ITEM 1. BUSINESS
The Corporation - ---------------
ICHOR Corporation was incorporated in July 1994 pursuant to the laws of the Commonwealth of Pennsylvania under the name "PDG Remediation, Inc.". In November 1996, the Corporation reincorporated under the laws of the State of Delaware and changed its name to "ICHOR Corporation". In this document, unless the context otherwise requires, the "Corporation" refers to ICHOR Corporation and its subsidiaries.
General - -------
From its inception to December 1997, the Corporation operated in the environmental services business. The Corporation's initial operations included a thermal treatment facility in Florida and remediation services offices in Florida and Pennsylvania. In December 1996, the Corporation acquired a waste oil recycling facility in Illinois.
In response to changes in the Florida market, the Corporation closed certain remediation services offices and sold certain remediation facilities in 1995 and 1996. The Corporation sold the balance of its remediation services operations in April 1997 and its waste oil recycling facility in December 1997. In March 1998, the Corporation sold its wholly-owned subsidiary, ICHOR Services, Inc. ("Services").
In 1998, the Corporation provided certain consulting services to an industrial customer in Europe. The Corporation is currently seeking new business opportunities.
The Corporation completed its initial public offering in February 1995. In July 1996, Drummond Financial Corporation ("Drummond") acquired a 59.5% interest in the Corporation from PDG Environmental, Inc. In December 1996, the Corporation issued approximately 50.3% of the Corporation's common stock to Logan International Corp. ("Logan") as partial consideration for a loan receivable through which the Corporation acquired its waste oil recycling facility. Logan and Drummond are controlled by MFC Bancorp Ltd. ("MFC"). In the first quarter of 1998, the Corporation completed the issuance of an aggregate of 467,500 shares of 5% Cumulative Redeemable Convertible Preferred Stock, Series 1 (the "Preferred Stock") of the Corporation to affiliates of MFC. In December 1998, Drummond and Logan transferred all of their shares of common stock of the Corporation to a wholly-owned subsidiary of MFC.
Acquisition - -----------
In October 1998, the Corporation entered into an agreement to acquire all of the issued and outstanding shares of common stock of Nazca Holdings Ltd. ("Nazca"), subject to the satisfaction by Nazca of certain performance criteria. Nazca, through its subsidiary, is in the business of the exploration for and development of ground water resources in Chile. Nazca holds two exploration concessions in Chile and has applied for an additional six concessions, and is in the process of
conducting exploration and development work on the granted concessions. The consideration payable by the Corporation for the Nazca shares consists of: (i) $200,000 per concession, upon receipt of certain regulatory approvals, by the delivery of shares of common stock of the Corporation having an attributed value of between $1.00 and $1.75 per share, depending upon the fair market value of the shares at the time such approvals are granted, and (ii) one share of common stock of the Corporation for each $1.00 of net after tax income earned by the Corporation from the concessions, up to a maximum of 1,500,000 shares. Incorporated by reference herein is the Corporation's Form 8-K dated October 20, 1998 relating to the agreement to acquire the shares of common stock of Nazca.
At December 31, 1998, the Corporation had 4 employees.
ITEM 2.
ITEM 2. PROPERTIES
The Corporation's administrative facilities are located on leased premises located in Vancouver, British Columbia, Canada.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In June 1995, Klein v. PDG Remediation, Inc., et al., No. CIV-4954 (DAB) was filed in the United States District Court for the Southern District of New York and alleged that the Corporation, its directors and certain of its officers, PDGE and the underwriters of the Corporation's initial public offering issued or participated in issuing a registration statement and prospectus which contained material misstatements or omissions, which were relied upon by the plaintiff. Specifically, the plaintiff alleged that the defendants knew or should have known that the Florida reimbursement program in which the Corporation participated was operating at a deficit and was being revised to eliminate funding of environmental remediation activities for lower priority sites. The action was certified as a class action on behalf of all purchasers of the Corporation's common stock from February 9, 1995 through May 23, 1995. The plaintiff sought: (i) either the rescission of any agreement with respect to the purchase of shares of common stock of the Corporation by members of the class or statutory damages, and (ii) interest, attorneys' fees and other costs and expenses.
