidity and financial position. We do not have an
employment agreement with Mr. Case. If we cannot retain Mr. Case or hire and
retain qualified personnel, our business, results of operations, financial
condition and prospects could be adversely affected.
Year 2000
We have not experienced any computer malfunction or operational problems
resulting from the adoption of Year 2000 date information integration into our
information systems.
Economic Conditions
Our business in Central and Eastern Europe is sensitive to the local financial
condition of the economies in which we work, government environmental regulation
as well as the condition of worldwide financial markets. We have extensively
discussed these topics above. A downturn in economic conditions in one or more
of our Central and Eastern European markets, a governmental failure to develop
and enforce environmental regulations as well as unforeseen governmental
legislation could have a material adverse effect on our results of operations,
financial condition, business and prospects. Although we attempt to stay
informed of economic and market conditions, government environmental
initiatives, changing permit requirements, any continuing failure on our part to
identify potentially adverse developments and to respond to such trends would
have a material adverse effect on our results of operations, financial
condition, business and prospects.
33
Stock Price
Our Common Shares have no public market . Several of our shareholders who have
held their stock in our Company for the required periods may, in compliance with
all the applicable regulations, may sell their shares pursuant to Rule 144 of
the Securities Act of 1933, as amended (the "Securities Act"); other
shareholders who purchased our stock in a Rule 504 private offering possess
non-restricted stock and may sell those shares in certain jurisdictions where
such trades comply with local blue sky laws. When and if our stock is sold by
any shareholder, its selling price may be extremely volatile. We do not expect
any significant trading of our stock and if there are any trades, we expect the
market price of our shares to be subject to significant fluctuations in response
to new business, operating results and other factors, and those fluctuations may
continue in the future. In addition, most stock markets in recent years have
experienced significant price and volume fluctuations that often are unrelated
or disproportionate to the operating performance of particular companies. These
fluctuations, as well as a shortfall in sales or earnings as compared to public
market analyst's expectations, changes in analyst's recommendations or
projections, and general economic and market conditions, may adversely effect
the market price of our common stock.
RISKS RELATED TO THE BUSINESS
Described below are what we perceive to be the material risks and uncertainties
facing our Company. There may be additional risks that we are not currently
aware of or that we presently consider immaterial. All of these risks could
adversely affect our business, results of operations, liquidity and financial
position.
Control by Herbert G. Case, Jr. Herbert G. Case, Jr. is the beneficial
owner of 7,215,809 shares of the common stock of our Company, representing
66.143% of all of our common shares outstanding. As a result, Mr. Case has
absolute control of our Company and will be able to elect all of our directors
and control our affairs, including the election of our officers and the
determination of their compensation.
Substantial Dependence Upon the Company's Officers and Directors. The
Company has been relying upon the loans and services offered by certain of its
officers and directors: Herbert G. Case, Jr. has made aggregate loans to the
Company of over one million dollars over the last several years and most
recently, Mr. Case made a $200,000 loan to the Company in December, 1999;
Director, Robert Van Pelt, has been rendering significant consulting and
administrative services, as an outside director, without compensation, and;
Director, Joseph J. Tomasek, has permitted the Company to utilize his law
offices as the Company's principal office for correspondence and administrative
purposes, without charging the Company rent. In the event any one or more of
these officers and directors were to cease making capital loans to the Company,
rendering services to the Company or providing office space to the Company, such
actions could have a material adverse effect upon the Company's financial
condition and operations. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
below.
Our Company Has Never Been Profitable and Continues to Suffer Operating
Losses: At December 31, 1999, we had an accumulated deficit of $4,071,991
representing a consolidated net loss for the period from its inception through
December 31, 1999. The consolidated loss was caused primarily by the costs
involved in establishing our market position in Central and Eastern Europe (the
"CEE"). Our cash flow since inception has been principally the result of equity
and debt financing and limited revenues generated from our operating activities
in the Central and Eastern Europe (the "CEE"). Our ability to achieve
profitability is dependent upon our ability to realize revenues from our
contracts with both public and private entities realizing revenues that exceed
our costs.
35
Our Competitors in Our Markets Have More Resources Than We Do: In
seeking to market US technologies and environmental services in Central and
Eastern Europe (the "CEE"), we face difficult and stiff competition from a
number of US and foreign companies that are much better capitalized than we are.
Competition in Hungary, the Czech Republic and Romania, our principal markets,
is well documented. Although management believes that our market position in the
CEE as well as our strategic offering of US technologies to perform
environmental services is extremely valuable to these markets and will give us a
competitive advantage, no assurances can be given that such will be the case.
Our Business Operations Could Be Stopped by Future Laws and
Regulations: Our operations are and will be, subject to and substantially
affected by the foreign laws of the Countries in the CEE, their respective
regulations, orders and permits which govern environmental protection, health
and safety, zoning and other matters. These laws, regulations, orders and
permits may impose restrictions on operations that could adversely affect our
results of operations and financial condition, such as limitations on the
expansion of disposal facilities, limitations on or restrictions upon the
treatment of waste or certain categories of waste or mandates regarding the
disposal of and/or utilization of solid or hazardous waste. In particular, we
are, and will be, subject to extensive and evolving environmental and land use
laws and regulations, which have become increasingly stringent. These laws and
regulations affect our businesses and will affect our businesses in a variety of
ways. In order to develop and operate a low temperature thermal desorption soil
cleaning equipment, a waste derived fuel facility landfill or other waste
management facility, it is necessary to obtain and maintain in effect various
facility permits and other governmental approvals, including those related to
zoning, environmental protection and land use. These permit approvals are
difficult, time consuming and costly to obtain and may be subject to community
opposition by government officials or citizens, regulatory delays, subsequent
modifications and other uncertainties. There can be no assurance that we will be
successful in obtaining and maintaining in effect permits and approvals required
for the successful operation and growth of our business, including permits and
approvals required for the development of additional soil cleaning and/or waste
derived fuel operations. The siting, design, operation and closure/shutdown of
soil cleaning sites, waste derived fuel facilities and their respective
equipment are also subject to extensive regulations. These regulations could
require us to undertake investigatory or remedial activities, to curtail
operations or to close soil cleaning facility or other treatment facility
temporarily or permanently. Furthermore, future changes in these regulations may
require us to modify, supplement or replace equipment or facilities at costs
which could be substantial. It is not possible to predict what impact, if any,
new regulation laws, court decision or local and national laws may have in the
future on our facilities. Currently, we have no insurance that would cover our
loss of profits or business that would result from the application of
governmental laws, rules and regulations to our business activities.
35
Our Business Could Be Subject to Future Environmental Liabilities:
Although we believe that we generally benefit from increased environmental
regulations adopted from time to time by the countries in the CEE and from
enforcement of those regulations, increased regulation and enforcement also
create significant risks for us. The assessment, analysis, remediation,
transportation, handling and management of hazardous substances necessarily
involve significant risks, including the possibility of damages or personal
injuries caused by the escape of hazardous materials into the environment, and
the possibility of fines, penalties or other regulatory action. These risks
include potentially large civil and criminal liabilities to customers and to
third parties for damages arising from performing services for customers.
Currently, we have insurance that provides up to $2,000,000 of liability and
property damage coverage, but we do not have insurance that would cover us
against environmental claims by regulatory agencies or third parties that could
fall outside of our existing insurance coverages. These potential liabilities
could arise from our activities that may be in compliance with government laws,
rules and regulations as currently in force but which are no longer so as a
result of the adoption of new governmental laws, rules and regulations. Such
claims could be brought against us solely or against us and our business
contractors, subcontractors or independent contractors who we have hired, on a
joint and several basis. All facets of our business are conducted in the context
of a rapidly developing and changing statutory and regulatory framework. In
certain business sectors, such as in Romania, environmental regulations and laws
are only beginning to be developed. In such instances, the market for our
businesses is not driven by environmental regulations and laws which are in
their nascent stage of development but by the need to reduce traditional fuel
costs in the power sector; accordingly, our existing relationship with cement
plants and their business plan to expand their waste derived fuel operations to
other power plants in these regions provides the economic foundation for our
businesses to operate in early regulation-stage countries. Although we are
confident that our relationships with both private and state-owned entities will
increasingly develop and provide expansion for our business activities, there
can be no assurances that such will be the case.
Our Customers and Other Parties Could Sue Us If We Do Not Perform
Services Promised or Our Business Operations Damage the Property or Land of
Others: In performing services for our customers, we potentially could be liable
for breach of contract, personal injury, property damage (including
environmental impairment), and negligence, including claims for lack of timely
performance or for failure to deliver the service promised (including improper
or negligent performance or design, failure to meet specifications, and breaches
of express or implied warranties). The damages available to a client, should it
prevail in its claims, are potentially large and could include consequential
damages. Industrial waste management companies, in connection with work
performed for customers, also potentially face liabilities to third parties from
various claims including claims for property damage or personal injury stemming
from a release of hazardous substances or otherwise. Claims for damage to third
parties could arise in a number of ways, including: through a sudden and
accidental release or discharge of contaminants or pollutants during
transportation of wastes or the performance of services; through the inability,
despite reasonable care, of a remedial plan to contain or correct an ongoing
seepage or release of pollutants; through the inadvertent exacerbation of an
existing contamination problem; or through reliance on reports prepared by such
waste management companies. Personal injury claims could arise contemporaneously
with performance of the work or long after completion of projects as a result of
alleged exposure to toxic or hazardous substances. Currently, we have insurance
coverage up to $2,000,000 for injuries we may cause to persons and property.
Operating In Other Countries Subjects Our Business and Our Business
Assets to A Foreign Government's Rules: Risks inherent in foreign operations
include loss of revenue, property and equipment from expropriation, governmental
royalties and fees and involuntary renegotiations of contracts with or licenses
from foreign governments. We are also exposed to the risk of changes in foreign
and domestic laws, regulations and policies that govern operations of
overseas-based companies. In the event we achieve and maintain profitable
operations in Hungary and in the other Central and Eastern European countries,
if we retain earnings it will be subject to substantial taxes on all profits
earned, and if we pay dividends, we will be subject to further substantial
taxes. Currently, the Company has no political risk insurance that would cover
or pay us the value of any of our assets located in Central and Eastern Europe
if part or all of these assets were to be expropriated or surcharged by a local
foreign government or agency.
36
Any Contracts That Pay Us In A Foreign Currency May Not Equal the
Equivalent in U.S. Dollar Value: We believe that any United States investors in
our stock seek a return on investment based upon the dollar value of our foreign
operating results. Although most of our current contracts are payable in United
States dollars, a few contracts as well as future contracts for our services and
technology are and may be payable in the local foreign currency, such as
Hungarian forints. Significant inflation in Hungary, the Czech Republic or
Romania, or significant future devaluation of the currencies of these nations
would decrease the dollar value of our investments. For example, the Hungarian
economy has been characterized by high rates of inflation and devaluation of the
Hungarian Forint against the U.S. Dollar and certain European currencies. In
1993, 1994, 1995, 1996 and 1997 the annual reported inflation rate in Hungary
(measured by the national consumer price index) was approximately 23%, 19%, 30%,
23% and 18%, respectively. The Hungarian Forint was devalued against the U.S.
Dollar in 1993, 1994, 1995, 1996 and 1997 by 14.2%, 15.9%, 26.7%, 18.0% and
23.6%, respectively. In March 1995, an immediate 9% devaluation of the Hungarian
Forint was announced together with a new policy of daily or "crawling peg"
devaluation. This involved daily devaluations amounting to approximately 1.9%
monthly in the second quarter of 1995, 1.3% monthly during the second half of
1995, 1.2% monthly during 1996, 1.1% through July 1997 and 1.0% beginning in
August 1997. The monthly rate is presently 0.9% and is expected to be further
decreased, subject to Hungary's economic condition. The exchange rate for the
Hungarian Forint, as set by the National Bank of Hungary, declined from 100.70
Forints per U.S. Dollar at December 31, 1993 to 211 Forints per U.S. Dollar at
May 15, 1998. On April 16, 1997, the government of the Czech Republic announced
a package of measures designed to finish vital microeconomic tasks, such as
completing the privatization of the energy distribution companies and
state-owned banks, restructuring firms to maintain competitiveness, and
strengthening the regulatory framework. Following pressure on the currency
resulting in a 15% depreciation, the government announced a further austerity
package on May 28th. The depreciation, along with increases in controlled rents
and utilities at midyear and the floods, is expected to push 1997 inflation
above 10%. This compares to earlier forecasts of up to 8.8% for 1997. Inflation
in 1996 reached 8.8%. We do not carry any insurance policy that would protect
our assets from material and adverse currency fluctuations or devaluations. As
well, we may provide technology and services in the future to companies or
governments that pay us in the "EURO" currency adopted by the ten members of the
European Common Market as their common currency. If and when we do receive
payment in EUROs, significant inflation in one or more of these European Common
Market countries or any future devaluations of the EURO would decrease the
dollar value of our investments as well.
If We Collect or are Paid in Foreign Currencies, We May Not Be Able to
Exchange These Currencies for U.S. Dollars at Favorable Exchange Rates: We are
subject to significant foreign exchange risk. There are currently no meaningful
ways to hedge currency risk in any Eastern European country or in the European
Common Market countries that utilize the EURO currency. Therefore, our ability
to limit our exposure to currency fluctuations is significantly restricted. The
Hungarian forint (HUF) became convertible for essentially all business
transactions within Hungary on January 1, 1996 and complies with IMF Article
37
VIII and OECD convertibility requirements. The HUF is generally not traded
outside the country. The HUF exchange rate is set by a basket which is composed
of the deutsche mark (70%) and the dollar (30%). The Hungarian Investment Act
guarantees foreigners the right to repatriate "in the currency of the
investment" any dividends, after-tax profits, royalties, fees, or other income
deriving from the operation or sale of the investment. The Act also grants
foreign employees of a foreign investment the right to transfer all of their
after-tax salaries. There are no onerous foreign exchange requirements, and
there are no known instances of delay in repatriations. Foreign investors are
allowed to keep cash contributions made in a convertible currency in a foreign
exchange account. Companies may use these funds to import duty-free goods
considered as part of the investment. Alternatively, it may import goods using
foreign exchange bought in HUF. Companies are allowed to maintain foreign
currency accounts at Hungarian banks where they keep their export receipts.
Companies must receive permission from the National Bank before taking out a
hard currency loan. In the fall of 1995, the Czech Parliament approved a Foreign
Exchange Act which resulted in expanded convertibility of the Czech crown. In
May of 1997, the CNB board canceled the fluctuation band for the Czech crown's
exchange rate (which had been set at +/-7.5 percent in February 1996). The board
also decided to abandon the previously used currency basket (65 percent German
Mark (DEM), 35 percent USD) and peg the crown to the DEM. As of July 1997, the
exchange rate was roughly 31 crowns to the U.S. dollar and 17 to 19.50 per 1
DEM. We do not have any insurance that would protect our assets against adverse
foreign exchange rates and fluctuations, which would include events effecting
the Common Market's EURO currenty which we may receive in payment for services
and technology in the future.
We Operate in an "Emerging Market" Subject to Higher Incidences of
Recession, Currency Devaluation and Political Upheaval: Our businesses are
located in the Central and Eastern European Countries of Hungary, Romania and
the Czech Republic. These Countries are generally considered to be less
developed or industrialized as countries located in Western Europe, the United
States and Canada as well as other developed countries. The markets of the
Central and Eastern European countries are referred to as "Emerging Markets".
