UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-23812
ADVANCED RECYCLING SCIENCES, INC.
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Formerly known as The Quantum Group, Inc.
(Name of small business issuer in its chapter)
Nevada 95-4255962
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
Park Irvine Business Center
14771 Myford Road, Suite B Tustin, California 92780
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (714) 508-1470
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Securities registered pursuant to section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
$.001 par value, common voting shares
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(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such
report(s), and (2) has been subject to such filing requirements for the
past 90 days. (1) Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-KSB/A or any amendment to this Form 10-KSB/A. [X]
The issuer's revenue for its most recent fiscal year was: $196,827.
The aggregate market value of the issuer's voting stock held as of March
28, 2001, by non-affiliates of the issuer was $10,617,225.75.
As of March 28, 2001, issuer had 14,197,281 shares of its $.001 par value
common stock outstanding.
Transitional Small Busines Disclosure Format. Yes [ ] No [X]
Documents incorporated by reference: none
Advanced Recycling Sciences, Inc., and Subsdiairies
Formerly The Quantum Group, Inc., and Subsidiaries
Amended Annual Report on Form 10-KSB for the Year ended December 31, 2000
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TABLE OF CONTENTS
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PART I
ITEM 1 DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . . .3
ITEM 2 DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . 14
ITEM 3 LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS. . . . . 15
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . 15
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 7 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . 23
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . 45
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS,
AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT . . . . . . . . . . . . . . . . . . . . . 46
ITEM 10 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 49
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . 51
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 52
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 52
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 54
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PART I
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FORWARD
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This Form 10-KSB/A contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. For
this purpose any statements contained in this Form 10-KSB/A that are not
statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," anticipate," "estimate" or "continue" or comparable
terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainty, and
actual results may differ materially depending on a variety of factors,
many of which are not within the Company's control. These factors include
but are not limited to economic conditions generally and in the industries
in which the Company and its customers participate; competition within the
Company's industry, including competition from much larger competitors;
technological advances which could render the Company's products less
competitive or obsolete; failure by the Company to successfully develop new
products or to anticipate current or prospective customers' product needs;
price increase or supply limitations for components purchased by the
Company for use in its products; and delays, reductions, or cancellations
of orders previously placed with the Company.
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ITEM 1. DESCRIPTION OF BUSINESS
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Advanced Recycling Sciences, Inc., ("ARS " or the "Company") f.k.a.
The Quantum Group, Inc., is in the business of developing innovative
products and technologies in the environmental and recycling industries,
with specific emphasis on scrap tire rubber recycling. The principal
offices of the Company are located at the Park Irvine Business Center,
14771 Myford Road, Suite B, Tustin, California 92780. The Company was
organized as a corporation in 1968, under the laws of the State of
California. In 1988 the Company changed its domicile from California to
the State of Nevada and has operated as a Nevada corporation since that
time. In March 2001, the Company amended its articles of incorporation to
change its name from The Quantum Group, Inc., to Advanced Recycling
Sciences, Inc. The Company is registered and qualified to do business in
the State of California.
The Company conducts most of its operations through several wholly
owned subsidiary companies. The corporate organization is as follows:
3
ARS
Advanced Recycling Sciences, Inc.
Innovative technology development
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Board of Directors
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Technology Sales Engineering Product Sales
Division Department Division
Full Circle Tire Technology Development Crumb Rubber
Recycling Systems Project Management & Product Sales
and Solutions System Engineering
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Advanced Poseidon Bay Area Tires2Oil, Inc.
Surfacing Products Recycling,
Technologies, Inc. GmbH Inc.
Crumb Rubber Tire & Tire Recycling Producing
Modified Asphalt Industrial Crumb Rubber High Grade
Paving & Rubber Production Petroleum
Technology Recycling and Activated
Transfer Product Carbon Iron
De-Icing Manufacturing Scrap Tires
Technology
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4
Company Subsidiaries
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Advanced Surfacing Technologies, Inc. ("AST") was incorporated in
Nevada in May 1997 as Quantum Modified Asphalt Xcetera, Inc., a wholly
owned subsidiary of the Company. The name was changed to Advanced
Surfacing Technologies, Inc., in March 2001.