In October 1998, the Corporation agreed to an out of court settlement of all claims in the aforesaid class action lawsuit, without any admission of liability or wrongdoing, pursuant to which it paid the settlement amount of $259,500.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. The Corporation's common stock is quoted on the NASDAQ SmallCap Market under the trading symbol "ICHR". The following table sets forth the quarterly high and low sale price per share of the Corporation's common stock for the periods indicated:
Fiscal Quarter Ended High Low - -------------------- ------ ------
March 31. . . . . . . . . . . . . $ 1.63 $ 1.19 June 30 . . . . . . . . . . . . . 1.50 1.25 September 30. . . . . . . . . . . 1.75 1.63 December 31 . . . . . . . . . . . 1.75 1.50
March 31. . . . . . . . . . . . . $ 1.75 $ 1.25 June 30 . . . . . . . . . . . . . 2.00 1.25 September 30. . . . . . . . . . . 2.25 1.25 December 31 . . . . . . . . . . . 3.25 1.25
(b) Shareholders. At March 23, 1999, the Corporation had approximately 16 holders of record of its common stock, some of which are securities clearing agencies and intermediaries.
(c) Dividends. The Corporation has not paid any dividends on its common stock and does not anticipate that it will pay any dividends in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table reflects selected consolidated financial data for the Corporation for the fiscal years ended December 31, 1998 and 1997, respectively, the 11 months ended December 31, 1996 and the fiscal year ended January 31, 1996. In September 1996, the Corporation changed its fiscal year end from January 31 to December 31. The Corporation does not have access to the information necessary to reclassify its financial information for the year ended January 31, 1995.
- ------------------- (1) Basic and diluted common share data is the same.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition of the Corporation for the years ended December 31, 1998 and 1997, respectively, and the 11 months ended December 31, 1996 should be read in conjunction with the Corporation's audited consolidated financial statements and related notes included elsewhere herein. In September 1996, the Corporation changed its fiscal year end from January 31 to December 31. As a result, the comparison of the year ended December 31, 1997 to the 11 months ended December 31, 1996 is a comparison between 12 and 11 month periods.
The Corporation sold its environmental remediation services operations in April 1997 and a waste oil recycling facility in December 1997. These operations have been accounted for as discontinued operations for the year ended December 31, 1997. Certain reclassifications have been made to the prior periods' financial statements to conform to the current period's method of presentation.
Results of Operations for the Year Ended December 31, 1998 Compared to the - -------------------------------------------------------------------------- Year Ended December 31, 1997 - ----------------------------
Revenues for the year ended December 31, 1998 increased to $0.7 million, from $6,000 for the comparative period of 1997. In the year ended December 31, 1998, the Corporation reported income of $0.1 million from consulting fees. Effective March 31, 1998, the Corporation sold Services and recognized a non- cash accounting gain of $0.4 million on the sale as a result of the disposal of net liabilities of Services.
Costs and expenses decreased to $0.9 million in the year ended December 31, 1998 from $1.0 million in the year ended December 31, 1997. Interest expense decreased to $0.1 million in the year ended December 31, 1998 from $0.6 million in the year ended December 31, 1997, primarily as a result of the sale of Services in the first quarter of 1998, which had financed certain receivables for work performed under certain Florida State rehabilitation programs. General and administrative expenses for the year ended December 31, 1998 increased to $0.5 million from $0.4 million in the comparative period of 1997, primarily as a result of an increase in professional fees.
In the year ended December 31, 1998, the Corporation paid $0.3 million in settlement of a class action lawsuit. See "Item 3. Legal Proceedings" herein for further details with respect to the action.
The Corporation reported a net loss of $0.2 million, or $0.08 per share, in the year ended December 31, 1998. In the year ended December 31, 1997, the Corporation reported a net loss of $4.1 million, or $0.83 per share, which included a loss of $3.0 million, or $0.62 per share, from discontinued operations.
Results of Operations for the Year Ended December 31, 1997 Compared to the 11 - ----------------------------------------------------------------------------- Months Ended December 31, 1996 - ------------------------------
Selling, general and administrative expenses for the year ended December 31, 1997 decreased to $0.4 million from $1.0 million for the 11 months ended December 31, 1996, primarily as a result of the legal and accounting costs associated with certain litigation involving the Corporation and the
costs associated with a proposed acquisition in the 11 months ended December 31, 1996 and reduced staffing as a result of the sale of the Corporation's environmental remediation services operations and a waste oil recycling facility in 1997. Interest expense was $0.6 million in the period ended December 31, 1997, compared to $0.4 million in the period ended December 31, 1996, primarily as a result of an increase in amounts funded under two agreements with Sirrom Environmental Funding, LLC during the year ended December 31, 1997, whereby the Corporation had funded the amounts billed and outstanding under certain Florida State environmental rehabilitation programs in the amount of $3.0 million, at the rate of prime plus 2% and 3%, respectively.
The Corporation reported a loss from continuing operations of $1.0 million in the year ended December 31, 1997, compared to $1.3 million in the 11 months ended December 31, 1996.