Emerging Markets often face economic problems that are not common in developed
nations. Deficiencies in regulatory oversight, market infrastructure and
business laws could expose our Company and its businesses to risks beyond those
normally encountered in developed countries, such as access, currency,
information, liquidity, market, operation, political and valuation risks.
Our Stockholders May Not Be Able to Execute U.S. Court Judgments
Against Our Assets Located in Central and Eastern Europe: Central and Eastern
Europe is generally considered by international investors to be an emerging
market. There can be no assurance that political, social and other developments
in these emerging markets will not have an adverse effect on the market value
and potential future liquidity of our Common Stock. In general, investing in the
securities of issuers with substantial operations in markets such as Central and
Eastern Europe involves a higher degree of risk than investing in the securities
of issuers with substantial operations in the United States and other similar
jurisdictions. Our Company is organized under the laws of the State of Nevada.
Although holders of record of our Common Stock will be able to effect service of
process in the United States upon us and may be able to effect service of
process upon our directors, due to the fact that we are primarily a holding
company which holds equity shares in our Central and European based
subsidiaries, substantially all of the assets of our Company are located outside
the United States. As a result, it may not be possible for stockholders to
enforce against our assets judgments of United States courts predicated upon the
civil liability provisions of United States laws. In addition, awards of
punitive damages in actions brought in the United States or elsewhere may not be
enforceable in any country of Central and Eastern Europe.
38
We Are Suing a Hungarian Municipality for Contract Payments Due Us; In
1998, we entered into an agreement with a political subdivision of the
municipality of Budapest in the Country of Hungary known as District XVIII to
remediate approximately 24,000 cubic meters of contaminated soil. Our technology
partner, Green Globe, LLC, a Connecticut-based environmental company, brought
its soil-cleaning equipment to Budapest to perform the cleaning of the
contaminated soil pursuant to its agreements with us. Green Globe, LLC's
equipment, known as a low temperature thermal desorption unit or an "LTTD" unit,
performed the soil cleaning operation which was completed in December, 1998.
Notwithstanding the completion of this soil-cleaning contract, District XVIII
has refused to pay to us the approximate $1,000,000 U.S. in payments due under
our agreement. Following a series of negotiations with District XVIII, we were
forced to institute legal proceedings in a Hungarian court to collect this
contract amount due. Our case against District XVIII commenced in the first
quarter of 2000 and following the first trial date, held on April 20, 2000, the
Hungarian Court awarded us a judgment in the approximate amount of $65,700 U.S.
for late contract payments and we proceeded with our claim for the approximate
$1,000,000 of contract payments due. At the first trial date of June 22, 2000,
the Court set a new trial date of October 17, 2000 in order for the parties to
submit new pleadings and supporting documentation. At the October 17, 2000 trial
date, our attorneys and the attorneys for District XVIII met with the presiding
judge and disclosed the identity of proposed witnesses and summaries of their
proposed testimony. The presiding judge set a new trial date for January 25,
2001. Although we intend to vigorously prosecute our claims against District
XVIII for the contract payments due us there can be no assurances that we will
succeed to obtain a judgment for the full amount of approximately $1,000,000
U.S. plus interest and court costs, or that if we were to obtain such a judgment
that we would be able to successfully execute the judgment and collect this
amount. See, Item 8 "Legal Proceedings" below.
We Have Not Been Able to Pay Our Technology Partner, Green Globe LLC;.
In December, 1997, we entered into certain agreements with Green Globe, LLC, a
Connecticut based environmental company controlled by David Green. Pursuant to
the terms of this agreement, Green Globe, LLC ("Green Globe") agreed to provide
all of the equipment and services, including training, mobilization, conversion
to in-country technical standards and specifications with respect to all "low
temperature thermal desorption" soil remediation projects generated through our
Company's business network in Central and Eastern Europe (the "CEE"). In return
for this commitment, we agreed to share profits, after deduction of costs and
expenses, equally with Green Globe. In order to facilitate entry into Hungary of
the capital equipment comprising the low temperature thermal desorption unit
("LTTD"), our Hungarian subsidiary, CEVA Hungary, entered into an equipment
lease arrangement with Green Globe with the proviso that our original agreement
would control and govern our relationship. Under the lease agreement, CEVA
Hungary committed to make lease payments to Green Globe to amortize the cost of
the LTTD Unit and to cover certain mobilization costs. As discussed above, Green
Globe, LLC performed our first soil decontamination project utilizing its LTTD
unit for the political subdivision of the City of Budapest, Hungary, known as
District XVIII, completing the work in December, 1998. District XVIII has
39
refused to pay to us the approximate $1,000,000 U.S. due under our contract to
clean the approximate 32,000 tons of decontaminated soil. See, Risk Factor "Our
Inability to Collect Contract Payments in Hungary ", above. As a result of our
inability to collect these contract payments from District XVIII, our Hungarian
subsidiary, CEVA Hungary, has been unable to make all of the equipment lease
payments it agreed to make to Green Globe, LLC under the lease agreement.
Accordingly, Green Globe, LLC may declare us in default of the payments required
under the equipment lease agreement. Although we intend to comply with all of
our promises and agreements with Green Globe, LLC, including, but not limited
to, making all payments required under our agreements, there can be no
assurances that Green Globe, LLC will not institute legal proceedings against us
to collect these payments. In addition, because of these events, there can be no
assurances that Green Globe, LLC will not terminate its relationship with us and
our Hungarian subsidiary, CEVA Hungary, in which case we will be required to
contract with a different technology partner to provide equipment and services
for soil remediation projects in Central and Eastern Europe. There can be no
assurances that we will be able to contract with another technology partner for
these purposes. In the event Green Globe, LLC institutes legal proceedings
against us and/or our Hungarian subsidiary, CEVA Hungary to collect sums that
may be due under our agreements and Green Globe, LLC obtains an enforceable
judgment against us and our assets, such legal proceeding and/or subsequent
judgment will have a material adverse effect on our business, results of
operations, financial condition and prospects. See, Item 8 "Legal Proceedings"
below.
We Need Additional Financing; We will require additional financing
although we have no current arrangements to obtain any additional financing. No
assurance can be given that such additional financing will be available on terms
that are satisfactory to us, if they are available at all.
40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect
to (i) the consolidated statements of income for the fiscal years ended December
31, 1999 and 1998, and (ii) the consolidated balance sheets at December 31, 1999
and 1998 are derived from the consolidated financial statements for CEVA
International, Inc., a Delaware corporation which merged with and into the
Company as of May 10, 1999, which have been examined by Rosenberg Rich Baker
Berman & Company, independent certified public accountants, all of which
financial statements are included elsewhere herein, are qualified by reference
to such financial statements, and should be read in conjunction with such
financial statements and the notes thereto. All amounts are in $-thousands
except for any share data. The historical number of shares outstanding has been
adjusted to take into account a 3.692488:1 stock split for CEVA-Delaware's
common stock effected in May 1999
On May 10, 1999, the Company, then known as ORO Bueno Inc., after
divesting itself of all operations, all assets except for a cash depository in
the amount of approximately $500,000, and substantially all liabilities,
extended an offer to all holders of the common stock of CEVA Delaware to
exchange their shares into newly to be issued common stock of the Company, and
CEVA Delaware merged into the Company. The operations of the newly combined
entity are comprised solely of the operations of CEVA Delaware. Therefore, the
discussion ensuing below pertains to the operations of CEVA Delaware for the
prior fiscal periods until the date of the merger, and to the operations of the
Company thereafter.
Year Ended
December 31,
Consolidated Income Statement Data: 1999 1998
---------- -----------
Revenues .................................. $ 1,892 $ 1,950
Cost of goods sold..................... 1,478 1,644
----- -----
Gross profit............................... 414 306
Operating income (loss).................... (1,188) (773)
Net income (loss).......................... (1,361) (666)
Earnings (loss) per share.................. $ (0.15) $ (0.09)
Shares used in computing per share data 9,002,433 7,308,198
At December 31,
Consolidated Balance Sheet Data: 1999 1998
----------- -----------
Working Capital............................ $ (3,503) $ (1,104)
Total assets............................... 4,300 4,988
Total current liabilities.................. 4,733 2,419
Shareholders' equity (impairment).......... $ (1,887) $ (1,156)
41
General
CEVA International, Inc. specializes in the application of
waste-to-energy alternative fuel and environmental remediation technologies. Its
primary target market and current operations focus on Central and Eastern
Europe, specifically Hungary, Romania, and the Czech Republic. These countries
not only have rapidly growing energy needs but at the same time are burdened
with a legacy of significant problems in the areas of environmental pollution
coupled with a scarcity of technical and managerial know-how in trying to
address these problems, even though the region has started developing and
implementing a regulatory, socio-economic and judicial infrastructure on par
with Western standards that can, when fully implemented, effectively deal with
the legacy of decades of centrally controlled state owned economies. CEVA during
the last several years has succeeded in establishing a presence and creating a
wide ranging network of business contacts and working relationships which
facilitates the day-to-day management of the Company's operations and which
management expects will bear fruit in the years to come. Despite this progress,
however, and although basing its projects and operations on traditional and
proven technologies, timing and success of individual projects often depend on
factors beyond the control of the Company and the resulting uncertainties make
reliable projections difficult. Except where the processing of oil and tar
contaminated soil and water depositories results in the manufacture of alternate
fuels that produce tangible cost savings when utilized in industrial processes
such as cement plants, a general relative scarcity of public or private funding
for remedial projects addressing environmental contamination has until now
limited the revenue potential for the Company.
Economic Conditions
Our business in Central and Eastern Europe is sensitive to the local
financial condition of the economies in which we work, government environmental
regulation as well as the condition of worldwide financial markets. We have
extensively discussed these topics above. A downturn in economic conditions in
one or more of our Central and Eastern European markets, a governmental failure
to develop and enforce environmental regulations as well as unforeseen
governmental legislation could have a material adverse effect on our results of
operations, financial condition, business and prospects. Although we attempt to
stay informed of economic and market conditions, government environmental
initiatives, changing permit requirements, any continuing failure on our part to
identify potentially adverse developments and to respond to such trends would
have a material adverse effect on our results of operations, financial
condition, business and prospects. Political and economic imperatives, however,
are dictating a gradual improvement in this area, and management expects that
the Company will be a primary beneficiary in view of its rapidly growing
physical presence and investments in the region.
Results of Operations for the Year Ended December 31, 1999 compared to the Year
Ended December 31, 1998
Revenues amounted to $1,892,220 for the year (compared to $1,950,256 in
1998) and in both 1999 and 1998 were derived to the most part through the
Company's Hungarian subsidiary which contributed 89% and 93%, respectively, to
these totals. The Hungary revenues are attributable primarily to two customers,
MOL, RT., the Hungarian Oil and Gas Company ("MOL") and the City of Budapest
District XVIII who together accounted for 95% and 81% of Ceva Hungary's
revenues. The MOL activities center around alternative fuel projects at a
refinery at Nyirbogdany owned by MOL and at Csepel Island. The Company has
constructed a processing facility jointly with MOL at the Nyirbogdany site where
we converted material into a liquid AF fuel. Prior to that, we completed a
42
trial-processing project in 1997 with MOL that successfully produced an AF solid
fuel. We are now working jointly with MOL to obtain permits for cement kilns,
and other outlets so that we can supply them with our processed AF solid and
liquid fuel. We expect to be able to significantly increase our revenues in
Hungary, based on further cooperation with MOL. The City of Budapest District
XVIII ("District 18") contract involves a soil remediation project for which the
Company in the summer of 1998 shipped a Low Temperature Thermal Desorption
("LTTD") facility from the U.S. that was subsequently installed in Hungary.
During the year, the Company invested considerable time and effort in the
further development and exploratory negotiations in its Hungarian and Romanian
markets, and the procurement of necessary permits issued by the respective local
and state government entities.
Operations in Rumania, currently the other main target market, were still
in a start-up phase and are not expected to generate significant income before
later in the year 2000. They contributed approximately 10% to total revenues
during both years and were derived from our contract with S.C. CIMUS S.A., a
cement company located in Campulung, Romania. The contract, executed in August,
1998, calls for the processing and supply of supplemental fuels derived from
refinery wastes. It is an exclusive arrangement and runs for a 20-year period.
We also entered in 1997 into an exclusive 10-year contract with the VEGA S.A.
refinery to remove that refinery's waste materials for use as feedstock for our
alternative fuel processing facility. At the time, this refinery was state-owned
but has since been sold to a private company through Romania's privatization
program. Also, in December 1999, CIMUS was purchased by "Holderbank Cement", a
global cement company that owns two other cement facilities in Romania. We have
started discussions for expanded cooperation with the new owners.
The fiscal year's results, in comparison to the prior year, were
primarily determined by a combination of significantly higher operating expenses
that increased by 49% from $1,078,742 to $1,602,396 and the inclusion of an
extraordinary gain of $250,000 in 1998 from cancellation of an indebtedness.
With revenues during the year remaining relatively unchanged from levels of the
prior year, gross margins increased slightly, to 22% in 1999 from approximately
16% in 1998, for gross profits totaling $414,109 ($306,069 in 1998). A large
portion of period costs-of-goods-sold are incurred from level amortization
expenses in connection with capitalized equipment leases for plant and equipment
used in the treatment of contaminated soils and depositories. The effect of
unused processing capacities is therefore a significant factor influencing
operating margins. In addition, margins fluctuate from project to project
depending upon local factors, varying labor contents and individually negotiated
terms, and any given reporting period's overall results are affected by the mix
and timing of such projects. This volatility represents a major risk factor in
predicting the Company's future performance and will relatively diminish only
upon the Company achieving significantly higher revenues from a larger number of
projects which in their totality can contribute to a more level gross margin
profile. In 1998, more than half of Ceva Hungary's revenues were derived from
the Budapest District 18 project which yielded a lower margin than the
MOL-related projects which predominated in the 1999 revenue profile and resulted
in the above overall margin increase for 1999. In both reporting periods,
however, gross margins were depressed by significant underutilization of
processing capacities relative to the LTTD facility. In both years, the plant
operated only during approximately three months each. Whereas in 1998 initial
difficulties during set-up and commissioning of the equipment reduced operating
time, the plant was fully operative in 1999, with its use, however, curtailed by
he finalization of the District 18 contract and the absence of follow-up orders.
The Company currently has installed plant and equipment capitalized in excess of
$3 Million which is amortized over periods averaging 5 years and results in
relatively high fixed expenses. If not adequately utilized through lack of
orders, the fixed portion of costs in form of amortization expenses assumes more
weight.
43
As mentioned above, operating expenses increased sharply from 1998 to 1999.
The increases were primarily in professional services and consulting expenses
($355,619 in 1999 compared to $67,699 in 1998), and in provisions for bad debts
($376,500 in 1999 compared to $151,401 in 1998), the latter increase a
consequence of a payment dispute with the Budapest municipality (see below)
which caused management to set up, in 1999, a $314,000 allowance against related
past due receivables. In the area of professional services, actual outlays
during 1998 were - at $219,699 - more closely comparable to 1999 than reflected
in the operating statements, however, a portion of approximately $152,000
incurred in connection with the merger between Oro Bueno and CEVA was
capitalized as organization cost, which led to the lower expense total for 1998.
During 1999, on the other hand, the Company incurred additional costs for
professional services in connection with reporting, registration and filing
activities with U.S. regulatory authorities, pursuant to the Company's new
status as a public company: see, Certain Relationships and Related Translations"
below. Related auditing services also added to the costs. Significant increases
were also recorded in a portion of depreciation and amortization expenses
classified as operating expenses ($148,378 in 1999 compared to $80,007 in 1998)
due to higher expenses in 1999 for amortization of deferred charges (see "Profit
Sharing Arrangement /Deferred Charge" in Notes to the Consolidated Financial
Statements) and depreciation charges for added office equipment. Partially
offsetting, however, were larger decreases in wages and travel expenses, which
combined totaled $369,536 during 1999, compared to $570,717 in the prior year.