The Company believes there are opportunities in the asphalt paving
industry. Among those opportunities, is a potentially large market for
crumb rubber to be used in producing crumb rubber modified ("CRM") asphalt
paving. This will include the use of specialized mobile equipment for the
mixing of crumb rubber and asphalt at hot mix plants, overseeing technology
transfer programs to international clients, on-site project management and
seminars to educate both public and private sector engineers about the
Company's products and services. Through AST, the Company will seek to
exploit these opportunities. AST will also research, develop and market
other technologies in the asphalt paving industry, including the worldwide
exclusive licence to certain ground surface applications of a novel ice
adhesion modification or "de-icing" technology the Company received when it
acquired Technology Development, Inc., from UTEK Corporation,
http://www.utekcorp.com.
Technology Development, Inc. ("TDI") was acquired by the Company in
February 2001. TDI will be absorbed into AST, which will oversee the
development and, if appropriate, commercialization of the ground surface
de-icing technology.
Poseidon Products GmbH. ("Poseidon") was established by the Company
jointly with SteG, a German Government sponsored company. In September
2000, the Company returned to SteG its original investment in Poseidon
Products in exchange for SteG's interest in Poseidon, making Poseidon a
wholly owned subsidiary in the Company.
Through Poseidon, the Company will finish construction of and operate
a tire recycling facility in Penkun, in the state of Mecklenburg-
Vorpommern. This facility will produce crumb rubber and manufacture a wide
range of value-added aftermarket products using technologies licensed or
developed by the Company.
Ground breaking on the Poseidon facility occurred on September 17,
1998. Site improvements were begun and foundations for the plant were
commenced. Due to difficulties in securing an accompanying bank to sponsor
the project, construction of the facility has been delayed. The Company
continues to negotiate funding for the facility with several German banks,
and hopes to have funding in place late in the year 2001 or early 2002.
The Company has obtained extensions on both the EU grants and the low
interest funding commitment from the government of the state of
Mecklenburg-Vorpommern.
Poseidon currently has an office in Penkun and is developing a
marketing plan to introduce and sell its manufactured products in Germany
and Europe. Assuming sufficient funding is obtained, the Company believes
the Poseidon facility will be completed and operational by early next year.
The Company expects to have a clearer understanding as to when the Poseidon
facility will be finished and operational by the end of the second quarter
of 2001.
As the Poseidon facility will incorporate much of the tire recycling
equipment and technology the Company has to offer, the Company intends to
use the Poseidon facility as a showcase for future full scale tire
recycling plants.
5
Bay Area Recycling, Inc. During March 2001, the Company signed a
Memorandum of Understanding with Shen Gang Development Limited a quasi
government organization associated with the city of Shen Yang in the
province of Liaoning PRC. The Memorandum calls for a 50/50 joint venture
between the Company and Shen Gang Development, Limited. The parties expect
to sign a definitive agreement by April 16, 2001 to jointly develop a
crumb rubber manufacturing facility called Bay Area Recycling, to be
located in Northern California. The Company has reserved the name Bay Area
Recycling, Inc., with the Secretary of State of California and will
incorporate it immediately upon the execution of the definitive agreement.
Bay Area Recycling will initially produce crumb rubber for the fast growing
California crumb rubber modified asphalt paving market and will look at
other product application in the future.
Tires2Oil, Inc. is a wholly owned subsidiary of the Company.
Tires2Oil was formed as a Nevada corporation on January 17, 2001. The
primary responsibility of Tires2Oil will be the continued research,
development and exploitation of certain super critical fluid ("SCF") tire
recycling technology recently acquired by the Company. The SCF technology
is used to break down tires into a clean form of synthetic crude oil which
can be easily upgraded in existing oil refineries. This technology has
been proven on a table top scale. Tires2Oil will focus its initial
efforts into determining whether this technology can be feasible on a
commercial scale.
The Company recently hired Sudheer Helekar to serve as a project
director. He will oversee the development and construction of the
Tires2Oil pilot plant. The Company has also contracted with Dr. William
Farone of Applied Power Concepts, Inc., of Anaheim, California to develop
the commercial processes and equipment for the Tires2Oil pilot plant.