The Corporation recognized a loss from the operation of its environmental remediation services operations of $0.5 million in the year ended December 31, 1997, compared to $0.2 million in the period ended December 31, 1996. The Corporation recorded a gain of $59,000 from the sale of these operations in the period ended December 31, 1997. The Corporation reported a loss of $1.2 million from the operation of a waste oil recycling facility and a loss of $1.4 million from the sale of the facility in the year ended December 31, 1997. The Corporation had income from the operation of its soil remediation facility of $90,000 in the 11 months ended December 31, 1996, as a result of a reduction in the reserve for operating losses.
The Corporation's net loss for the year ended December 31, 1997 was $4.1 million, or $0.83 per share, compared to $1.4 million, or $0.54 per share, for the 11 months ended December 31, 1996.
Liquidity and Capital Resources - -------------------------------
The Corporation had cash of $50,000 at December 31, 1998, compared to $0.1 million at December 31, 1997. The Corporation maintains a line of credit with an affiliate in the amount of $0.8 million to fund working capital requirements. The line of credit was fully utilized as at December 31, 1998.
Net cash used in operating activities was $0.9 million in the year ended December 31, 1998, compared to $1.0 million in the year ended December 31, 1997. A decrease in accounts payable and other liabilities used cash of $0.1 million in the year ended December 31, 1998, compared to $0.4 million in the comparable period of 1997. A decrease in cash held in escrow provided cash of $0.1 million in the year ended December 31, 1998, compared to $0.6 million in the year ended December 31, 1997. The Corporation recognized a non-cash accounting gain of $0.4 million on the sale of Services in the year ended December 31, 1998.
Investing activities used cash of $1.5 million in the year ended December 31, 1998, primarily as a result of the acquisition of a note receivable. The note is due in the near term and bears interest at a rate of 8.75% per annum. On October 20, 1998, the Corporation entered into an agreement to acquire all of the issued and outstanding shares of common stock of Nazca, which is in the business of the exploration for and development of ground water resources in Chile. See "Item 1. Business - Acquisition" herein for further details with respect to the agreement.
Financing activities provided cash of $2.2 million in the year ended December 31, 1998, compared to $0.5 million in the year ended December 31, 1997. In the first quarter of 1998, the Corporation
completed the issuance of an aggregate of 467,500 shares of Preferred Stock of the Corporation in consideration of debt forgiveness of $2.2 million and cash of $2.2 million, net of expenses.
The Corporation believes that its assets and line of credit should enable the Corporation to meet its current ongoing requirements. The Corporation anticipates that it may require substantial capital to pursue current and future acquisitions of businesses and/or operating assets and will seek such capital through debt and/or equity financing.
Year 2000 - ---------
Many of the world's computer systems currently record years in a two-digit format. These computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions and is commonly referred to as the "Year 2000" issue. Based on its current information, management of the Corporation has determined that the Year 2000 issue will not pose significant operational problems for its computer systems as it only utilizes commercially available software and personal computers, which are Year 2000 compliant. The total cost to the Corporation of Year 2000 compliance activities has not been and is not currently anticipated to be material to its financial position or results of operations in any given year. In addition, management of the Corporation has initiated communications with clients to ascertain their Year 2000 readiness and develop contingency plans as required, and management intends to address this issue with any prospective client. The determination by management and costs relating to the Year 2000 issue are based on management's best estimates, which were derived utilizing numerous assumptions of future events. However, there can be no assurance that these estimates will be achieved and actual results could vary materially from those anticipated.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data required with respect to this Item 8, and as identified in Item 14 of this annual report, are included in this annual report commencing on page 14.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Corporation's definitive proxy statement to be filed within 120 days of the end of the Corporation's fiscal year.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Corporation's definitive proxy statement to be filed within 120 days of the end of the Corporation's fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Corporation's definitive proxy statement to be filed within 120 days of the end of the Corporation's fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Corporation's definitive proxy statement to be filed within 120 days of the end of the Corporation's fiscal year.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements -----------------------------
Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(2) Financial Statement Schedules -----------------------------
Independent Auditors' Report Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3) List of Exhibits ----------------
2.1 Agreement and Plan of Merger dated October 1, 1996 between ICHOR Corporation and PDG Remediation, Inc. Incorporated by reference to the Corporation's Schedule 14C dated September 17, 1996.