The decrease occurred as a consequence of lesser costs after completion of the
installation of the LTTD equipment and initial training of local personnel in
Budapest and during trial operations at CIMUS S.A. in Romania, all conducted
with the support of imported professional staff. These activities added to 1998
expenses but were largely finished by 1999. In view of relatively unchanged
gross profits the overall higher expenses in 1999 contributed to a larger net
loss of $1,360,638 or $0.15 per share for the year compared to a loss of
$665,522 or $0.09 per share in the preceding year.
Liquidity and Capital Resources
The Company's liquidity remains strained because the level of
operations and revenues is not yet adequate to finance ongoing operations and
the required infrastructure. The Company's auditors issued a report on the
Company's financial statements, dated May 19, 2000, which included their opinion
that because of the Company's significant losses and stockholders' impairment,
substantial doubt exists as to the Company's ability to continue as a going
concern. In addition, the projects pursued by the Company necessitate
significant investments in capital equipment that the Company largely financed
through capital lease agreements with MOL and Green Globe, LLC, our LTTD
partner. These leases result in fixed payment obligations which total in excess
of $4 Million for the years 2000 through 2003. Equipment lease payments due to
Green Globe were calculated at $153,045 per quarter, payable through the third
quarter in 2003, however, the entire outstanding liability of approximately
$2,593,000 has been classified as a current liability due to the failure by the
Company to pay the 1999 installments in time. This lease has been declared in
default, however, no demand for payment of the entire amount has been made. The
cash shortage, only marginally improved by a $200,000 loan during the year from
Herbert Case, the Company's founder and majority shareholder, which is repayable
either in cash or equity shares at his option, was aggravated by the Company's
inability to collect on a past due receivable position of approximately $1
Million in connection with the soil remediation project involving the District
18 municipality in Budapest (see "Legal Proceedings").
As a result of the above, at December 31, 1999, the Company faced a
working capital deficit of $3,503,154. The Company's payment obligations include
first and foremost the Green Globe leases with approximately $2,593,000 (present
value). At this stage and without firm orders that would generate cash flow from
the operation and full utilization of the LTTD equipment in Hungary, management
intends to start negotiations with Green Globe with the goal of obtaining a
44
formal deferment of lease payments until the Company's financial situation
improves from either increased order activities, the receipt of the overdue
payments from District 18, or the receipt by the Company of new capital from
planned but not yet specifically formalized private placements of debt and/or
equity. There can be no assurance, however, that such negotiations will take
place or if taking place will be successful in so far as leading to an agreement
commensurate with he Company's financial situation and acceptable to both
parties. Current lease payment obligations also include contracts with MOL from
whom the Company leased certain equipment utilized in the performance of
alternative fuel processing projects at MOL sites. Such obligations total
approximately $260,000 in current liabilities, that is, due for payment during
2000 (and approximately $604,000 in long-term liabilities due at various times
in 2001). Management expects to be able to meet these obligations, as well as
its other current and future liabilities, from increasing contract work in
Hungary through MOL-related projects, and from the acceleration of projects in
Rumania in connection with the CIMUS and VEGA contracts.
Operations in Romania are expected to directly benefit if current
discussions with the purchaser of the CIMUS cement plant, Holderbank, which
focus on establishing a joint venture for the processing of waste from refinery
sites into alternate fuel for supply to Holderbank's cement plants in Romania
and elsewhere lead to concrete agreements. Management expects this to take place
during 2000, and to include significant new funding for the joint venture, to be
supplied by Holderbank.
ITEM 3. DESCRIPTION OF PROPERTY.
Our corporate headquarters offices are located at 75-77 North Bridge Street,
Somerville, New Jersey 08876. We utilize our headquarters offices for purposes
of coordinating our financial reports generated from our U.S.-based auditors as
well as those generated from our Central and Eastern European business
operations, to coordinate communications between our United States based
technology partners and independent contractors and to serve other business
administrative tasks. Currently, we do not pay any rent to utilize these
facilities which have been provided free of charge through December 31, 2000 by
one of our directors, Joseph J. Tomasek.
Budapest, Hungary. We and our subsidiary, CEVA Hungary, maintain
offices at H 1097 Budapest, Illatos ut 7, Hungary. We lease this office space,
comprised of approximately 200 square meters, for approximately $700 per month
and have a one-year lease running through December 31, 2001. We estimate that
the size of these offices will adequately accommodate our personnel and
administrative functions for the next 24 months.
Prague, the Czech Republic. We and our affiliate, CEVATech, maintain
offices at V novych domcich 23/78, 102 00 Praha 10-Hostivar, Czech Republic. We
lease this office space, comprised of approximately 45 square meters, for
approximately $250 per month and have a 5-year lease running through January 1,
2005. We estimate that the size of these offices will adequately accommodate our
business activities in the Czech Republic for the next 24 months.
Campulung, Romania. We maintain a research and development laboratory,
approximately 16 square meters, and office facilities, approximately 6 square
meters, located on the grounds of S.C. CIMUS S.A. cement facility located in
Campulung, Romania. This space is provided to us pursuant to our 20-year
agreement with this cement facility to provide alternative fuel. See, "The
Company's Position in the Market, Romania", above. We estimate that both the
size of the research and development laboratory as well as the size of the
office facilities will accommodate our laboratory testing functions, personnel
and administrative functions for the next 24 months.
45
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our Common Stock, as of September 30, 2000 by (i) each stockholder
known by the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (ii) each director of the Company, (iii) each officer
of the Company and (iv) all directors and executive officers as a group.
Name Number of Shares (1) Percentage (2)
_____________ ________________ _Beneficially Owned_
Herbert G. Case, Jr.(3) 7,215,809 65.84%
President, Chief Executive
Officer and Director
1026 Pasareti Ut 21/c
Budapest, Hungary
Joseph J. Tomasek 290,862 2.65%
Vice President/General
Counsel and Director
74 Linden Avenue
Verona, New Jersey 07044
Robert Van Pelt 204,612 1.87%
Secretary and Director
851 Holicong Road
New Hope, Pennsylvania 18938
James Atkins 20,000 .18%
Chief Financial Officer
1051 Budapest
Nador u. 32
Hungary
Tamas Sonkoly 600,000 5.47%
Budapest 1132
Visegradi u. 25
Hungary
All Officers and Directors 7,731,283 70.55%
as a Group (4 persons)
46
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Our directors and officers are as follows:
Name
Herbert G. Case, Jr. 56 President, Chief Executive Officer, Director
Robert Van Pelt 51 Secretary, Director
Joseph J. Tomasek 52 Vice President, Director
James Atkins 32 Chief Financial Officer
- -------------------------------------------------------------------------------
(1) Except as otherwise indicated, we believe that the beneficial
owners of Common Stock listed above, based on information
furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community
property laws where applicable. Beneficial ownership is
determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common
Stock subject to options or warrants currently exercisable, or
exercisable within 60 days, are deemed outstanding for
purposes of computing the percentage of the person or group
holding such options or warrants, but are not deemed
outstanding for purposes of computing the percentage of any
other person or group.
(2) Percentages based upon a total 10,909,415 shares of common stock
issued and outstanding as of May 31, 2000.
(3) Mr. Herbert Case also owns 17 shares of the Company's redeemable
preferred stock, representing 100% of this class of
Company securities issued and outstanding. see, Item 11,
"Description of Securities", below.
Herbert G. Case, Jr., President, Chief Executive Officer and Director. Mr. Case
founded the Company in 1991. Prior to his founding the Company, Mr. Case was the
founder of several United States based environmental services and alternative
fuel processing companies over a 20 year span: Intersol Industries, Inc. was
established in 1979; Patchem, Inc. was established in 1979, and; Kiln Chemistry
and Resources, Inc. was established in 1983. In 1986, all of these companies
were restructured as wholly owned subsidiaries of the parent corporation,
Cemtech, Inc.. In 1992, Mr. Case, who owned 60% of the equity, sold Cemtech,
Inc. and subsidiaries to a consortium that included Waste Management USA and the
Swiss cement conglomerate, "Holderbank Cement". Since 1992, Mr. Case has served
as a full-time employee, without salary,of the Company in the capacity of
President and Chief Executive Officer.
Robert Van Pelt, Secretary and Director. Mr. Van Pelt has been an officer and
director of the Company since 1997. Mr. Van Pelt is the owner and founder of
Bedminster Financial Group, Ltd. of New Hope, Pennsylvania, an investment
banking and brokerage firm that Mr. Van Pelt assumed ownership of in 1998.
Bedminster Financial Group, Ltd. is a member of the National Association of
Securities Dealers, Inc. Prior to his assumption of ownership of Bedminster
Financial Group, Ltd. in 1998, Mr. Van Pelt was previously employed as a
principal officer of that firm since October, 1995. Mr. Van Pelt holds a
degree in Business Administration from Boston College which he was awarded in
1969.
47
Joseph J. Tomasek, Vice President and Director. Mr. Tomasek has been an officer
and director of the Company and has served as general counsel since 1997. Mr.
Tomasek is engaged in the private practice of corporate finance and securities
law and has managed his own firm, the Law Offices of Joseph J. Tomasek, Esq.,
since 1992, representing corporate clients in the areas of corporate and
securities law. Mr. Tomasek holds a Bachelor of Arts Degree and Juris Doctor
Degree from Seton Hall University as well as a graduate degree in European
Studies from the European Studies Institute in Strasbourg, France.
James Atkins, Chief Financial Officer. Mr. Atkins is a UK Chartered Accountant
with extensive experience in environmental sector businesses in the EU and
Central Europe. Mr. Atkins and the Company executed an employment agreement,
dated June 1, 2000, pursuant to which Mr. Atkins was appointed to serve as the
Company's Chief Financial Officer through an initial term of six months. He
trained with Arthur Andersen during the period, 1990 to 1993 in the UK and
worked for two years with Waste Management International PLC in the UK and
Germany during the period, 1993 to 1995. In 1995 he moved to Hungary where he
worked as a manager with Deloitte & Touche's Financial Advisory Services Group
in Budapest. In 1998 he established Rochester Financial Advisory, which provides
corporate finance advisory services to environmental companies in Hungary and
Central Europe.
ITEM 6. EXECUTIVE COMPENSATION.
The President and Chief Executive Officer of the Company, Herbert G. Case, Jr.,
has served in these positions without an employment agreement nor salary through
December 31, 1999. It is anticipated that once the Company receives adequate
funding, the Company will pay Mr. Case an annual salary of $120,000. James
Atkins was hired to serve as the Company's Chief Financial Officer pursuant to
an employment agreement, dated June 1, 2000. The Company pays Mr. Atkins a
monthly salary of $7,800 and issued to him a stock grant of 25,000 shares of the
Company's common stock. The term of Mr. Atkins employment agreement is six
months, expiring November 30, 2000 unless extended by mutual agreement of the
Company and Mr. Atkins.
Mr. Dennis Konnick was appointed as the Company's Operations Director by virtue
of an employment agreement dated May 19, 2000. The Company pays Mr. Konnick an
annual salary of $100,000 and received a stock grant for 25,000 shares of the
Company's common stock that vest over the three year term of the Agreement. The
Company is providing Mr. Konnick with a furnished apartment and covers certain
travel expenses. On September 1, 2000, the Company executed an Employment
Agreement, appointing Stephen Soley Managing Director of the Company's Hungarian
subsidiary, CEVA Hungary Kft. for a term of one year. Pursuant to the terms of
this agreement, Mr, Soley shall manage the operations in Hungary and receive
annual compensation equal to approximately $67,500 US, and earn stock grants of
50,000 Company common shares on the second, third and fourth anniversary dates
of the agreement, provided Mr. Soley is employed under the agreement on those
dates. None of the other officers or directors of the Company have an employment
agreements with the Company. As well, no officer or director has received any
salary during the prior two fiscal years and through June 30, 2000 except,
however, the Company has paid expenses for Mr. Herbert G. Case, Jr. in the
amounts of $189,091 through June 30, 2000, $73,424 during the fiscal year ended
December 31, 1999 and $11,900 during the fiscal year ended December 31, 1998.
48
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Mr. Herbert G. Case, Jr., the President and Chief Executive Officer of the
Company, has made loans to the Company from time to time since its inception in
1991. In May, 1999, in connection with the Company's merger into Oro Bueno,
Inc., Mr. Case converted $850,000 of his stockholder loan into preferred shares.
These preferred shares are redeemable in the Company's sole discretion for
common shares. During 1999, Mr. Herbert Case made cash advances to the Company
of $200,000, repayable in cash or common shares of the Company, at his option.
The Company has paid expenses for Mr. Herbert G. Case, Jr. in the amounts of
$73,424 and $11,900 during the fiscal years ended December 31, 1999 and 1998,
respectively. Through June 30, 2000, the Company has paid $189,091.47 of Mr.
Case's expenses.
Joseph J. Tomasek, an officer and director, who serves as general counsel for
the Company, was paid $88,707.64 and $30,250.83 in legal fees and expenses
during calendar years1999 and 1998, respectively, and $34,844.40 through
September 30, 2000 by the Company. Mr. Tomasek has provided the Company with the
use of his law offices in Somerville, New Jersey to serve as the Company's
United States business and principal offices, utilizing his law offices for
purposes of communications, administration and coordination of the business and
financial activities of the Company. Mr. Tomasek has not charged nor has the
Company paid Mr. Tomasek any charges for rent during the prior two fiscal years
nor during the current fiscal year.
ITEM 8. LEGAL PROCEEDINGS.
The Company is not involved in any legal proceedings except as follows: on
January 5, 2000, we recommenced litigation against a political subdivision of
the City of Budapest known as District XVIII in the Hungarian court known as the
Economic College of the Metropolitan Court, Budapest, 2nd District Varsanyui
u.40-44, to obtain approximately $1,000,000 U.S. for contract payments due us.
In 1998, together with our soil remediation technology partner, Green Globe,
LLC, we entered into a contract with District XVIII to remove contamination from
approximately 32,000 tons of soil. Utilizing its low temperature thermal
desorption unit or "LTTD" unit, Green Globe, LLC completed this soil remediation
project in December, 1998. Since that time, we have attempted to obtain the
payment due to us under our District XVIII contract through negotiations which
were unsuccessful. Accordingly, we commenced a lawsuit to collect the monies due
us in January, 2000 in the above identified Hungarian Court. At the first trial
date on April 20, 2000, the Hungarian Court awarded us a judgment in the
approximate amount of $65,700 U.S. for late contract payments against District
XVIII and recognized our principal claim of approximately $1,000,000 for the
contract payments due us. At the most recent trial date of October 17, 2000, the
attorneys for the Company and District XVIII submitted identities of proposed
witnesses and summaries of their proposed testimony to the presiding judge. We
intend to vigorously prosecute our claim against District XVIII in the Hungarian
courts. See, Risk Factor, "We Are Suing a Hungarian Municipality for Contract
Payments Due Us" above.
In 1995 and 1996, the Company had performed certain environmental services for a
U.S. based company in the United States. A claim was filed against the Company
by Remtech Environmental, L.P., among others, in the Superior Court, Camden
County, State of New Jersey, seeking to collect a claim in the aggregate amount
of $98,679. The Company disputed all of the plaintiff's claims, and vigorously
defended the action. In January, 2000, the Company, not wanting to risk the
uncertainties of a trial, settled the claim for $25,000, payable $5,000 per
month, which settlement amount was paid in full by the Company.