Advanced Environmental Technologies, Limited ("AET") is a wholly owned
subsidiary of the Company. AET was incorporated pursuant to the laws of
the province of Alberta, Canada on April 21, 1997 as QEST Industries, Inc.
The Company changed the name in March 2001. AET will provide engineering
support services to tire recycling facilities in both North and South
America. These services will be provided via the Company's strategic
alliance with Sultech Engineering, a Calgary based engineering concern.
The Company pays Sultech on an as needed, job by job basis.
Other Subsidiaries
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QCAL, Inc. ("QCAL") is a wholly owned subsidiary of The Quantum
Group, Inc. QCAL rescinded its joint venture agreement with the State of
California Department of Corrections ("CDC") and has closed down its tire
crumbing facility at the Richard J. Donovan Correctional Facility at Rock
Mountain in San Diego County, California ("Donovan Correctional Facility").
QCAL made the decision to close down the San Diego plant due to
insufficient funds to purchase all of the equipment necessary to
manufacture crumb rubber products and the fact that the installation of the
appropriately sized granulator for shredding and granulating tires proved
to be impractical at the prison facility. In July 2000, Thomas Driscoll
resigned as an officer of the Company. QCAL has completed its exit from
the Donovan Correctional Facility, and all obligations of the Company
relative thereto have been satisfied in full.
The Company plans to ship the Press and the C3000 granulator installed
at the Donovan Correctional Facility to Germany to be installed at the
Posiedon Facility.
6
With the completion of its exit from the Donovan Correctional
Facility, the Company anticipates it will discontinue all operations in its
QCAL subsidiary.
Modified Asphalt Technologies, Inc. ("MAT") In January 2001, the
Company and MAT mutually agreed to rescind the MAT Purchase Agreement
entered into by the parties in January 2000. The Company no longer owns
any interest in MAT.
Eurectec, Inc. ("Eurectec") is a wholly owned subsidiary of The
Quantum Group, Inc. Through Eurectec, the Company entered into a certain
license agreement with CISAP SpA of Italy. Unfortunately, CISAP could not
provide equipment that operated to its represented specifications. As a
result, the Company no longer markets or sells CISAP equipment, nor does it
intend to do so in the future. The Company is currently involved in
litigation with CISAP. Beyond dealing with the CISAP litigation, the
Company anticipates little, if any business will be transacted through
Eurectec in the future.
The Company has developed a new group website which can be viewed at
http://www.arsciences.com. The website allows visitors to access an
overview of the Company's activities, obtain market information for the
Company's trading stock and view the Company's EDGAR filings. The Company
has a portal website, http://www.tirerecycling.com. The Company is
developing a Tires2Oil website, which can be viewed at
http://www.tires2oil.com. The Company may develop additional websites in
the future.
Market For The Company's Products
In 2000 there were almost 300,000,000 tires discarded in the United
States. There are currently between two and three billion tires stockpiled
in the United States and an estimated 1,000,000,000 tires discarded
annually worldwide. Although millions of tires are discarded every year,
there has been no consensus on the best way to dispose of the tires. Waste
tires continue to accumulate in huge tire dumps throughout the world. One
of the early governmental responses to this problem was to require the
tires be shred into small pieces. This measure was taken to help reduce
the size of the tire dumps, the potential for fires, and the health hazards
which existed because of mosquitoes and rodents which inhabit these tire
dumps. The European Union has issued a directive banning landfilling of
all tires, whether whole or shredded, by the year 2007.
In an effort to induce recycling of tires in the United States, many
states have enacted laws charging recycling fees on all new tire sales.
The fees are deposited into state operated funds which are used for grants
to fund tire recycling technology research projects and to compensate tire
recyclers for recycling tires. In addition, the federal and state
governments have created a market for recycled rubber by enacting statutes
which require that new road construction include a certain percentage of
recycled rubber in the roads. A typical street one mile long and 30 feet
wide using a 1.5 inch topping will use approximately 39,000 pounds of crumb
rubber. An interstate highway one mile long and 72 feet wide using a 3
inch topping will require 186,000 pounds of crumb rubber in the topping
mix.
7
Several different methods for disposing of or recycling tires have
been attempted. At one point, a market developed for shredded tires as
fuel in cement kilns and electric power plants, however, most states have
prohibited or strictly limited tire burning because of its adverse
environmental impact. In addition, it has been recognized that tire
burning is an inadequate use of the valuable rubber resource contained in
the tires.