3.1 Articles of Incorporation.(1)
3.2 Certificate of Designations. Incorporated by reference to the Corporation's Form 8-K dated March 12, 1998.
3.3 Bylaws.(1)
10.1 Amended 1994 Stock Option Plan.(2)
10.2 1995 Qualified Incentive Stock Option Plan.(2)
10.3 Amended and Restated Employment Agreement for John M. Musacchio dated February 1, 1997.(3)
10.4 Loan Agreement dated January 15, 1997 between Ortek Inc. and Volendam Investments Limited.(4)
10.5 Loan Agreement dated January 15, 1997 among Drummond Financial Corporation, the Corporation and ICHOR Services, Inc.(4)
10.6 Amendment to Loan Agreement dated June 30, 1997 among Drummond Financial Corporation, the Corporation and ICHOR Services, Inc.(3)
10.7 Stock Purchase Agreement between the Corporation and Evergreen Holding Inc. dated December 23, 1997. Incorporated by reference to the Corporation's Form 8-K dated January 7, 1998.
10.8 Debt Settlement Agreement between Logan International Corp. and the Corporation dated September 30, 1997.(5)
10.9 Debt Settlement Agreement between Logan International Corp. and the Corporation dated February 20, 1998.(5)
10.10 Debt Settlement Agreement between Sutton Park International Ltd. and the Corporation dated February 20, 1998.(5)
10.11 Subscription Agreement between Constable Investments Ltd. and the Corporation dated February 26, 1998.(5)
10.12 Subscription Agreement between Conqueror Holdings Ltd. and the Corporation dated February 26, 1998.(3)
10.13 Subscription Agreement between Sutton Park International Ltd. and the Corporation dated February 26, 1998.(5)
10.14 Subscription Agreement between Zellstoff-und Papierfabrik Rosenthal GmbH and the Corporation dated February 26, 1998.(3)
10.15 Purchase Agreement between the Corporation and Nazca Holdings Ltd. dated October 17, 1998. Incorporated by reference to the Corporation's Form 8-K dated October 20, 1998.
23 Consent of Independent Auditors.
27 Article 5 - Financial Data Schedule for the year ended December 31, 1998.
- --------------- (1) Incorporated by reference to the Corporation's Form 10-K dated January 31, 1996. (2) Incorporated by reference to the Corporation's Definitive Schedule 14A dated July 8, 1996. (3) Incorporated by reference to the Corporation's Form 10-K dated December 31, 1997. (4) Incorporated by reference to the Corporation's Form 10-K dated December 31, 1996. (5) Incorporated by reference to a Schedule 13D\A dated March 13, 1998.
(b) Reports On Form 8-K -------------------
The Corporation filed the following reports with respect to the indicated items:
Form 8-K dated October 20, 1998: Item 2. Acquisition or Disposition of Assets. Item 7. Financial Statements and Exhibits.
Form 8-K/A dated January 4, 1999: Item 7. Financial Statements and Exhibits.
- ------------------------------------------------------------------------------ PETERSON SULLIVAN P.L.L.C. 601 UNION STREET SUITE 2300 SEATTLE WA 98101 (206) 382-7777 FAX 382-7700 CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT ----------------------------
To the Board of Directors and Shareholders Ichor Corporation and Subsidiary
We have audited the consolidated balance sheets of Ichor Corporation and its subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the years ended December 31, 1998, 1997 and the eleven months ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ichor Corporation and its subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998, 1997 and the eleven months ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Peterson Sullivan P.L.L.C. February 17, 1999 Seattle, Washington
ICHOR CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (In Thousands of Dollars)
1998 1997 ---------- ---------- ASSETS Current Assets Cash $ 50 $ 127 Cash held in escrow - 617 Accounts receivable, less allowance for doubtful accounts of none and $562 at December 31, 1998 and 1997, respectively 560 332 Notes receivable 2,080 680 Advances to affiliates 540 270 Other assets 51 2 ---------- ----------
Total current assets 3,281 2,028 ---------- ----------
$ 3,281 $ 2,028 ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and other liabilities $ 8 $ 402 Advances from affiliates 1,132 780 Debt - 757 ---------- ----------
Total current liabilities 1,140 1,939
Shareholders' Equity Preferred stock, $.01 par value; 5,000,000 shares authorized; Series 1, nonvoting; shares issued and outstanding 467,500 at December 31, 1998 and 217,500 at December 31, 1997 5 2 Common stock, $.01 par value; 30,000,000 shares authorized; shares issued 4,970,320 at December 31, 1998 and 1997 50 50 Additional paid-in capital on preferred stock 4,400 2,173 Additional paid-in capital on common stock 5,743 5,743 Retained deficit (7,986) (7,808) ---------- ----------
2,212 160
Less cost of 62,800 shares of common stock held in treasury at December 31, 1998 and 1997 (71) (71) ---------- ----------
2,141 89 ---------- ----------
$ 3,281 $ 2,028 ========== ==========
The accompanying notes are an integral part of these financial statements.