50
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Although we have a trading symbol, "OROB", there is no public trading market for
our Common Shares.
Currently we have two (2) warrants outstanding to purchase 25,000 shares of our
Common Stock, at a warrant exercise price of $1.00 per share, exercisable during
a three year period. As well, we have two Convertible Promissory Notes
outstanding whose holders may convert an aggregate $25,000 of principal debt
into a maximum of 50,000 shares of our Common Stock. These notes do not provide
for the payment of any interest and are automatically convertible into the
Common Shares as aforesaid on their respective six month anniversary dates. We
have agreed to register the Common Shares underlying the above identified
warrants by filing a registration statement under the Securities Act of 1933, as
amended, on or before March 1, 2000.
There are currently 56 holders of our Common Stock. Some of these shareholders
may have beneficially owned their shares for a period in excess of one year and,
accordingly, may under certain circumstances sell their Company Common Shares
pursuant to Rule 144 of the Securities Act.
We have never paid dividends on our outstanding securities and do not expect to
do.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
In March, 1999, our Company sold an aggregate of 50,020 common shares to two
accredited investors and received gross subscription proceeds of $200,000. The
Company relied upon the private placement exemption from the registration
requirements of the Securities Act provided by Section 4(2) of this Act. Both
investors signed subscription agreements containing representations that
included confirmations that they were accredited investors, had knowledge and
experience enabling them to evaluate the risks and merits of their investment
and were acquiring restricted securities for their own respective accounts. The
price of the common shares was determined by negotiation between the parties.
On April 6, 1999, ORO Bueno, Inc., the predecessor to our Company, completed the
placement of 550,000 shares of its Common Stock to eight (8) accredited
investors in New York pursuant to a private placement offering conducted in
accordance with Rule 504 of Regulation D for the subscription price of $1.00 per
share and received $550,000 in gross proceeds from this offering. The
subscription price of $1.00 per share was arbitrarily determined and not based
upon any objective criteria of value such as book value or an established market
price.
In connection with the merger of CEVA International, Inc., a Delaware
corporation, with and into ORO Bueno, Inc., a Nevada corporation, which occurred
on May 10, 1999, CEVA International, Inc.shareholders exchanged their Common
Shares in said corporation for Common Shares of ORO Bueno, Inc. in a transaction
based upon the private offering exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.
50
Pursuant to two private placement investments by two accredited investors, in
November, 1999, we delivered two (2) convertible promissory notes in the
aggregate principal amount of $25,000, automatically convertible into Common
Shares of our Company at the conversion rate of $.50 per share on the six month
anniversary dates of these notes; in addition, each of the accredited investors
received a warrant to purchase an aggregate 25,000 shares of our Common Stock at
the exercise price of $1.00 per share, exercisable at any time over a three year
period commencing upon the warrant issue date. These Convertible Promissory
Notes and Common Stock Purchase Warrants, the subscription prices for which were
negotiated between the parties, were placed with the accredited investors
pursuant to the private placement exemption afforded to the Company by Section
4(2) of the Securities Act of 1933, as amended.
During the first quarter, 2000, we issued 100,000 of our common shares and
600,000 of our common shares to Dr. Andras Toth and Mr. Tamas Sonkoly,
respectively, in exchange for their 5% and 30% equity ownership interests in our
subsidiary, CEVA Hungary Ltd. We placed these common shares with these
individuals pursuant to negotiated transactions and claim the private placement
exemption afforded by Section 4(2) of the Securities Act.
Subsequently, we authorized the issuance of 300,000 shares of our common stock
to Mr. Janos Soos in exchange for his 15% equity ownership interest in our
subsidiary, CEVA Hungary, Ltd. The Company placed these securities pursuant to
the private placement exemption of Section 4(2) of the Securities Act.
ITEM 11. DESCRIPTON OF SECURITIES.
CEVA International, Inc. (the "Company") is currently authorized by its Articles
of Incorporation to issue an aggregate 125,000,000 shares of capital stock
consisting of 100,000,000 shares of Common Stock $.001 Par Value ("Common
Stock") and 25,000,000 shares of preferred stock. One hundred shares of the
preferred stock have been designated Series A Redeemable Non-dividend Preferred
Stock of which 17 shares are issued and outstanding.
Common Stock
The holders of shares of our Common Stock are entitled to one vote per
share held on all matters submitted to a vote of shareholders of the Company. In
addition, such holders are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of the dissolution or liquidation of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of all liabilities of the Company as well as all
required prior payments with respect to any outstanding shares of Common Stock.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional unissued or treasury shares.
51
Redeemable Non-Preferred Stock ("Preferred Stock")
Herbert G. Case, Jr. has converted his outstanding loans to CEVA
International, Inc. in the approximate amount of $850,000 into 17 shares of
Preferred Stock. The Preferred Stock has the following rights, privileges and
designations:
(1) each share of Redeemable Non-Dividend Preferred Stock
shall have a Liquidation Value, or Stated Value of $50,000;
(2) the Redeemable Non-Dividend Preferred Stock shall have
liquidation rights superior to the Common Stock of the Company and shall be
superior to all other series or issuances of the stock of the Company;
(3) the Company shall be obligated to redeem all or part of
the Redeemable Non-Dividend Preferred Stock outstanding in the event the Company
has earned after-tax profits during any previous fiscal year in an amount equal
to or greater than One Million ($1,000,000.00) Dollars, determined in accordance
with generally accepted accounting principles, consistently applied (the "After
Tax Profit"), calculated as follows: the Company shall redeem for cash that
number of shares of Redeemable Non-Dividend Preferred Stock whose aggregate
Stated Value is equal to twenty-five (25%) percent of the After Tax Profit; for
example, in the event the Company earns $1,200,000 in After Tax Profit during a
prior fiscal year, the Company will be obligated to redeem 6 shares of the
Redeemable Non-Dividend Preferred Stock outstanding ($1,200,000 X 25% =
$300,000, divided by $50,000, the Stated Value, = 6 shares of Redeemable
Non-Dividend Preferred Stock);
(4) the Redeemable Non-Dividend Preferred Stock shall not be
entitled to receive any preference or fixed rate of dividend and shall only be
entitled to participate in any cash or stock dividend after the holders of the
shares of Common Stock of the Company have received such dividend;
(5) the Redeemable Non-Dividend Preferred Stock shall be
entitled to be paid out of the assets of the Company upon liquidation prior to
any distribution or payment to the holders of the shares of the Common Stock of
the Company;
(6) the holders of the Redeemable Non-Dividend Preferred Stock
shall have no right to vote at or participate in any meeting of the stockholders
of the Company and shall have voting rights only in certain enumerated and
extraordinary events.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada Revised Statutes and the Company's Articles of Incorporation and
Bylaws authorize indemnification of a director, officer, employee or agent of
the Company against expenses incurred by him or her in connection with any
action, suit, or proceeding to which such person is named a party by reason of
having acted or served in such capacity, except for liabilities arising from
such person's own misconduct or negligence in performance of duty. In addition,
even a director, officer, employee or agent of the Company who was found liable
for misconduct or negligence in the performance of duty may obtain such
indemnification if, in view of all the circumstances in the case, a court of
competent jurisdiction determines such person is fairly and reasonably entitled
to indemnification. Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers, or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
52
ITEM 13. FINANCIAL STATEMENTS.
The following financial statements are included herein:
Audited Financial Statements of CEVA International, Inc. and Subsidiary for
the Fiscal Years Ended December 31, 1999 and December 31, 1998.
Audited Financial Statements of CEVA International, Inc. and Subsidiary for
the Fiscal Years Ended December 31, 1998 (Restated) and December 31, 1997.
53
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 15. EXHIBITS.
(a) (i)Audited Financial Statements of CEVA International, Inc. and Subsidiary
for the Fiscal Years Ended December 31, 1999 and December 31, 1998.
(ii)Audited Financial Statements of CEVA International, Inc. and
Subsidiary for the Fiscal Years Ended December 31, 1998 (Restated) and
December 31, 1997.
(b) Other Exhibits
Exhibit No. Document Description
*2.1 Agreement and Plan of Merger, dated March 29, 1999 *2.2
Articles of Merger, dated April 23, 1999 *2.3 Certificate of
Merger, dated April 26, 1999
*3.1 Articles of Incorporation of Oro Bueno, Inc.,dated January 30,
1994
*3.2 Certificate of Amendment of Articles of Incorporation of Oro
Bueno, Inc.,
dated July 10, 1997
*3.3 Amended and Restated Articles of Incorporation of Oro Bueno,
Inc., dated April 24, 1999.
*3.4 Bylaws of CEVA International, Inc., a Nevada corporation
*10.1 Loan and Master LTTD Services Agreement with Green Globe LLC,
dated December 6, 1997
*10.2 Lease Agreement between Green Globe LLC and CEVA Hungary,
dated June 5, 1998
*10.3 "The Unified Deed of Association of CEVA Hungary Ltd." dated
November 23, 1998
**10.4 Service Agreement, dated September 1, 1997, by and
between Hungarian Oil and Gas ("MOL") and the Company
**10.5 Waste Fuel Agreement, dated August 1, 1998, by and between
S.C.Cimus S.A. and CEVA International, Inc.
**10.6 Joint Venture Agreement, dated May 19/24,2000, by and
between Breitenburger Auslandbeteiligungs GmbH ("Holderbank
Cement") and CEVA International, Inc.
**10.7 Amendment of Entrepreneurial Contract, dated July 25, 2000, by
and between Hungarian Oil and Gas ("MOL") and CEVA
International, Inc.
**10.8 Waste Materials Processing Agreement, dated August 1, 2000,
by and between Rompetrol Rafinare Vega S.A. ("VEGA") and
CEVA International, Inc.
**10.9 Employment Agreement, dated September 1, 2000 by and between
the Company and Stephen Soley
*23.1 Consent of Independent Auditors
27 Financial Data Schedules
- --------------
*Previously filed
**Filed by the Company as exhibits with Amendment No. 4 to subject Registration
Statement on Form 10-SB with the Commission on January 2, 2001 and certain
portions of these exhibits are subject to applications for confidential
treatment.
54
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, as
amended, the Registrant caused this Amendment No. 5 to its registration
statement on Form 10-SB to be signed on its behalf by the undersigned, thereunto
duly authorized.
CEVA International, Inc.
Date: January 29, 2001 By:/s/ Herbert G. Case, Jr.
Herbert G. Case, Jr.
Its: President and Chief Executive Officer
Acting Chief Financial Officer
Signature Title Date
/s/Herbert G. Case, Jr. President,
Herbert G. Case, Jr. Chief Executive Officer January 29, 2001
Acting Chief Financial Officer
Director
/s/Joseph J. Tomasek Vice President and
Joseph J. Tomasek Director January 29, 2001
Treasurer and January 29, 2001
Robert Van Pelt Director
55
Ceva International, Inc. and Subsidiary
Consolidated Financial Statements
December 31, 1999 and 1998
56
Ceva International, Inc. and Subsidiary
Index to the Consolidated Financial Statements
December 31, 1999 and 1998
Page
Independent Auditors' Report..................................................................... 1
Consolidated Financial Statements
Consolidated Balance Sheet.................................................................. 2
Consolidated Statements of Operations....................................................... 3
Consolidated Statements of Comprehensive Loss............................................... 4
Consolidated Statement of Stockholders' Equity (Impairment) 5
Consolidated Statements of Cash Flows....................................................... 6
Notes to the Consolidated Financial Statements.............................................. 7-13
Independent Auditors' Report on Additional Information........................................... 14
Consolidating Balance Sheet - December 31, 1999 ............................................ 15
Consolidating Statement of Operations and Deficit - Year Ended December
31, 1999......................................................................................... 16
Consolidating Statement of Operations and Deficit - Year Ended December
31, 1998.......................................................................................... 17
57
58
Independent Auditors' Report
To the Board of Directors and Stockholders of
Ceva International, Inc.
We have audited the accompanying consolidated balance sheet of Ceva
International, Inc. and Subsidiary as of December 31, 1999 (Restated) and the
related consolidated statements of operations, comprehensive loss, stockholders'
equity (impairment), and cash flows for the years ended December 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ceva
International, Inc. and Subsidiary as of December 31, 1999 and the results of
their operations and cash flows for the years ended December 31, 1999 and 1998
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in the Notes to
the Consolidated Financial Statements, the Company has incurred significant
operating losses and has a stockholders' impairment. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters are described in the Notes to the Consolidated
Financial Statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
May 19, 2000, except for "RESTATEMENT - 1999", "SETTLEMENT INCOME", "PREFERRED
STOCK" and "CAPITAL LEASES" notes to the consolidated financial statements which
are dated December 12, 2000
58
Ceva International, Inc. and Subsidiary
Consolidated Balance Sheet
December 31, 1999
(Restated)
Assets
Current Assets
Cash $ 85,565
Accounts receivable (net of allowance for doubtful accounts of $314,000) 1,138,896
Prepaid expenses 5,317
--------------
Total Current Assets 1,229,778
Equipment (net of accumulated depreciation of $1,007,607) 2,882,112
Intangible assets (net of accumulated amortization of $6,310) 979
Deferred charges (net of accumulated amortization of $62,500) 187,500
--------------
Total Assets 4,300,369
==============
Liabilities and Stockholders' Impairment
Current Liabilities
Accounts payable and accrued expenses 1,350,569
Notes payable 225,000
Loans payable to stockholder 200,000
Current maturities of capital leases 2,854,725
Deferred credit 102,638
--------------
Total Current Liabilities 4,732,932
Capital leases, net of current maturities 604,446
Redeemable preferred stock - Series A 850,000
--------------
Total Liabilities 6,187,378
--------------
Minority interest in subsidiary -
--------------
Stockholders' Equity
Common stock, voting, $.001 par value; 100,000,000 common shares
authorized; 9,823,165 common shares issued and outstanding 9,823
Additional paid-in capital 2,113,205
(Deficit) (4,071,991)
Accumulated other comprehensive income - foreign currency
translation adjustment 61,954
--------------
Total Stockholders' Equity (Impairment) (1,887,009)
--------------
$ 4,300,369
Total Liabilities and Stockholders' Equity
==============
See notes to the consolidated financial statements.
2
59
Ceva International, Inc. and Subsidiary
Consolidated Statements of Operations
Year Ended December 31,
-----------------------------------
1999 1998
--------------- ---------------
Restated Restated
--------------- ---------------
Revenue $ 1,831,975 $ 1,950,256
Direct Costs 1,478,111 1,644,187
--------------- ---------------
Gross Profit 353,864 306,069
--------------- ---------------
Operating Expenses
Bad debts 376,500 151,401
Professional services 254,711 30,300
Wages 217,675 391,345
Travel 151,861 179,372
Depreciation and amortization 148,378 80,007
International expenses 100,908 37,399
Officer's compensation 73,424 11,900
Other expenditures 64,937 32,829
Employee benefits 58,169 24,267
Auto expenses 40,819 37,824
Rent 30,534 7,580
Directors' fees 30,000 -
Office expenses 23,310 16,530
Telephone 16,067 39,926
Entertainment 6,996 7,537
Other taxes 4,691 7,282
Insurance 3,416 4,009
Advertising - 395
Miscellaneous - 18,839
--------------- ---------------
Total operating expenses 1,602,396 1,078,742
--------------- ---------------
(Loss) from operations (1,248,532) (772,673)
--------------- ---------------
Other income (expense)
Interest expense, net of other income (163,338) (161,457)
Settlement income 60,245 -
Minority interest in loss of consolidated subsidiary - 29,277
--------------- ---------------
Total other income (expense) (103,093) (132,180)
--------------- ---------------
(Loss) before provision for income taxes (1,351,625) (904,853)
Provision for income taxes 9,013 10,669
--------------- ---------------
(Loss) before extraordinary item (1,360,638) (915,522)
Extraordinary item, cancellation of indebtedness, net of income tax
effect of $0 - 250,000
--------------- ---------------
Net (Loss) $ (1,360,638) $ (665,522)
=============== ===============
(Loss) per common share before extraordinary item $ (0.15) $ (0.13)
=============== ===============
(Loss) per common share $ (0.15) $ (0.09)
=============== ===============
Weighted average of common shares outstanding 9,002,433 7,308,198
=============== ===============
See notes to the consolidated financial statements.