In an effort to reclaim valuable resources from tires, attempts have
been made to recover oil from tires through pyrolysis. Pyrolysis is a
process of heating tires to very high temperatures and extracting the
petroleum content from the rubber. To date pyrolysis systems have not
reached commercial viability because of the substantial capital investment
required to construct such systems, the high operating cost and low
efficiency of such systems when compared to the price of crude oil.
Another system being offered by some of the Company's competitors is a
cryogenic process which freezes the tires to very cold temperatures using
liquid nitrogen, at which point the brittle rubber can be broken free of
the steel and fabric content of the tire. Cryogenic systems are expensive,
costing from 4 to 20 million dollars. To date, the Company is not aware
of any facility using a cryogenic system that is not subsidized by
government grants or private grants from producers of liquid nitrogen.
Although this process uses much more sophisticated technology, the process
tends to be cumbersome and expensive to operate. Moreover, if the
equipment is shut down for maintenance or repairs the entire system must be
taken off line for a period of days. Another disadvantage of such systems
is that the crumb rubber made by the cryogenic process has reduced
elasticity, which limits the usefulness of the crumb rubber for after
market products.
Other systems uses efficient shredding equipment, but rely on
hammermill technology for granulating the shredded rubber. These systems
tend to be very large, noisy and inefficient, largely because hammermill
technology was designed for other industrial applications and has not been
readily adaptable for use in tire recycling.
In addition to the fact that there is no agreed upon best method for
recycling scrap tires, another of the challenges facing the tire recycling
industry has been the lack of reasonably priced equipment for the
production of crumb rubber, particularly given the production capacity of
such equipment and the prevailing market prices of crumb rubber. Prices of
crumb rubber vary according to the mesh (size) of the rubber. The 2001
issue of Scrap Tire and Rubber Users Directory, published by Recycling
Research Institute, provided information regarding historical market prices
of tire-derived materials, including crumb rubber. In 2000-2001, the
average price of crumb rubber with a mesh of minus 10 was $.055 - .20 per
pound. This is the size most commonly used in asphalt paving. Aftermarket
products manufactured from press equipment use rubber of approximately
minus 30 mesh, which for 2000-2001 was priced at $.09 - .32 per pound.
Very finely ground crumb rubber which is suitable for devulcanization is
usually minus 80-100 mesh. In 2000-2001 crumb this size ranged in price
from $.18 - .80 per pound.
Another obstacle to market development has been the limited and
uncertain demand for crumb rubber. Without an established market for crumb
rubber and reasonably predictable prices for crumb rubber there is no way
to assure a recycler that he could recover his capital investment or make a
profit on a recycling operation. In turn manufacturers have been reluctant
to specify the use of crumb rubber in products because of the lack of a
broad and consistent supply of high quality crumb rubber at predictable
prices.
8
Moreover, the tire recycling industry is highly competitive, no single
competitor holds a dominant market position. Some of the Company's
competitors have longer operating histories and are financially stronger
than the Company. There are several companies which offer different pieces
of equipment to recyclers such as shredders, slitters and granulating
equipment. Few companies, however, offer complete recycling systems which
include all the equipment required to process whole tires to crumb rubber
and in turn use crumb rubber to produce aftermarket products and CRM
asphalt paving.
Products
Crumbing Equipment
Eco Granulating System ("EGS")
------------------------------
The Company believes the system it offers has several advantages over
the systems offered by competitors, including (i) lower initial cost of a
system; (ii) higher operating efficiencies and lower operating expense;
(iii) less maintenance down time; and (iv) recycling at ambient
temperatures resulting in high quality crumb rubber output.