ICHOR CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1998 and 1997 and Eleven Months Ended December 31, 1996 (In Thousands of Dollars, Except for Per Share Amounts)
1998 1997 1996 ---------- ---------- ---------- Revenues Fees $ 144 $ - $ - Interest 92 6 - Gain on disposal of a subsidiary 437 - - Other 8 - 145 ---------- ---------- ----------
681 6 145
Costs and expenses General and administrative 497 418 1,042 Interest 102 613 423 Litigation settlement 260 - - ---------- ---------- ----------
859 1,031 1,465 ---------- ---------- ----------
Loss from continuing operations (178) (1,025) (1,320)
Discontinued operations (any tax benefits from losses are fully reserved; any taxes associated with gains are offset by tax losses) Loss from operation of environmental remediation services segment - (489) (169) Gain on sale of environmental remediation services segment - 59 - Loss from operation of waste oil recycling facility - (1,224) - Loss on sale of waste oil recycling facility - (1,375) - Gain from operation of soil remediation facility - - 90 ---------- ---------- ----------
Loss from discontinued operations - (3,029) (79) ---------- ---------- ----------
Net loss $ (178) $ (4,054) $ (1,399) ========== ========== ==========
Basic loss per common share Loss from continuing operations $ (.08) $ (.21) $ (.51) Discontinued operations - (.62) (.03) ---------- ---------- ----------
Net loss $ (.08) $ (.83) $ (.54) ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
ICHOR CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended December 31, 1998 and 1997 and Eleven Months Ended December 31, 1996 (In Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
ICHOR CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998 and 1997 and Eleven Months Ended December 31, 1996 (In Thousands of Dollars)
1998 1997 1996 ---------- ---------- ---------- Cash Flows from Operating Activities Net loss $ (178) $ (4,054) $ (1,399) Adjustments to reconcile net loss to cash flows from operating activities Gain on disposal of subsidiary (437) - - Changes in current assets and liabilities Cash held in escrow 145 637 (286) Accounts receivable (254) (185) 3,077 Advances to affiliates (270) (270) - Repayments to former parent - - (117) Prepaid expenses and other assets - 106 (40) Accounts payable and other liabilities (115) (403) (1,127) Advances from affiliates 352 360 193 Net assets of discontinued operations - 2,723 74 Other (100) 42 (84) ---------- ---------- ----------
Net cash provided by (used in) operating activities (857) (1,044) 291
Cash Flows from Investing Activities Increase in note receivable (1,400) - - Investment (50) - - ---------- ---------- ----------
Net cash used in investing activities (1,450) - -
Cash Flows from Financing Activities Proceeds from issuance of preferred shares 2,230 - - Purchase of stock held in treasury - (19) (52) Proceeds from debt - 750 51 Principal payments on debt - (188) (24) ---------- ---------- ----------
Net cash provided by (used in) financing activities 2,230 543 (25) ---------- ---------- ----------
Increase (decrease) in cash (77) (501) 266
Cash, beginning of year 127 628 362 ---------- ---------- ----------
Cash, end of year $ 50 $ 127 $ 628 ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
ICHOR CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands of Dollars, Except for Per Share Amounts)
Note 1. The Company and Summary of Significant Accounting Policies
The Company - -----------
Prior to December 1997, Ichor Corporation ("the Company") was in the environmental industry, providing environmental remediation services and operating a recycling waste oil facility. The Company sold the remediation services segment of its business in April 1997 for $147 in cash and retained the segment's current assets and liabilities. The waste oil recycling facility was sold in December 1997 for $1,000 including $320 in cash and a $680 note which was paid in 1999. Both segments were accounted for as discontinued operations and unless otherwise stated, all notes to financial statements relate to continuing operations.
In March 1998, the Company sold its subsidiary at a non-cash accounting gain of $437 which resulted from the assumption of the subsidiary's liabilities by the purchaser. The Company is presently evaluating other potential business acquisitions.
During 1998, the Company entered into an agreement to acquire Nazca Holdings Ltd. ("Nazca"). A wholly-owned subsidiary of Nazca is in the business of locating and developing ground water resources in Chile to be sold to mining, agricultural and public utility customers. Because the transaction was incomplete at December 31, 1998, the results of Nazca's operations are not included in these consolidated financial statements.
In July 1996, Drummond Financial Corporation ("Drummond") acquired a 59.5% interest in the Company. In December 1996, Logan International Corporation ("Logan") acquired a 50.3% interest in the Company which reduced Drummond's ownership to 29.6%. Because of these acquisitions, the Company changed its year end from January 31 to December 31, beginning in 1996. Effective December 31, 1998, Drummond and Logan transferred their interests in the Company to a subsidiary of their common parent corporation, MFC Bancorp Ltd. ("MFC"). Advances to/from affiliates involve various subsidiaries of MFC and are due in the near term.