60
Ceva International, Inc. and Subsidiary
Consolidated Statements of Comprehensive Loss
Year Ended December 31,
---------------------------------------
1999 1998
---------------- ----------------
(Restated)
----------------
Net (loss) $ (1,360,638) $ (665,522)
---------------- ----------------
Other comprehensive income
Foreign currency translation adjustment (net of $0 tax effect) 7,460 54,494
---------------- ----------------
Other comprehensive income 7,460 54,494
---------------- ----------------
Comprehensive (loss) $ (1,353,178) (611,028)
================ ================
See notes to the consolidated financial statements.
61
Ceva International, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity (Impairment)
Period From January 1, 1998 to December 31, 1999
(Restated)
Accumulated
other
comprehensive
income-
Foreign
Additional Retained currency
Paid in Earnings translation
Common Stock Capital (Deficit) adjustment Total
------------------------ ------------ ----------- -------------- -----
Post Split)
Number
of Shares Amount
------------ -------- ------------- ----------- ---------------------
Balance at January 1, 1998 7,308,198 $ 7,308 $ 1,492,692 $ (2,045,831) $ - $ (545,831)
Net (Loss), Year Ended December 31, 1998 - - - (665,522) - (665,522)
Foreign Currency Translation Adjustment - - - - 54,494 54,494
------------ -------- ------------- ----------- -------- -----------
Balances, December 31, 1998 7,308,198 7,308 1,492,692 (2,711,353) 54,494 (1,156,859)
Issuances of Common Share 374,967 375 343,307 - - 343,682
Issuance of Common Shares Pursuant to a Private
Placement 550,000 550 549,450 - - 550,000
Costs associated with the Private Placement - - (80,000) - - (80,000)
Acquisition of Oro Bueno, Inc. 1,590,000 1,590 (1,590) - - -
Costs associated with acquisition of Oro Bueno, Inc. - - (190,654) - - (190,654)
Net (Loss), Year Ended December 31, 1999 - - - (1,360,638) - (1,360,638)
Foreign Currency Translation Adjustment - - - - 7,460 7,460
------------ -------- ------------- ----------- -------- -----------
9,823,165 $ 9,823 $ 2,113,205 $ (4,071,991) $ 61,954 $ (1,887,009)
Balances, December 31, 1999 (Restated)
============ ======== ============= =========== ======== ===========
See notes to the consolidated financial statements.
62
Ceva International, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Year Ended December 31
---------------------------------
1999 1998
--------------- ---------------
Cash Flows From Operating Activities (Restated)
---------------
Net (loss) $ (1,360,638) $ (665,522)
Adjustments to reconcile net (loss) to net cash provided (used) by operating
activities
Depreciation and amortization 581,185 285,993
Minority interest in loss of consolidated subsidiaries - (29,277)
Decreases (increases) in assets
Accounts receivable (175,551) (664,378)
Escrow funds receivable - 198,000
Inventory 79,407 (79,407)
Prepaid expenses 3,729 (7,548)
Due from related party 5,499 96,319
Increases (decreases) in liabilities
Accounts payable and accrued expenses (86,568) 1,014,147
Deferred credit 18,538 84,100
--------------- ---------------
Net cash provided (used) by operating activities (934,399) 232,427
--------------- ---------------
Cash flows from investing activities
Cash paid for machinery and equipment (25,771) (100,000)
--------------- ---------------
Net cash (used) by investing activities (25,771) (100,000)
--------------- ---------------
Cash flows from financing activities
Proceeds from private placement 550,000 -
Proceeds from majority stockholder's loan 200,000 -
Proceeds from borrowings 25,000 408,745
Repayment of capital lease obligations - (359,833)
(Cash payments for) application of acquisition costs 190,654 (190,654)
--------------- ---------------
Net cash provided (used) by financing activities 965,654 (141,742)
--------------- ---------------
Effect of exchange rate changes on cash 7,460 54,494
--------------- ---------------
Net increase in cash 12,944 45,179
Cash at January 1 72,621 27,442
--------------- ---------------
Cash at December 31 $ 85,565 $ 72,621
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 200 $ 200
Cash paid for interest $ 187,948 $ 164,388
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES Capitalized lease obligations incurred for purchase of
equipment in 1998:
Equipment under capital lease $ 3,044,561
Deferred charge incurred 250,000
---------------
3,294,561
Obligations under capital lease incurred 3,294,561
---------------
$ -
===============
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1999, 17 shares of redeemable preferred stock were issued in exchange for
$850,000 of a shareholder's loans. See notes to the consolidated financial
statements.
63
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Nature of Organization
On May 10, 1999, Ceva International, Inc. (the "Company" or "Ceva") merged
with Oro Bueno, Inc. ("Oro"), a Nevada corporation , whereby each issued
and outstanding share of the Company's common stock was exchanged for one
similar share of Oro totaling 7,683,165 shares. Prior to the merger, each
company effected a forward stock split of their respective common shares
(Oro: 1.9790223 to 1 and Ceva 3.692488 to 1). Oro changed its name upon
completion of the merger to Ceva International, Inc. The shareholders of
Ceva retained an approximate 79% controlling interest in the new Company.
The transaction is considered a recapitalization of Ceva for accounting
purposes and all financial information regarding operations will be that of
Ceva. In anticipation of the merger, Oro engaged in a private placement in
early 1999, pursuant to the exemption from the registration requirements of
the Securities Act of 1933, as amended (the "1933 Act") provided by Rule
504 of Regulation D promulgated under the 1933 Act, raising gross proceeds
of $550,000. Fees incurred and associated with the merger regarding legal,
underwriting, promotion, accounting and auditing as well as other various
expenses have been offset against Additional Paid-in Capital.
Ceva International, Inc., a New Jersey corporation, was organized in 1991
to develop an Eastern European market presence in the waste technology
management business. In that connection, the Company organized Ceva
Hungary, a Hungarian corporation, which is 50% owned by Ceva International,
Inc. with the remaining 50% thereof owned by Hungarian stockholders active
in its business development and accounted for as a minority interest. The
Company's intentions are to create alternative fuel sources from industrial
waste for use in the cement and other industries. (see "SUBSEQUENT EVENTS")
Going Concern Uncertainty
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern.
The Company has incurred significant operating losses which have resulted
in a stockholders' impairment. This raises substantial doubt of the
Company's ability to continue as a going concern. Management's plans are to
negotiate a joint venture with a major global industrial company, which
will provide working capital and contracts for the company's development.
Additionally, management is looking to hire a Chief Financial Officer to
strengthen the management team and enhance its financial control systems.
Finally, the Company has recapitalized the majority stockholder's loan to
stockholders' equity and is in discussions with a number of financial
institutions with a view to increase the company's capital.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the company and its 50% owned subsidiary. Intercompany transactions and
balances have been eliminated in consolidation.
Depreciation and Amortization
The cost of equipment is depreciated for financial reporting purposes on a
straight-line basis over the useful lives of the assets which is 3 to 7
years. Repairs and maintenance which do not extend the useful lives of the
related assets are expensed as incurred. Deferred charges in connection
with LTTD contracts and intangibles are being amortized over 5 years.
Income Taxes
The Company is taxed as a "C" Corporation for federal purposes and deferred
taxes are recognized for operating losses that are anticipated to offset
future federal income taxes.
The basic corporation income tax rate applicable to Ceva Hungary is 18%
(1998:18%). In addition, a supplementary tax of up to 35% (1998:35%) is
payable on dividends from post-1994 profits. The actual rate of
supplementary tax depends on the residence of the recipient shareholder and
the terms of the applicable tax treaty between Hungary and the relevant
foreign country. A rate of 35% (1998:35%) applies to Hungarian
shareholders.
Revenue Recognition
Revenue is recognized in accordance with contracts as services are
rendered.
64
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES - (Continued)
Earnings (Loss) per Common Share
In accordance with Financial Accounting Standards Board No. 128 "Earnings
Per Share", basic earnings (loss) per common share amounts are computed by
dividing the net (loss) by the weighted average number of shares
outstanding. Common stock equivalents have not been included in this
computation since the effect would be anti-dilutive.
Securities Issued for Services
The Company accounts for common stock and common stock purchase warrants
issued for services by reference to the fair market value of the Company's
stock on the date of stock issuance or warrant grant in accordance with
Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation. (FASB 123)" Compensation/consultant expense is
recorded for the fair market value of the stock and warrants issued.
Foreign Currency Translation
For Ceva Hungary whose functional currency is the Hungarian Florint,
balance sheet accounts are translated into U.S. dollars at exchange rates
in effect at the end of the year and income statement accounts are
translated at average exchange rates for the year. Translation gains and
losses are included as a separate component of stockholders' equity
(impairment).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION OF BUSINESS AND CREDIT RISK
At times throughout the year the Company may maintain certain bank accounts
in excess of the FDIC and Hungarian limits.
The Company conducts its business primarily in the Eastern European
nations.
The Company has contracts with a small number of customers; the loss of one
of the major ones would have a near-term severe impact on the Company. One
major customer receivable of approximately $1,000,000 has been reserved in
the amount of $314,000 at December 31, 1999. The full amount is in dispute
and expected to be resolved through court proceedings in Hungary.
EQUIPMENT
Equipment at cost, less accumulated depreciation consists of the following
at December 31, 1999:
Total Hungary United States
----------------- ---------------- ----------------
Equipment under capital lease $ 3,044,561 $ 3,044,561 $ -
Field and office equipment 845,158 438,073 407,085
----------------- ---------------- ----------------
Subtotal 3,889,719 3,482,634 407,085
Less accumulated depreciation 1,007,607 838,409 169,198
----------------- ---------------- ----------------
Total $ 2,882,112 $ 2,644,225 $ 237,887
================= ================ ================
Depreciation expense amounted to $531,185 and $273,493 for years ended
December 31, 1999 and 1998, respectively.
65
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
PROFIT SHARING ARRANGEMENT/DEFERRED CHARGE
The Company has entered into an agreement to share profits with a vendor on
its Low Temperature Thermal Desorption (LTTD) contracts. The vendor also
has the exclusive right to provide equipment and services that might be
required under any LTTD contracts. This contract, implemented in 1997, has
a term of ten years or may be terminated by mutual consent of the parties.
In 1998, the vendor provided for only $250,000 of an agreed upon $500,000
advance in which the entire $500,000 was included as part of the lease
obligation to be repaid (see "CAPITAL LEASES"). The remaining $250,000 was
recorded as a deferred charge as an accommodation to the vendor's profit
sharing arrangement and exclusive right to provide equipment and services
and will amortize over the repayment terms of the 5 year lease.
Amortization expense totaled $50,000 and $12,500 during the years ended
December 31, 1999 and 1998, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31, 1999:
Trade accounts payable $ 778,692
Interest 310,130
Sales and payroll taxes 111,747
Salaries 75,000
Directors' fees 30,000
Consulting fees 25,000
Professional fees 20,000
---------------
Total $ 1,350,569
===============
NOTES PAYABLE
Notes payable are comprised of the following at December 31, 1999:
Unsecured
Note payable interest only at 12% per annum due in full on December 31,
1999. Interest rate increases to 24% per annum should balance not be
settled by December 31, 1999. The due date of the note has been extended
to June 30, 2000. The note is guaranteed by the principal stockholder. $ 200,000
Two non-interest bearing notes due April 30, 2000 are payable either in
cash or convertible into common shares of the company at .50(cent)per share.
A non-detachable warrant has been issued to each note holder entitling the
holder to purchase 15,000 common shares of the company at $1 per share
expiring November 2, 2002. The notes were subsequently converted into
common shares. 25,000
---------------
Total - current maturities $ 225,000
===============
RELATED PARTY TRANSACTIONS
Loan Payable to Stockholder
The majority stockholder has advanced working capital to the Company. The
advance of $200,000 at December 31, 1999, is unsecured, and due April 30,
2000. The repayment may be made either in cash plus interest at 10% per
annum or convertible into common shares at a conversion rate of .25(cent)
per share with a 10% dividend rate at the option of the holder.
Additionally, 50,000 common shares have been issued to the majority
stockholder as compensation (additional interest expense) for the loan
provided to the company. The loan was subsequently converted into common
shares. The share value was determined at a fair and reasonable price in
relation to the last quoted market price less a reasonable discount.
66
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
RELATED PARTY TRANSACTIONS, Continued
Professional, International and Directors' Fees
Fees were incurred to individuals who are shareholders of the Company and
amounted to $312,306 and $59,675 during years ended December 31, 1999 and
1998, respectively.
Included in accounts payable and accrued expenses are balances totaling
$213,687 at December 31, 1999 that pertain to the shareholders that
provided services above.
CAPITAL LEASES
The Company leases certain equipment under capital leases expiring in
various years through 2003. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset at the inception of the lease. The
assets are amortized over the lower of their related lease terms or their
estimated productive lives. Amortization of assets under capital leases is
included in depreciation expense in 1999 and 1998.
Properties under capital leases are as follows at December 31, 1999:
Equipment under capital lease $ 3,044,561
Less accumulated amortization 774,246
---------------
Total $ 2,270,315
===============
The following is a schedule of minimum lease payments due under capital
leases as of December 31, 1999:
Year Ending December 31,
2000 $ 3,506,727
2001 686,593
---------------
Total net minimum capital lease payments 4,193,320
Less amounts representing interest 734,149
---------------
Present value of net minimum capital lease payments 3,459,171
Less current maturities of capital lease obligations 2,854,725
---------------
Obligations under capital leases, excluding current maturities $ 604,446
===============
Interest rates on capitalized leases are 10% and are imputed based on the
lower of the Company's incremental borrowing rate at the inception of each
lease or the lessor's implicit rate of return.
The Company has a lease in default of the Capital Lease Agreement at
December 31, 1999. The entire outstanding lease balance has been
accelerated from long-term liabilities into current liabilities. No demand
for payment in full has been made by the lessor.
PREFERRED STOCK
Preferred stock is non-voting, $.001 par value per share with 25,000,000
shares authorized. Series A of the preferred stock series has 100 shares
authorized, 17 shares issued and outstanding. The total outstanding Series
A redeemable preferred stock at December 31, 1999 is $850,000. The
following is a description of the Series A preferred stock:
(1) each share of redeemable non-dividend preferred stock has a liquidation
value, or stated value of $50,000
(2) the redeemable non-dividend preferred stock has liquidation rights
superior to the common stock of the corporation and shall be superior to
all other series or issuances of the stock of the corporation
67
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
PREFERRED STOCK (continued)
(3) The company shall be obligated to redeem all or part of the redeemable
non-dividend preferred stock outstanding in the event the corporation has
earned after-tax profits during any previous fiscal year in an amount equal
to or greater than one million ($1,000,000.00) dollars, determined in
accordance with generally accepted accounting principles, consistently
applied (the "After Tax Profit"), calculated as follows: the corporation
shall redeem for cash that number of shares of redeemable non-dividend
preferred stock whose aggregate stated value is equal to twenty-five (25%)
percent of the after tax profit
(4) the redeemable non-dividend preferred stock is not entitled to receive
any preference or fixed rate of dividend and shall only be entitled to
participate in any cash or stock dividend after the holders of the shares
of common stock of the corporation have received such dividend
(5) the redeemable non-dividend preferred stock is entitled to be paid out
of the assets of the company upon liquidation prior to any distribution or
payment to the holders of the shares of the common stock of the corporation
(6) the holders of the redeemable non-dividend preferred stock have no
right to vote at or participate in any meeting of the stockholders of the
corporation and shall have voting rights only in certain enumerated and
extraordinary events.