The Company has designed a complete tire recycling and granulating
production system which integrates individual pieces of tire recycling
equipment made by other manufacturers. The EGS System reduces scrap
automobile and truck tires to useful and valuable crumb rubber, reusable
steel scrap and nylon fluff. The system as designed follows common
processing steps accepted in the industry. The process begins by sending
truck tires through a de-beader, slitter and shredder. Automobile tires go
directly to a shredder. In the next step, the shredded material is fed to
a grizzly which extracts approximately 90% of the steel from the shredded
tires and further reduces the size of the material to minus one inch. Then
the material is processed through a magnetic separator which removes the
steel shred and a pneumatic aspiration system which removes the nylon
fibers. The product is processed through a granulator which further
reduces the shred to approximately 5 mesh and removes any remaining steel
and fabric. Finally, the crumb rubber is processed through a granulator
which reduces the product to particle sizes ranging from 0 to .5 mm, .5 mm
to 2 mm, 2 mm to 4 mm. The EGS System will also offer as an option, a
grinder which will reduce the crumb rubber to minus 60 mesh.
The EGS System the Company markets does not require the Company to
manufacture any equipment. Most of the equipment used in the system e.g.,
de-beaders, slitters, grizzlies, grinders and granulators are currently
manufactured by other companies. If necessary, third party contractors can
manufacture all of the equipment and parts required to integrate the
individual pieces of equipment into a unified recycling system.
SuperCollider - Impact 500 Technology
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During 1997, the Company worked on the in-house development of a
compact SuperCollider machine designed to take large mesh size crumb rubber
produced by the EGS System and buffings from tire retreading and pulverize
it into fine powder in order to open up several new markets. These markets
include extrusion products, press products and products combining super-
fine crumb and plastic. The Company finalized the engineering for the
SuperCollider and concluded the development, prototype work and initial
performance testing during 1998 and early 1999. After testing the initial
prototype, the Company decided not to sell the SuperCollider into the
market until a number of improvements could be made. During 1999, the
9
Company made those improvements and began additional testing. The first
SuperCollider was installed and operational at the Donovan Correctional
Facility. It has now been removed and the Company anticipates it will be
shipped and installed at the Poseidon Facility.
REVULCON - Revulc 300 Technology
---------------------------------
The Company is currently renegotiating its exclusive worldwide license
agreement with Faru GmbH., Dresden, Germany ("Faru"). Faru is the patent
holder of the REVULCON technology. This technology enables the production
of high density, smooth finish rubber moldings and extrusions, including
new tires, by adding REVULCON compound. This is done by a process of
devulcanizing the rubber, returning it to a state where it can be utilized
in new products and re-vulcanized. The reactivated rubber waste can be
processed without further additives to rubber products like mats, plates,
solid rubber tires, components for fall protection, elements for sound and
vibration deadening, blocking and insulating layers against heat and
moisture. Profiles and other goods can be made by extrusion or injection
molding when the revulcanized rubber is mixed with fresh rubber or
plastics. While there are other companies developing and marketing
competing technology, the REVULCON technology is the only one that does
not introduce or use of chemicals in its process.
Aftermarket Product Equipment
Eco-Press
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The Company also sells press equipment which can be used to process
crumb rubber into value added aftermarket products including door mats,
anti-fatigue mats, cattle and heated floor mats, roofing products, trailer
liners, carpet underlay. Also other products such as speed bumps, sports
surfaces such as tennis and other ball game courts, gymnastic and running
track surfaces, and playground safety surfaces are other end products which
can be manufactured using crumb rubber. The Company also has a slicer
machine capable of peeling pre-cast cylinders of solid crumb rubber for use
in making continuous roll sheeting material.
Rothbury Technology
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The Company, has the exclusive worldwide manufacturing and marketing
rights to a process for giving a mixture of crumb rubber granulates, resins
and other additives heat conductive characteristics for use in products
such as heatable floor coverings, livestock and pet mats and underlayments
developed by Rothbury Engineering Limited, Great Britain.
The Rothbury technology relies on a heating filament, which operates
on either AC or DC electricity, imbedded in a rubber underlayment. These
products can be operated more cost effectively than interior forced air and
radiant heating systems. In exterior applications, the heated rubber
products provide superior heat conducting properties to other available
technology such as heating coils in concrete. These heated products give
manufacturers new products and a new market for crumb rubber.
10
The Company has patent applications pending in the United States and
Europe on the Roxbury echnology subject to the license agreement. If the
patent is granted, it will be held by Advanced Recycling Sciences, Inc.