Notes receivable include $1,400 from one company which is secured with collateral in excess of the note balance, bears interest at 8.75%, and is due in the near term.
Note 1. (Continued)
In 1997, Logan converted $1,425 of its debt from the Company into 142,500 shares of the Company's Preferred Stock, Series 1. In addition, another subsidiary of MFC converted a $750 advance into 75,000 shares of Preferred Stock, Series 1. Interest paid on a cash basis was the same as interest expense for 1998 and 1997. No interest was paid in cash in 1996.
During 1998, the Company settled a purported class action lawsuit for $260 involving purchases of its common stock in a prior year.
Principles of Consolidation - ---------------------------
The consolidated financial statements include the accounts of the Company and its subsidiary. Significant intercompany accounts and transactions have been eliminated.
Cash - ----
Cash balances are occasionally in excess of federally insured amounts. Cash held in escrow represents amounts which were subject to withdrawal restrictions.
Taxes on Income - ---------------
The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates.
Earnings Per Share - ------------------
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding in the period. Diluted earnings per share takes into consideration common shares outstanding (computed under basic earnings per share) and potentially dilutive common shares. The conversion of the convertible preferred stock, warrants and the stock options have not been reflected as exercised for the purposes of computing earnings or loss per share since the conversion of such stock or exercise of such warrants and options would be antidilutive. The weighted average number of shares was 4,907,520, 4,912,643, and 2,585,590 for the years ended December 31, 1998, 1997, and the eleven months ended December 31, 1996. The loss from operations to compute the amount attributable to common shareholders includes the recognition of preferred stock dividends in arrears of $214 and none for 1998 and 1997, respectively. The Company has 1,150,000 warrants outstanding which allows the holder to acquire common shares at $6 each until 2000. The Company also has 100,000 warrants outstanding which allows the holder to acquire common shares at $1.37 each until 1999.
Note 1. (Continued)
Preferred Stock - ---------------
The entire redemption value of Preferred Shares, Series 1, can be exchanged for common stock at 90% of the common stock average market price (as defined). Redemption value is $10 per share and shares are redeemable only by the Company with a 30 day notice. The Preferred Shares, Series 1, have a liquidation preference over other stock to the extent of the redemption value plus unpaid dividends. This stock has an annual cumulative dividend rate of 5%, payable quarterly and no dividends may be paid on common stock if preferred share dividends are in arrears.
Stock-Based Compensation - ------------------------
Compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee is required to pay for the stock. There is no stock-based compensation included in these consolidated financial statements.
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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Value of Recorded Instruments - ----------------------------------
The fair value of the notes receivable and advances to/from an affiliate were estimated to approximate their recorded values based on the terms of the instruments.
New Accounting Standards - ------------------------
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" is effective for years beginning after December 15, 1997. The primary objective of this statement is to report and disclose a measure of all changes in equity of an entity that result from transactions and other economic events of the period other than transactions with owners. There are no elements of other comprehensive income for 1998, 1997 and 1996; therefore, no disclosures are necessary beyond the consolidated statements of operations.
Note 1. (Continued)
Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information," is effective for years beginning after December 15, 1997. This statement requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Currently, the Company has limited operations and, therefore, management believes there are no identifiable segments and no additional segment information is provided.
Statement of Financial Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" establishes accounting and reporting standards for derivative instruments and for hedging activities. This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Because the Company does not engage in any derivatives or hedging activities, there should be no impact on its financial statements.
Note 2. Income Taxes
The reconciliation of income tax on income from continuing operations computed at the federal statutory rates to income tax expense is as follows:
Eleven Year Ended Year Ended Months Ended December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Tax at statutory rate $ (60) $ (349) $ (449) Permanent difference associated with gain on disposal of subsidiary (149) - - Valuation allowance 209 377 832 Other - (28) (383) ------------ ------------ ------------ $ - $ - $ - ============ ============ ============
Note 2. (Continued)
The significant components of the Company's deferred tax asset as of December 31, 1998 and 1997, is as follows:
1998 1997 ---------- ---------- Accounts receivable allowance $ - $ 191 Net operating loss carryforward 629 2,999 ---------- ---------- Net deferred tax asset before valuation allowance 629 3,190
Valuation allowance for deferred tax asset (629) (3,190) ---------- ---------- Net deferred tax asset $ - $ - ========== ==========
The Company has a net operating loss carryforward of approximately $1,850 at December 31, 1998, which expires at: $756 in 2010; $35 in 2011; $443 in 2012; $616 in 2013. The Company's utilization of the losses is subject to limitation due to ownership and operational changes, except those that expire in 2012 and 2013. At December 31, 1997, $2,770 of the deferred tax asset was attributable to the net operating loss carryforwards of a subsidiary which was disposed of in 1998.