DEFERRED CREDIT
Ceva Hungary sold equipment which was then leased back to them in a
sales-leaseback transaction. Total profits from the sale amounted to
$102,638 at December 31, 1999 and will be recognized over the term of the
lease.
INCOME TAXES
Deferred taxes are recognized for temporary differences relating to federal
net operating losses. A valuation allowance was included because the
federal net operating loss carry forwards may expire unused. The valuation
allowance on the tax benefit of net operating loss carry forwards decreased
by $20,000 in the year ended December 31, 1999 and increased $71,270 in the
year ended December 31, 1998.
The major components of the Company's current and long-term deferred tax assets
are as follows:
December 31,
1999
-----------------
Tax benefit of net operating loss carry forwards $ 225,000
Less: valuation allowance (225,000)
-----------------
Net tax benefit of net operating loss carry forwards $ -
=================
Income tax expense is comprised of the following:
Year Ended December 31,
-----------------------------------
1999 1998
--------------- ---------------
Current Provision $ 9,013 $ 10,669
Deferred Benefit - -
--------------- ---------------
Total $ 9,013 $ 10,669
=============== ===============
At December 31, 1999, the Company has approximately $800,000 of federal net
operating loss carryforwards available for income tax purposes which expire
on December 31, 2019.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of the Company's financial instruments (all of which
are held for non-trading purposes) are as follows:
68
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
December 31, 1999
--------------------------------
Carrying
Amount Fair Value
--------------- --------------
Cash and short-term investments $ 85,565 85,565
Accounts receivable 1,138,896 1,138,896
Accounts payable and accrued expenses 1,350,569 1,350,569
Long-term debt 3,459,171 3,459,171
Loan payable to stockholder 200,000 200,000
The carrying amount approximates fair value for cash and short-term
instruments. For accounts receivable fair values are estimates based on
relevant market conditions. The fair value of accounts payable and accrued
expenses, long-term debt and loan payable to stockholder is based on
current rates at which the Company could borrow funds with similar
remaining maturities.
MAJOR CUSTOMERS
For the years ended December 31, 1999 and 1998, the Company had three and
two major customers, respectively, sales to which represented approximately
90% ($1,686,774) and 75% ($1,470,510), respectively, of the Company's
revenues. The Company had accounts receivable balances due from these
customers of $850,249 at December 31, 1999. The loss of these customers
would have a materially adverse effect on the Company.
The following indicates the revenues from each of the major customers:
Year Ended December 31,
-------------------------------------
1999 1998
----------------- -----------------
Major Customer #1 $ 778,410 $ 428,843
Major Customer #2 829,850 1,041,667
Major Customer #3 78,514 -
----------------- -----------------
Total $ 1,686,774 $ 1,470,510
================= =================
The following is a breakdown of revenue by country:
Year Ended December 31,
1999 1998
------------------ ------------------
Hungary $ 1,686,774 $ 1,809,823
United States 205,446 140,433
------------------ ------------------
$ 1,892,220 $ 1,950,256
================== ==================
SETTLEMENT INCOME
The company settled a dispute with a vendor which resulted in the reduction
of a liability of $60,245. This amount has been included in "Other Income
and Expense" on the 1999 Consolidated Statement of Operations.
EXTRAORDINARY ITEM
The Company was relieved from an obligation of $250,000 in 1998 due to the
insolvency of the supplier of the related equipment. A discharge was
granted to the Company which resulted in the recognition as an
extraordinary item (net of $0 income tax effect).
SUBSEQUENT EVENT
In April 2000, the Company acquired an additional 5% ownership interest
from a minority shareholder in Ceva Hungary bringing the ownership interest
of the Company in its Ceva Hungary Subsidiary up to 55%.
69
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
RESTATEMENT - 1998
The 1998 consolidated statement of operations and deficit has been restated
due to the reversal of a previously booked receivable determined to be
uncollectible ($208,000). In addition, the minority interest in the loss of
the consolidated subsidiary ($49,213) has been reduced so that the
adjustment to the minority interest in subsidiary on the balance sheet
becomes $0. This is a change from the previously reported negative balance
of $49,213.
RESTATEMENT - 1999
the 1999 consolidated balance sheet and statement of stockholders' equity
(impairment) has been restated to reflect the redeemable preferred stock
(see "PREFERRED STOCK") from stockholders' equity into long-term
liabilities. Additionally, a capital lease in default has been accelerated
from long-term liabilities into current liabilities (see "CAPITAL LEASES").
Additionally, settlement income from the reduction of a liability as a
result of settlement of a dispute has been reclassified from Revenue to
Settlement Income (see "SETTLEMENT INCOME").
70
Independent Auditors' Report on Additional Information
To the Board of Directors and Stockholders of
Ceva International, Inc.
Our report on our audits of the consolidated balance sheet of Ceva
International, Inc. and Subsidiary as of December 31, 1999 and consolidated
statements of operations, comprehensive loss, stockholders' equity (impairment),
and cash flows for the years ended December 31, 1999 and 1998, appears on page
1. Our audits were made for the purpose of forming an opinion on the above
referenced consolidated financial statements taken as a whole. The additional
information on the following pages is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the audits
of the above referenced consolidated financial statements and, in our opinion,
is fairly stated in all material respects.
/s/Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
May 19, 2000
71
Ceva International, Inc. and Subsidiary
Consolidating Balance Sheet
December 31, 1999
(Restated)
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
--------------- --------------- --------------- --------------
Assets
Current Assets
Cash $ 75,322 $ 10,243 $ - $ 85,565
Accounts receivable (net of allowance
for doubtful accounts of $314,000 for
Ceva Hungary) 288,647 850,249 - 1,138,896
Due from Ceva International, Inc. - 78,968 (78,968) -
Prepaid expenses 5,317 - - 5,317
--------------- --------------- --------------- ------------
Total Current Assets 369,286 939,460 (78,968) 1,229,778
Equipment (net of accumulated depreciation) 237,889 2,644,223 - 2,882,112
Investment in Ceva Hungary 53,833 - (53,833) -
Intangible assets (net of accumulated amortization) - 979 - 979
Deferred charges (net of accumulated amortization) 187,500 - - 187,500
--------------- --------------- --------------- ------------
Total Assets 848,508 3,584,662 (132,801) 4,300,369
=============== =============== =============== ============
Liabilities and Stockholders' Equity
Current Liabilities
Due to Ceva Hungary 78,968 - 78,968 -
Accounts payable and accrued expenses 547,990 802,579 - 1,350,569
Notes payable 225,000 - - 225,000
Loans payable to stockholder 200,000 - 200,000
Current maturities of capital leases - 2,854,725 - 2,854,725
Deferred credit - 102,638 - 102,638
--------------- --------------- --------------- ------------
Total Current Liabilities 1,051,958 3,759,942 78,968 4,732,932
Capital leases, net of current maturities - 604,446 - 604,446
--------------- --------------- --------------- ------------
Redeemable preferred stock 850,000 - - 850,000
--------------- --------------- --------------- ------------
Total Liabilities 1,901,958 4,364,388 78,968 6,187,378
--------------- --------------- --------------- ------------
Minority interest in subsidiary - - - -
--------------- --------------- --------------- ------------
Stockholders' Equity
Common stock 9,823 100,000 100,000 9,823
Additional paid-in capital 2,113,205 - - 2,113,205
(Deficit) (3,176,478) (941,680) (46,167) (4,071,991)
Accumulated other comprehensive income - foreign
currency translation
adjustment - 61,954 - 61,954
--------------- --------------- --------------- ------------
Total Stockholders' Equity (Impairment) (1,053,450) (779,726) 53,833 (1,887,009)
--------------- --------------- --------------- ------------
Total Liabilities and Stockholders' Equity $ 848,508 $ 3,584,662 $ 132,801 $ 4,300,369
=============== =============== =============== ============
72
Ceva International, Inc. and Subsidiary
Consolidating Statement of Operations and Deficit
Year Ended December 31, 1999
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
--------------- --------------- --------------- ----------------
Revenue $ 145,201 $ 1,686,774 $ - $ 1,831,975
Direct Costs - 1,478,111 - 1,478,111
--------------- --------------- --------------- ----------------
Gross Profit 145,201 208,663 - 353,864
--------------- --------------- --------------- ----------------
Operating Expense
Bad debts 62,500 314,000 - 376,500
Professional services 254,711 - - 254,711
Wages 53,435 164,240 - 217,675
Travel 151,861 - - 151,861
Depreciation and amortization 136,735 11,643 - 148,378
International expenses 100,908 - - 100,908
Officer's compensation 73,424 - - 73,424
Other expenditures 15,189 49,748 - 64,937
Employee benefits 26,262 31,907 - 58,169
Auto expenses 40,819 - - 40,819
Rent 17,948 12,586 - 30,534
Directors' fees 30,000 - - 30,000
Office expenses 23,310 - - 23,310
Telephone 16,067 - - 16,067
Entertainment 6,996 - - 6,996
Other taxes 4,691 - - 4,691
Insurance 3,416 - - 3,416
Management services - 100,000 (100,000) -
--------------- --------------- --------------- ----------------
Total operating expense 1,018,272 684,124 (100,000) 1,602,396
--------------- --------------- --------------- ----------------
(Loss) from operations (873,071) (475,461) 100,000 (1,248,532)
--------------- --------------- --------------- ----------------
Other income (expense)
Interest expense net of other income (95,747) (67,591) - (163,338)
Management fee income 100,000 - 100,000 -
Settlement income 60,245 - - 60,245
--------------- --------------- --------------- ----------------
Total other income (expense) 64,498 (67,591) 100,000 (103,093)
--------------- --------------- --------------- ----------------
Income (loss) before provision for income taxes (808,573) (543,052) - (1,351,625)
Provision for income taxes - 9,013 - 9,013
--------------- --------------- --------------- ----------------
Net income (loss) (808,573) (552,065) - (1,360,638)
Retained earnings (deficit), beginning of year (2,367,905) (389,615) 46,167 (2,711,353)
--------------- --------------- --------------- ----------------
Retained earnings (deficit), end of year $ (3,176,478)$ (941,680) $ 46,167 $ (4,071,991)
=============== =============== =============== ================
73
Ceva International, Inc. and Subsidiary
Consolidating Statement of Operations and Deficit
Year Ended December 31, 1998
(Restated)
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
--------------- --------------- --------------- ----------------
Revenue $ 140,433 $ 1,809,823 $ - $ 1,950,256
Direct Costs - 1,644,187 - 1,644,187
--------------- --------------- --------------- ----------------
Gross Profit 140,433 165,636 - 306,069
--------------- --------------- --------------- ----------------
Operating Expense
Professional services 30,300 - - 30,300
Wages 95,192 296,153 - 391,345
Travel 179,372 - - 179,372
Depreciation and amortization 69,004 11,003 - 80,007
International expenses 37,399 - - 37,399
Officer's compensation 11,900 - - 11,900
Other expenditures 4,944 27,885 - 32,829
Bad debts 151,401 - - 151,401
Employee benefits 24,267 - - 24,267
Auto expenses 37,824 - - 37,824
Rent - 7,580 - 7,580
Office expenses 16,530 - - 16,530
Telephone 39,926 - - 39,926
Entertainment 7,537 - - 7,537
Other taxes 7,282 - - 7,282
Insurance 4,009 - - 4,009
Advertising 395 - - 395
Miscellaneous - 18,839 - 18,839
Management services - 100,000 (100,000) -
--------------- --------------- --------------- ----------------
Total operating expense 717,282 461,460 (100,000) 1,078,742
--------------- --------------- --------------- ----------------
(Loss) from operations (576,849) (295,824) (100,000) (772,673)
--------------- --------------- --------------- ----------------
Other income (expense)
Interest expense (116,261) (63,727) - (179,988)
Management fee income 100,000 - 100,000 -
Interest and other income 13,292 5,239 - 18,531
Minority interest in loss of
consolidated subsidiary - - 29,277 29,277
--------------- --------------- --------------- ----------------
Total other income (expense) (2,969) (58,488) 129,277 (132,180)
--------------- --------------- --------------- ----------------
Income (loss) before provision for income taxes (579,818) (354,312) 29,277 (904,853)
Provision for income taxes - 10,669 - 10,669
--------------- --------------- --------------- ----------------
Income (loss) before extraordinary item (579,818) (364,981) 29,277 (915,522)
Extraordinary item, cancellation of
indebtedness, net of income tax effect of $0 250,000 - - 250,000
--------------- --------------- --------------- ----------------
Net income (loss) (329,818) (364,981) 29,277 (665,522)
Retained earnings (deficit), beginning of year (2,038,087) (24,634) 16,890 (2,045,831)
--------------- --------------- --------------- ----------------
Retained earnings (deficit), end of year $ (2,367,905)$ (389,615) $ 46,167 $ (2,711,353)
=============== =============== =============== ================
74
Ceva International, Inc. and Subsidiary
Consolidated Financial Statements
December 31, 1998 (Restated) and 1997
75
Ceva International, Inc. and Subsidiary
Index to the Consolidated Financial Statements
December 31, 1998 (Restated) and 1997
Page
Independent Auditors' Report..................................................................... 1
Consolidated Financial Statements
Consolidated Balance Sheets................................................................. 2
Consolidated Statements of Operations and Deficit........................................... 3
Consolidated Statements of Comprehensive Loss............................................... 4
Consolidated Statements of Cash Flows....................................................... 5
Notes to the Consolidated Financial Statements.............................................. 6-11
Independent Auditors' Report on Additional Information........................................... 12
Consolidating Balance Sheet - December 31, 1998 ............................................ 13
Consolidating Statement of Operations and Deficit - Year Ended December 31, 1998........... 14
Consolidating Balance Sheet - December 31, 1997............................................. 15
Consolidating Statement of Operations and Deficit - Year Ended December 31, 1997........... 16
76
Independent Auditors' Report
To the Board of Directors and Stockholders of
Ceva International, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Ceva
International, Inc. as of December 31, 1998 and 1997 and the related
consolidated statements of operations and deficit, comprehensive loss and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ceva
International, Inc. and Subsidiary as of December 31, 1998 and 1997 and the
results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in the Notes to
the Consolidated Financial Statements, the Company has incurred operating losses
for a number of years and has a stockholders' impairment. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters are also described in the Notes to the
Consolidated Financial Statements. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
July 28, 1999, except for "SUBSEQUENT EVENTS" and "RESTATEMENT" notes to the
consolidated financial statements which are dated May 19, 2000
77
Ceva International, Inc. and Subsidiary
Consolidated Balance Sheets
December 31,
---------------------------------
1998 1997
--------------- ---------------
Assets (Restated)
Current Assets
Cash $ 72,621 $ 27,442
Accounts receivable (net of allowance for doubtful accounts of $0 and
$109,061, respectively) 963,345 298,967
Escrow funds receivable - 198,000
Inventory 79,407 -
Prepaid expenses 9,046 1,498
Prepaid acquisition costs 190,654 -
--------------- ---------------
Total Current Assets 1,315,073 525,907
Due from related party 5,499 101,818
Property and equipment (net of accumulated depreciation) 3,421,864 209,359
Intangible assets (net of accumulated amortization) 2,894 5,195
Deferred charges (net of accumulated amortization) 237,500 -
Deferred income taxes 5,000 5,000
--------------- ---------------
Total Assets 4,987,830 847,279
=============== ===============
Liabilities and Stockholders' Impairment
Current Liabilities
Accounts payable and accrued expenses 1,442,137 427,990
Current maturities of long-term debt 200,000 11,733
Current maturities of capital leases 693,239 -
Deferred credit 84,100 -
--------------- ---------------
Total Current Liabilities 2,419,476 439,723
Long-term debt, net of current maturities - 238,267
Capital leases, net of current maturities 2,630,625 -
Loans payable to stockholder 1,094,588 685,843
--------------- ---------------
Total Liabilities 6,144,689 1,363,833
--------------- ---------------
Minority interest in subsidiary - 29,277
--------------- ---------------
Stockholders' Equity
Preferred stock, non-voting, $.001 par value; 25,000,000 shares authorized;
Series A - redeemable, non-dividend, $50,000 stated value per share, 100
shares authorized, no shares issued and outstanding (Redeemable
preference in either cash or convertible into common shares) - -
Common stock, $.01 par value; 20,000,000 common shares authorized;
7,308,198 common shares issued and outstanding 20,000 20,000
Additional paid-in capital 1,480,000 1,480,000
(Deficit) (2,711,353) (2,045,831)
Accumulated other comprehensive income - foreign currency translation
adjustment 54,494 -
--------------- ---------------
Total Stockholders' Equity (Impairment) (1,156,859) (545,831)
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 4,987,830 $ 847,279
=============== ===============
See notes to the consolidated financial statements.