Note 3. Stock Option Plans
1994 Amended Stock Option Plan - ------------------------------
The Company maintains a stock option plan which provides for the issuance of up to 350,000 shares of the Company's common stock to employees and non- employee directors.
The following table summarizes information with respect to the 1994 Amended Stock Option Plan:
Weighted Average Number of Exercise Shares Price --------- -------- Outstanding at January 31, 1996 147,500 $ .75 Granted 42,500 1.18 Canceled - Reusable (10,500) .75 --------- Outstanding at December 31, 1996 179,500 .81
Note 3. (Continued)
Weighted Average Number of Exercise Shares Price --------- -------- Granted 145,000 2.00 Canceled - Reusable (89,500) 1.10 --------- Outstanding at December 31, 1997 235,000 1.39 Granted - - Canceled - Reusable (170,000) 1.39 --------- Outstanding at December 31, 1998 65,000 $ .83 ========= ======== Exercisable at December 31, 1998 65,000 $ .83 ========= ======== Reserved for future grants at December 31, 1998 285,000 =========
The weighted average fair value (per option) at date of grant for options granted during the year ended December 31, 1997, and the eleven months ended December 31, 1996, was $.65 and $1.18, respectively. Almost all options have an expiration date ten years after issuance. No options have been exercised.
1995 Qualified Incentive Stock Option Plan - ------------------------------------------
The Company's board of directors approved a second stock option plan on August 15, 1996. This plan provides for the issuance of up to 150,000 shares of the Company's common stock to key employees.
The following table summarizes information with respect to the 1995 Qualified Incentive Stock Option Plan:
Weighted Average Number of Exercise Shares Price --------- -------- Outstanding at January 31, 1996 - $ - Granted 150,000 .75 Canceled - Reusable (25,000) .75 --------- Outstanding at December 31, 1996 125,000 .75 Granted - - Canceled - Reusable (25,000) .75 --------- Outstanding at December 31, 1997 100,000 .75
Note 3. (Continued)
Weighted Average Number of Exercise Shares Price --------- -------- Granted - - Canceled - Reusable (100,000) .75 --------- Exercisable at December 31, 1998 - $ - ========= ======== Reserved for future grants at December 31, 1998 150,000 =========
The weighted average fair value (per option) at grant date for options granted during the eleven months ended December 31, 1996, was $.72. All options have an expiration date ten years after issuance. No options have been exercised.
Compensation - ------------
For both the 1994 Amended Stock Option Plan and the 1995 Qualified Incentive Stock Option Plan, when options are granted, or the exercise price is adjusted, the exercise price cannot be less than the fair market value of the Company's common stock (as defined). However, had compensation expense been recognized on the basis of fair value pursuant to Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," instead of the accepted accounting method used by the Company, net loss and per share data would have been adjusted as follows:
Eleven Year Ended Year Ended Months Ended December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------
Net loss - ------------------------------- As reported $ (178) $ (4,054) $ (1,399) =========== =========== =========== Proforma $ (178) $ (4,085) $ (1,551) =========== =========== ===========
Basic earnings per share data - ------------------------------- As reported $ (.08) $ (.83) $ (.54) =========== =========== =========== Proforma $ (.08) $ (.83) $ (.60) =========== =========== ===========
Note 3. (Continued)
The fair value of each option granted is estimated on the grant date using the Black Scholes model. The assumptions used in calculating fair value are as follows:
Eleven Year Ended Months Ended December 31, December 31, 1997 1996 ------------ ------------ Risk-free interest rate 6.0% 5.0% Expected life of the options 3 years 10 years Expected volatility 101.2% 111.5% Expected dividend yield 0.0% 0.0%
- ------------------------------------------------------------------------------ PETERSON SULLIVAN P.L.L.C. 601 UNION STREET SUITE 2300 SEATTLE WA 98101 (206) 382-7777 FAX 382-7700 CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders Ichor Corporation and Subsidiaries
Our report on the consolidated financial statements of Ichor Corporation and Subsidiary is included on page 14 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Peterson Sullivan P.L.L.C. February 17, 1999 Seattle, Washington
ICHOR CORPORATION AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Year Ended December 31, 1998 and 1997 and Eleven Months Ended December 31, 1996 (In Thousands of Dollars)
Additions -------------------- Balance at Charged Balance at beginning Charged to other close of period to income accounts Deductions of period ---------- --------- -------- ---------- ----------
Year Ended December 31, 1998 (4) Allowance for doubtful accounts $ 562 $ - $ - $ 562 $ - ========== ========= ======== ========== ==========
Year Ended December 31, 1997 (3) Allowance for doubtful accounts $ 690 $ 2 $ - $ 130 $ 562 ========== ========= ======== ========== ==========
Eleven Months Ended December 31, 1996 (1) (2) Allowance for doubtful accounts $ 724 $ 40 $ 130 $ 204 $ 690* ========== ========= ======== ========== ==========
(1) Allowance for uncollectibility to reflect the fair value of receivables purchased; recorded at the date of acquisition of the waste oil recycling facilities. (2) Uncollectible accounts written off, net of recoveries. (3) Allowance for uncollectibility sold in conjunction with sale of waste oil recycling facility. (4) Allowance for uncollectibility sold in conjunction with sale of ICHOR Services, Inc.