78
Ceva International, Inc. and Subsidiary
Consolidated Statements of Operations and Deficit
Year Ended December 31,
-----------------------------------
1998 1997
--------------- ---------------
(Restated)
Revenue $ 1,950,256 $ 1,003,388
Direct Costs 1,644,187 495,915
--------------- ---------------
Gross Profit 306,069 507,473
--------------- ---------------
Operating Expenses
Wages 391,345 12,095
Travel 179,372 65,577
Bad debts 151,401 185,906
Depreciation and amortization 80,007 11,167
Auto expenses 37,824 35,760
Telephone 39,926 30,332
International expenses 37,399 114,044
Other expenditures 32,829 7,395
Professional services 30,300 143,757
Miscellaneous 18,839 110,095
Employee benefits 24,267 12,072
Office expenses 16,530 9,118
Officer's compensation 11,900 11,900
Rent 7,580 6,241
Entertainment 7,537 8,676
Other taxes 7,282 7,315
Insurance 4,009 3,593
Advertising 395 1,422
--------------- ---------------
Total operating expenses 1,078,742 776,465
--------------- ---------------
(Loss) from operations (772,673) (268,992)
--------------- ---------------
Other income (expense)
Interest expense (179,988) (39,515)
Interest and other income 18,531 -
Minority interest in loss of consolidated subsidiary 29,277 16,890
--------------- ---------------
Total other income (expense) (132,180) (22,625)
--------------- ---------------
(Loss) before provision for income taxes (904,853) (291,617)
Provision for income taxes 10,669 200
--------------- ---------------
(Loss) before extraordinary item (915,522) (291,817)
Extraordinary item, cancellation of indebtedness, net of income tax
effect of $0 250,000 -
--------------- ---------------
Net (loss) (665,522) (291,817)
(Deficit), beginning of year (2,045,831) (1,754,014)
--------------- ---------------
(Deficit), end of year $ (2,711,353) $ (2,045,831)
=============== ===============
(Loss) per common share before extraordinary item $ (0.13) $ (0.04)
=============== ===============
(Loss) per common share $ (0.09) $ (0.04)
=============== ===============
Weighted average of common shares outstanding (restated for 1997) 7,308,198 7,308,198
=============== ===============
See notes to the consolidated financial statements.
79
Ceva International, Inc. and Subsidiary
Consolidated Statements of Comprehensive Loss
Year Ended December 31,
---------------------------------------
1998 1997
---------------- ----------------
(Restated)
Net (loss) $ (665,522) $ (291,817)
---------------- ----------------
Other comprehensive income
Foreign currency translation adjustment (net of $0 tax effect) 54,494 -
---------------- ----------------
Other comprehensive income 54,494 -
---------------- ----------------
Comprehensive loss $ (611,028) (291,817)
================ ================
See notes to the consolidated financial statements.
80
Ceva International, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Year Ended December 31
---------------------------------
1998 1997
--------------- ---------------
(Restated)
Cash Flows From Operating Activities
Net (loss) $ (665,522) $ (291,817)
Adjustments to reconcile net (loss) to net cash provided (used) by operating
activities
Depreciation and amortization 285,993 11,167
Minority interest in loss of consolidated subsidiaries (29,277) (16,890)
Decreases (increases) in assets
Accounts receivable (664,378) 179,211
Escrow funds receivable 198,000 (198,000)
Inventory (79,407) -
Prepaid expenses (7,548) 7,817
Due from related party 96,319 9,420
Increases (decreases) in liabilities
Accounts payable and accrued expenses 1,014,147 (203,758)
Deferred credit 84,100 -
--------------- ---------------
Net cash provided (used) by operating activities 232,427 (502,850)
--------------- ---------------
Cash flows from investing activities
Cash paid for machinery and equipment (100,000) (209,580)
Purchase of intangible assets - (5,195)
--------------- ---------------
Net cash (used) by investing activities (100,000) (209,580)
--------------- ---------------
Cash flows from financing activities
Proceeds from stockholders' loans 408,745 546,170
Repayment of stockholders' loans - (81,941)
Proceeds from borrowings - 250,000
Repayment of capital lease obligations (411,653) -
Cash payments for acquisition costs (190,654) -
--------------- ---------------
Net cash provided (used) by financing activities (193,562) 714,229
--------------- ---------------
Effect of exchange rate changes on cash 106,314 -
--------------- ---------------
Net increase (decrease) in cash 45,179 (23,918)
Cash at January 1 27,442 51,360
--------------- ---------------
Cash at December 31 $ 72,621 $ 27,442
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 200 $ 200
Cash paid for interest $ 164,388 $ 41,013
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
In 1997, the Company's bank credit line of $265,400 was exchanged for
a stockholder's personal bank loan which is included in loans payable to
stockholders.
Capitalized lease obligations incurred for purchase of equipment in 1998:
Equipment under capital lease $ 3,044,561
Deferred charge incurred 250,000
---------------
3,294,561
Obligations under capital lease incurred 3,294,561
---------------
$ -
===============
See notes to the consolidated financial statements.
81
Ceva International, Inc. and Subsidiary
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Nature of Organization
Ceva International, Inc., a New Jersey corporation, was organized in 1991
to develop an Eastern European market presence in the waste technology
management business. In that connection, the Company organized Ceva
Hungary, a Hungarian corporation, which is 50% owned by Ceva International,
Inc. with the remaining 50% thereof owned by Hungarian stockholders active
in its business development. The Company's intentions are to create
alternative fuel sources from industrial waste for use in the cement and
other industries.
The Company's financial statements have been prepared in conformity with
principles of accounting applicable to a going concern.
The Company has incurred large operating losses which have resulted in a
stockholders impairment. Additional funds are needed to finance the
equipment required for signed and proposed contracts to increase the level
of business to cover the Company's operating expenses and create profits.
Management has retained an investment banking firm which has assisted in
merging the Company with a public "shell" Company and has raised $750,000
in private placements for working capital operating purposes. Additional
capital raising efforts are also currently being held (see "SUBSEQUENT
EVENTS"). In addition, the stockholder's loan has been recapitalized to
stockholders' equity. Moreover, the Company has instituted controls to
avoid future large bad debt losses.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the company and its 50% owned subsidiary. Intercompany transactions and
balances have been eliminated in consolidation.
Inventory
Inventories are valued at the lower of cost (determined on a first-in
first-out basis) or market.
Depreciation and Amortization
The cost of property and equipment is depreciated for financial reporting
purposes on a straight-line basis over the useful lives of the assets which
is 3 to 7 years. Repairs and maintenance which do not extend the useful
lives of the related assets are expensed as incurred. Deferred charges in
connection with LTTD contracts are being amortized over 10 years.
Income Taxes
The Company is taxed as a "C" Corporation for federal and state purposes
and deferred taxes are recognized for operating losses that are anticipated
to offset future federal and state income taxes.
The basic corporation income tax rate applicable to Ceva Hungary is 18%
(1998:18%). In addition, a supplementary tax of up to 35% (1997:35%) is
payable on dividends from post-1994 profits. The actual rate of
supplementary tax depends on the residence of the recipient shareholder and
the terms of the applicable tax treaty between Hungary and the relevant
foreign country. A rate of up to 35% (1997:27%) applies to Hungarian
shareholders.
Revenue Recognition
Revenue is recognized in accordance with contracts as services are
rendered.
Foreign Currency Translation
For Ceva Hungary whose functional currency is the Hungarian Florint,
balance sheet accounts are translated into U.S. dollars at exchange rates
in effect at the end of the year and income statement accounts are
translated at average exchange rates for the year. Translation gains and
losses are included as a separate component of stockholder's equity
(impairment).
Securities Issued for Services
The Company accounts for common stock and common stock purchase warrants
issued for services by reference to the fair market value of the Company's
stock on the date of stock issuance or warrant grant in accordance with
Financial Accounting Standards Board Statement No. 123 "Accounting for
Stock-Based Compensation. (FASB 123)" Compensation/consultant expense is
recorded for the fair market value of the stock and warrants issued.
82
Ceva International, Inc.
Notes to the Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassification
Certain amounts in 1997 have been reclassified to conform to the current
year (1998) presentation.
CONCENTRATION OF BUSINESS AND CREDIT RISK
At times throughout the year the Company may maintain certain bank accounts
in excess of the FDIC and Hungarian limits.
The Company conducts its business primarily in the Eastern European
nations.
The Company has contracts with a small number of customers; the loss of one
of the major ones would have a near-term severe impact on the Company. One
customer, a municipality in Hungary, has not recognized billings by the
Company. The matter is being litigated and management believes that
recovery will be made in full.
EQUIPMENT
Equipment at cost, less accumulated depreciation consists of the following:
December 31,
--------------------------------------
1998 1997
----------------- ----------------
Equipment under capital lease $ 3,044,561 $ 187,285
Field and office equipment 676,756 54,888
----------------- ----------------
Subtotal 3,721,317 242,173
Less accumulated depreciation 299,453 32,814
----------------- ----------------
Total $ 3,421,864 $ 209,359
================= ================
DUE FROM RELATED PARTY
Due from related party represents advances to a corporation controlled by
the same interests as the Company which are without a fixed maturity date
and bear no interest.
DEFERRED CREDIT
Ceva Hungary sold equipment which was then leased back to them in a
sale-leaseback transaction. Total profits from the sale amounted to $84,100
and $0 at December 31, 1998 and 1997, respectively, and will be recognized
over the term of the lease.
LOAN PAYABLE-STOCKHOLDER
A stockholder has advanced working capital to the Company. The advances of
$1,094,588 and $967,549 at December 31, 1998 and 1997, respectively, are
unsecured, with interest at 9.5% per annum effective January 1, 1998, and
with no definitive repayment terms. The loan was reclassified into
stockholders' equity pursuant to the subsequent merger of the Company into
the public "shell" Company. (see "SUBSEQUENT EVENTS")
83
Ceva International, Inc.
Notes to the Consolidated Financial Statements
LONG-TERM DEBT
Long-term debt is comprised of the following:
December 31,
---------------------------------
Notes Payable 1998 1997
--------------- ---------------
Note payable to individual with interest at 12%, payable monthly at $5,741
per month beginning June 1, 1998. This note is personally guaranteed by a
stockholder. This note was reclassified into a capital lease agreement in
1998. $ - $ 250,000
Unsecured
Note payable interest only at 12% per annum due in full on December 31,
1999. Interest rate shall increase to 24% per annum should balance not be
settled by December 31, 1999. The note is guaranteed by the principal
stockholder. 200,000 -
Less current maturities 200,000 11,733
--------------- ---------------
Long-term debt, net of current maturities $ - $ 238,267
=============== ===============
CAPITAL LEASES
The Company leases certain equipment under capital leases expiring in
various years through 2003. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset at the inception of the lease. The
assets are amortized over the lower of their related lease terms or their
estimated productive lives. Amortization of assets under capital leases is
included in depreciation expense in 1998 and 1997.
Properties under capital leases are as follows:
December 31,
----------------------------------
1998 1997
--------------- ---------------
Equipment under capital lease $ 3,044,561 $ -
Less accumulated amortization 216,989 -
--------------- ---------------
Total $ 2,827,572 $ -
=============== ===============
The following is a schedule of minimum lease payments due under capital
leases as of December 31, 1998.
Year Ending December 31,
1999 $ 1,158,661
2000 1,110,652
2001 1,062,643
2002 612,180
2003 464,608
---------------
Total net minimum capital lease payments 4,408,744
Less amounts representing interest 1,084,880
---------------
Present value of net minimum capital lease payments 3,323,864
Less current maturities of capital lease obligations 693,239
---------------
Obligations under capital leases, excluding current maturities $ 2,630,625
===============
Interest rates on capitalized leases are 10% and are imputed based on the
lower of the Company's incremental borrowing rate at the inception of each
lease or the lessor's implicit rate of return.
84
Ceva International, Inc.
Notes to the Consolidated Financial Statements
INCOME TAXES
Deferred taxes are recognized for temporary differences between the basis
of assets and liabilities for financial statement and state income tax
purposes. The differences relate primarily to federal and state net
operating losses. A valuation allowance was included because the state net
operating loss carry forwards may expire unused. The valuation allowance on
the tax benefit of net operating loss carry forwards increased $71,270 and
$23,903 in the years ended December 31, 1998 and December 31, 1997.
The major components of the Company's current and long-term deferred tax
assets are as follows:
December 31,
---------------------------------------
1998 1997
----------------- -----------------
Tax benefit of net operating loss carry forwards $ 250,000 $ 178,730
Less: valuation allowance 245,000 173,730
----------------- -----------------
Net tax benefit of net operating loss carry forwards 5,000 5,000
Current portion - -
----------------- -----------------
Long-term deferred tax asset $ 5,000 $ 5,000
================= =================
Income tax expense is comprised of the following:
December 31,
-----------------------------------
---------------
1998 1997
--------------- ---------------
Current Provision $ 10,669 $ 200
Deferred Benefit - -
--------------- ---------------
Total $ 10,669 $ 200
=============== ===============
At December 31, 1998, the Company had $326,049 of federal net operating
loss carryforwards available for income tax purposes which expire on
December 31, 2018.
At December 31, 1998, the Company had State net operating losses carry
forwards available for income tax purposes as follows:
Expiration December 31,
1999 $ 453,821
2000 402,733
2001 269,597
2002 221,646
2003 282,349
2004 274,727
2005 326,049
---------------
Total $ 2,230,922
===============
CONTINGENCIES
A suit was instituted against the Company by a vendor which the Company is
vigorously defending. The amount of the suit was accrued in a prior year and
is recorded as an accounts payable in these consolidated financial
statements.
85
Ceva International, Inc.
Notes to the Consolidated Financial Statements
PROFIT SHARING ARRANGEMENT/DEFERRED CHARGE
The Company has entered into an agreement to share profits with a vendor on
its Low Temperature Thermal Desorption (LTTD) contracts. The vendor also has
the exclusive right to provide equipment and services that might be required
under any LTTD contracts. This contract, implemented in 1997, has a term of
ten years or may be terminated by mutual consent of the parties. In 1998,
the vendor provided for only $250,000 of an agreed upon $500,000 advance in
which the entire $500,000 was included as part of the lease obligation to be
repaid (see "CAPITAL LEASES"). The remaining $250,000 was recorded as a
deferred charge as an accommodation to the vendor's profit sharing
arrangement and exclusive right to provide equipment and services and will
amortize over the repayment terms of the 5 year lease. Amortization expense
totaled $12,500 and $0 and during the years ended December 31, 1998 and
1997, respectively.
EARNINGS PER SHARE
In accordance with Financial Accounting Standards Board No. 128 "Earnings
Per Share". Basic earnings per share amounts are computed based on the
weighted average number of shares actually outstanding, after restating the
number of shares outstanding in 1997 to be equal to 1998 outstanding shares.
The number of shares used in the computations were 7,308,198 in 1998 and
1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of the Company's financial instruments (all of which
are held for nontrading purposes) are as follows:
December 31,
----------------------------------------------------------------
1998 1997
-------------------------------- -----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------------- -------------- ------------- -------------
Cash and short-term investments $ 72,621 $ 72,621 $ 27,442 $ 27,442
Accounts receivable 1,171,345 1,171,345 298,967 298,967
Accounts payable and accrued expenses 1,442,137 1,442,137 427,990 472,990
Long-term debt 2,630,625 2,630,625 238,267 238,627
Loan payable to stockholder 1,094,588 1,094,588 685,843 685,843
The carrying amount approximates fair value for cash and short-term
instruments. For accounts receivable fair values are estimates based on
relevant market conditions. The fair value of accounts payable and accrued
expenses, long-term debt and loan payable to stockholder is based on
current rates at which the Company could borrow funds with similar
remaining maturities.
EXTRAORDINARY ITEM
The Company was relieved from an obligation of $250,000 in 1998 due to the
insolvency of the supplier of the related equipment. A discharge was
granted to the Company which resulted in the recognition as an
extraordinary item (net of $0 income tax effect).
86
Ceva International, Inc.
Notes to the Consolidated Financial Statements
MAJOR CUSTOMERS
For the years ended December 31, 1998 and 1997, the Company has three and
two major customers, respectively, sales to which represented approximately
75% ($1,470,510) and 90% ($898,502), respectively, of the Company's
revenues. The loss of these customers would have a materially adverse
effect on the Company.
The following indicates the revenues from each of the major customers:
Year Ended December 31,
------------------------------------
1998 1997
---------------- ----------------
Major Customer #1 $ 428,843 $ 616,420
Major Customer #2 1,041,667 -
Major Customer #3 - 173,021
Major Customer #4 - 109,061
---------------- ----------------
Total $ 1,470,510 $ 898,502
================ ================
SUBSEQUENT EVENTS
On May 10, 1999, Ceva International, Inc. (the "Company" or "Ceva") merged
with a Nevada corporation whereby each issued and outstanding share of the
Company's common and preferred stock was exchanged for one similar share of
the Nevada corporation. Stock splits for both companies took place prior to
the exchange. The surviving Nevada corporation changed its name upon
completion of the merger to Ceva International, Inc. The shareholders of
Ceva retained an approximate 79% controlling interest in the new Company.
The transaction is considered a recapitalization of Ceva for accounting
purposes and all financial information regarding operations will be that of
Ceva. In anticipation of the merger, the Nevada corporation engaged in a
private placement in early 1999, pursuant to the exemption from the
registration requirements of the Securities Act of 1933, as amended (the
"1933 Act") provided by Rule 504 of Regulation D promulgated under the 1933
Act, raising gross proceeds of $550,000. Fees incurred in 1998 and
associated with the merger regarding legal, underwriting, promotion,
accounting and auditing as well as other various expenses have been
capitalized as prepaid acquisition costs on the balance sheet. These costs
will be offset in 1999 against Additional Paid-in Capital.
In April 2000, the Company acquired an additional 5% ownership interest
from a minority shareholder in Ceva Hungary bringing the ownership interest
of the Company in its Ceva Hungary Subsidiary up to 55%.
Two non-interest bearing notes totaling $25,000 and due April 30, 2000 were
issued in November 1999 and are payable either in cash or convertible into
common shares of the Company at .50(cent) per share. A non-detachable
warrant has been issued to each note holder entitling the holder to
purchase 15,000 common shares of the Company at $1 per share expiring
November 2, 2002. The notes were converted to common shares.
RESTATEMENT
The 1998 consolidated statement of operations and deficit has been restated
due to the reversal of a previously booked receivable determined to be
uncollectible ($208,000). In addition, the minority interest in loss of
consolidated subsidiary ($49,213) has been reduced so that the adjustment
to the minority interest in subsidiary on the balance sheet becomes $0.
This is a change from the previously reported negative balance of $49,213.
87
Ceva International, Inc. and Subsidiary
Consolidating Balance Sheet
(Restated)
December 31, 1998
------------------------------------------------------------
Ceva DR (CR) Consolidated
International Ceva Hungary Elimination Totals
------------- -------------- ------------ -------------
Assets
Current Assets
Cash $ 11,379 $ 61,242 $ - $ 72,621
Accounts receivable (net of allowance for
doubtful accounts of $0) 207,923 755,422 - 963,345
Inventory - 79,407 - 79,407
Due from Ceva International Inc. - 166,839 (166,839) -
Prepaid expenses - 9,046 - 9,046
Prepaid acquisition costs 190,654 - - 190,654
------------ ------------ ----------- ------------
Total Current Assets 409,956 1,071,956 (166,839) 1,315,073
Due from related party 5,499 - - 5,499
Property and equipment (net of accumulated depreciation) 298,850 3,123,014 - 3,421,864
Investment in Ceva Hungary 53,833 - (53,833) -
Deferred charges (net of accumulated amortization) 237,500 - - 237,500
Intangible assets (net of accumulated amortization) - 2,894 - 2,894
Deferred income taxes 5,000 - - 5,000
------------ ------------ ----------- ------------
Total Assets 1,010,638 4,197,864 (220,672) 4,987,830
============ ============ =========== ============
Liabilities and Stockholders' Equity
Current Liabilities
Due to Ceva Hungary 166,839 - 166,839 -
Accounts payable and accrued expenses 417,115 1,025,022 - 1,442,137
Current maturities of long-term debt 200,000 - - 200,000
Current maturities of capital leases - 693,239 - 693,239
Deferred credit - 84,100 - 84,100
------------ ------------ ----------- ------------
Total Current Liabilities 783,954 1,802,361 166,839 2,419,476
Capital leases, net of current maturities - 2,630,625 - 2,630,625
Loans payable to stockholder 1,094,588 - - 1,094,588
------------ ------------ ----------- ------------
Total Liabilities 1,878,542 4,432,986 166,839 6,144,689
------------ ------------ ----------- ------------
Minority interest in subsidiary - - - -
------------ ------------ ----------- ------------
Stockholder's Equity
Common stock, $.01 par value; 20,000,000 common shares 20,000 100,000 100,000 20,000
authorized; 2,000,000 common shares issued and
outstanding
Additional paid-in capital 1,480,000 - - 1,480,000
(Deficit) (2,367,904) (389,616) (46,167) (2,711,353)
Accumulated other comprehensive income - Foreign currency
translation adjustment - 54,494 - 54,494
------------ ------------ ----------- ----------------
Total Stockholders' Equity (Impairment) (867,904) (235,122) 53,833 (1,156,859)
------------ ------------ ----------- ----------------
Total Liabilities and Stockholders' Equity $ 1,010,638 $ 4,197,864 $ 220,672 $ 4,987,830
============ ============ =========== ================
88
Ceva International, Inc. and Subsidiary
Consolidating Statement of Operations and Deficit
Year Ended December 31, 1998
(Restated)
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
--------------- --------------- --------------- ----------------
Revenue $ 140,433 $ 1,809,823 $ - $ 1,950,256
Direct Costs - 1,644,187 - 1,644,187
--------------- --------------- --------------- ----------------
Gross Profit 140,433 165,636 - 306,069
--------------- --------------- --------------- ----------------
Operating Expense
Wages 95,192 296,153 - 391,345
Travel 179,372 - - 179,372
Bad debts 151,401 - - 151,401
Depreciation and amortization 69,004 11,003 - 80,007
Auto expenses 37,824 - - 37,824
Telephone 39,926 - - 39,926
International expenses 37,399 - - 37,399
Other expenditures 4,944 27,885 - 32,829
Professional services 30,300 - - 30,300
Miscellaneous - 18,839 - 18,839
Employee benefits 24,267 - - 24,267
Office expenses 16,530 - - 16,530
Officer's compensation 11,900 - - 11,900
Rent - 7,580 - 7,580
Entertainment 7,537 - - 7,537
Other taxes 7,282 - - 7,282
Insurance 4,009 - - 4,009
Advertising 395 - - 395
Management services - 100,000 (100,000) -
--------------- --------------- --------------- ----------------
Total operating expense 717,282 461,460 (100,000) 1,078,742
--------------- --------------- --------------- ----------------
(Loss) from operations (576,849) (295,824) 100,000 (772,673)
--------------- --------------- --------------- ----------------
Other income (expense)
Interest expense (116,261) (63,727) - (179,988)
Management fee income 100,000 - 100,000 -
Interest and other income 13,292 5,239 - 18,531
Minority interest in loss of
consolidated subsidiary - - 29,277 29,277
--------------- --------------- --------------- ----------------
Total other income (expense) (2,969) (58,488) 129,277 (132,180)
--------------- --------------- --------------- ----------------
Income (loss) before provision for income taxes (579,818) (354,312) 229,277 (904,853)
Provision for income taxes - 10,669 - 10,669
--------------- --------------- --------------- ----------------
Income (loss) before extraordinary item (579,818) (364,981) 229,277 (915,522)
Extraordinary item, cancellation of
indebtedness, net of income tax effect of $0 250,000 - - 250,000
--------------- --------------- --------------- ----------------
Net income (loss) (329,818) (364,981) 229,277 (665,522)
Retained earnings (deficit), beginning of year (2,038,087) (24,634) 16,890 (2,045,831)
--------------- --------------- --------------- ----------------
Retained earnings (deficit), end of year $ (2,367,905)$ (389,615) $ 246,167 $ (2,711,353)
=============== =============== =============== ================
89
Ceva International, Inc. and Subsidiary
Consolidating Balance Sheet
December 31, 1997
Ceva DR (CR) Consolidated
International Ceva Hungary Elimination Totals
--------------- --------------- --------------- --------------
Assets
Current Assets
Cash $ (10,261) $ 37,703 $ - $ 27,442
Accounts receivable (net of allowance for
doubtful accounts of $109,061) 173,021 125,946 - 298,967
Escrow funds receivable 198,000 - - 198,000
Due from Ceva Hungary 63,705 - (63,705) -
Deposit 52,000 - (52,000) -
Prepaid expenses - 1,498 - 1,498
--------------- --------------- ------------ -------------
Total Current Assets 476,465 165,147 (115,705) 525,907
Due from related party 101,818 - - 101,818
Property and equipment (net of accumulated depreciation) 5,354 204,005 - 209,359
Investment in Ceva Hungary 53,833 - (53,833) -
Intangible assets (net of accumulated amortization) - 5,195 - 5,195
Deferred income taxes 5,000 - - 5,000
--------------- --------------- ------------ -------------
Total Assets 642,470 374,347 (169,538) 847,279
=============== =============== ============ =============
Liabilities and Stockholders' Equity
Current Liabilities
Due to Ceva International, Inc. - 63,705 63,705 -
Accounts payable and accrued expenses 276,656 151,334 - 427,990
Current maturities of long-term debt 11,733 - - 11,733
--------------- --------------- ------------ -------------
Total Current Liabilities 288,389 215,039 63,705 439,723
Due to Ceva International, Inc. - 52,000 52,000 -
Long term debt, net of current maturities 238,267 - - 238,267
Loans payable to stockholder 653,901 31,942 - 685,843
--------------- --------------- ------------ -------------
Total Liabilities 1,180,557 298,981 115,705 1,363,833
--------------- --------------- ------------ -------------
Minority interest in subsidiary - - (29,277) 29,277
--------------- --------------- ------------ -------------
Stockholders' Equity
Common stock, $.01 par value; 20,000,000 common shares authorized;
2,000,000 common shares issued and
outstanding 20,000 100,000 100,000 20,000
Additional paid-in capital 1,480,000 - - 1,480,000
(Deficit) (2,038,087) (24,634) (16,890) (2,045,831)
--------------- --------------- ------------ -------------
Total Stockholders' Equity (Impairment) (538,087) 75,366 83,110 (545,831)
--------------- --------------- ------------ -------------
Total Liabilities and Stockholders' Equity $ 642,470 $ 374,347 $ 169,538 $ 847,279
=============== =============== ============ =============
90
Ceva International, Inc. and Subsidiary
Consolidating Statement of Operations and Deficit
Year Ended December 31, 1997
Ceva Ceva DR (CR) Consolidated
International Hungary Elimination Totals
--------------- --------------- --------------- ----------------
Revenue $ 386,968 $ 616,420 $ - $ 1,003,388
Direct Costs 35,000 460,915 - 495,915
--------------- --------------- --------------- ----------------
Gross Profit 351,968 155,505 - 507,473
--------------- --------------- --------------- ----------------
Operating Expense
Bad debts 185,906 - - 185,906
International expenses 114,044 - - 114,044
Professional services 94,174 49,583 - 143,757
Travel 65,577 - - 65,577
Auto expenses 35,760 - - 35,760
Telephone 30,332 - - 30,332
Employee benefits 12,072 - - 12,072
Officer's compensation 11,900 - - 11,900
Office expenses 9,118 - - 9,118
Entertainment 8,676 - - 8,676
Rent 6,241 - - 6,241
Miscellaneous 5,378 104,717 - 110,095
Insurance 3,593 - - 3,593
Depreciation 2,812 8,355 - 11,167
Advertising 1,422 - - 1,422
Wages - 12,095 - 12,095
Other expenditures - 7,395 - 7,395
Other taxes - 7,315 - 7,315
--------------- --------------- --------------- ----------------
Total operating expense 587,005 189,460 - 776,465
--------------- --------------- --------------- ----------------
(Loss) from operations (235,037) (33,955) - (268,992)
--------------- --------------- --------------- ----------------
Other income (expense)
Interest expense net of other income (39,690) 175 - (39,515)
Minority interest in loss of
consolidated subsidiary - - 16,890 16,890
--------------- --------------- --------------- ----------------
Total other income (expense) (39,690) 175 16,890 (22,625)
--------------- --------------- --------------- ----------------
Income (loss) before provision for income taxes (274,727) (33,780) 16,890 (291,617)
Provision for income taxes (200) - - (200)
--------------- --------------- --------------- ----------------
Net income (loss) (274,927) (33,780) 16,890 (291,817)
Retained earnings (deficit), beginning of year (1,763,160) 9,146 - (1,754,014)
--------------- --------------- --------------- ----------------
Retained earnings (deficit), end of year $ (2,038,087)$ (24,634) $ 16,890 $ (2,045,831)
=============== =============== =============== ================
91