* The consolidated balance sheet shows the allowance for doubtful accounts to be $560 (instead of $690). This is because $130 was reclassified to "net assets of discontinued waste oil recycling facility" at December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 1999 ICHOR CORPORATION
By: /s/ Michael J. Smith ----------------------------------------- Michael J. Smith, President, Chief Financial Officer, Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Michael J. Smith March 26, 1999 - ------------------------------ Michael J. Smith President, Chief Financial Officer, Treasurer and Director
/s/ Roy Zanatta March 26, 1999 - ------------------------------ Roy Zanatta Secretary and Director
/s/ John Musacchio March 26, 1999 - ------------------------------ John Musacchio Director
/s/ Leonard Petersen March 26, 1999 - ------------------------------ Leonard Petersen Director
/s/ Young-Soo Ko March 26, 1999 - ------------------------------ Young-Soo Ko Director
/s/ Jae-Sun Lee March 26, 1999 - ------------------------------ Jae-Sun Lee Director
EXHIBIT INDEX
Exhibit Number Description -------------- -----------
2.1 Agreement and Plan of Merger dated October 1, 1996 between ICHOR Corporation and PDG Remediation, Inc. Incorporated by reference to the Corporation's Schedule 14C dated September 17, 1996.
3.1 Articles of Incorporation.(1)
3.2 Certificate of Designations. Incorporated by reference to the Corporation's Form 8-K dated March 12, 1998.
3.3 Bylaws.(1)
10.1 Amended 1994 Stock Option Plan.(2)
10.2 1995 Qualified Incentive Stock Option Plan.(2)
10.3 Amended and Restated Employment Agreement for John M. Musacchio dated February 1, 1997.(3)
10.4 Loan Agreement dated January 15, 1997 between Ortek Inc. and Volendam Investments Limited.(4)
10.5 Loan Agreement dated January 15, 1997 among Drummond Financial Corporation, the Corporation and ICHOR Services, Inc.(4)
10.6 Amendment to Loan Agreement dated June 30, 1997 among Drummond Financial Corporation, the Corporation and ICHOR Services, Inc.(3)
10.7 Stock Purchase Agreement between the Corporation and Evergreen Holding Inc. dated December 23, 1997. Incorporated by reference to the Corporation's Form 8-K dated January 7, 1998.
10.8 Debt Settlement Agreement between Logan International Corp. and the Corporation dated September 30, 1997.(5)
10.9 Debt Settlement Agreement between Logan International Corp. and the Corporation dated February 20, 1998.(5)
10.10 Debt Settlement Agreement between Sutton Park International Ltd. and the Corporation dated February 20, 1998.(5)
10.11 Subscription Agreement between Constable Investments Ltd. and the Corporation dated February 26, 1998.(5)
10.12 Subscription Agreement between Conqueror Holdings Ltd. and the Corporation dated February 26, 1998. (3)
10.13 Subscription Agreement between Sutton Park International Ltd. and the Corporation dated February 26, 1998.(5)
10.14 Subscription Agreement between Zellstoff-und Papierfabrik Rosenthal GmbH and the Corporation dated February 26, 1998.(3)
10.15 Purchase Agreement between the Corporation and Nazca Holdings Ltd. dated October 17, 1998. Incorporated by reference to the Corporation's Form 8-K dated October 20, 1998.
23 Consent of Independent Auditors.
27 Article 5 - Financial Data Schedule for the year ended December 31, 1998.
- ---------------- (1) Incorporated by reference to the Corporation's Form 10-K dated January 31, 1996. (2) Incorporated by reference to the Corporation's Definitive Schedule 14A dated July 8, 1996. (3) Incorporated by reference to the Corporation's Form 10-K dated December 31, 1997. (4) Incorporated by reference to the Corporation's Form 10-K dated December 31, 1996. (5) Incorporated by reference to a Schedule 13D\A dated March 13, 1998.