Crumb Rubber Modified ("CRM") Asphalt Paving
Crumb Rubber Modified/Asphalt Mixing Equipment
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The crumb rubber modified ("CRM") asphalt paving industry is still in
the early stage of development. Currently, the Company knows of five
states which have done sufficient testing of CRM asphalt to no longer
consider it experimental. The testing performed by Arizona, California,
Florida, New Mexico and Texas has shown that the application of asphalt
rubber systems significantly increases the life of the roadway surface
while reducing the maintenance costs and life-cycle costs. These states
are all increasing their overall use of various CRM asphalt systems. The
Company believes that within the next five years, the number of states
specifying and using CRM asphalt paving will increase to as many as thirty
four.
The Company has spent significant time and effort researching and
seeking to establish itself in the CRM asphalt paving industry. The
Company will seek to establish itself as a premier provider of crumb
rubber/asphalt mixing equipment to contractors in the asphalt paving
industry.
In addition to providing crumb rubber/asphalt mixing equipment, the
Company, through Bay Area Recycling, will have the ability to provide a
ready source of crumb rubber to its own operations and to outside clients.
Roadway Surface De-Icing Technology
-----------------------------------
In February 2001, the Company acquired TDI. TDI had two primary
assets: a worldwide exclusive license for the ground surface applications
of a patented novel ice adhesion modification technology developed at
Dartmouth College's Thayer School of Engineering; and a $200,000 pre-paid
credit for additional research and development of the technology by the
Dartmouth College engineering professor who developed the technology.
While this technology is still in its early stages of development, the
Company believes that this technology can be commercially developed to
provide rapid non-thermal de-icing of CRM asphalt surface. De-icing is
accomplished through a novel electrochemical decomposition technology which
the Company believes can be applied to roadways, bridges, airport runways,
tarmacs and other surfaces exposed to cold environments. The Company
anticipates that this technology will be capable of being retro-fitted to
existing surfaces, as well as being used in new construction.
The Company's rights are limited to ground surface applications.
Dartmouth College sold BFGoodrich the license rights to use this technology
in aerospace and marine applications. Torvec, Inc., purchased the license
rights for land-based vehicle applications.
Tires2Oil(TM) Super Critical Fluid Process
In June 2000, the Company acquired the exclusive worldwide licensing
rights to certain Super Critical Fluid ("SCF-Oil ") tire recycling
technology developed and patented by the University of South Alabama.
Through a simple one-step process, this technology can be used to produce
synthetic crude oil which can easily be upgraded in existing oil
refineries. In addition to synthetic crude oil, the process also produces
carbon black, which has a number of manufacturing uses or with further
processing can be converted to activated carbon used in water and air
purification system technologies. The Company believes this technology
will provide another environmentally conscious means of recycling scrap
tires.
Based on preliminary laboratory results achieved at the University of
South Alabama, this SCF-Oil process appears to be capable of producing
significantly more oil per ton of processed tires than currently existing
processes such as pyrolsis. The Company believes this technology, unlike
currently existing technologies, represents the first commercially feasible
tires to oil recycling process. To date, this technology has been
demonstrated only in the laboratory.
The Company intends to continue development of this technology. The
Company has begun ordering equipment for the establishment of a pilot plant
to be used to develop firm criteria and product data for enabling the
construction of full scale production plants. The estimated cost of
establishing this pilot plant is $1,000,000 This will be accomplished
through the Company's Tires2Oil subsidiary. Once the Company has a firm
understanding of the criteria, data, and production specifications,
Tires2Oil will market and license this technology worldwide. The Company
may also seek to set up its own full scale production plants. The current
estimated cost of building a full scale production plant is between
$11,000,000 and $13,000,000.
Research and Development
During the past year the Company's primary efforts were employed in
the evaluation and due diligence associated with the acquisition of the
Tires2Oil and de-icing technologies via our strategic alliance with UTEK
Corporation. Therefore, the Company did not expend significant resources
in research and development during fiscal year 2000. With the acquisition
of these new technologies, the Company anticipates incurring significantly
greater expenses for research and development during fiscal year 2001.
Marketing and Sales
The Company has been most successful marketing and selling outside of
the United States where attractive incentives are offered to investors by
way of government grants, low interest loans and tax advantaged investment
programs.
The Company continues to rely principally on the efforts of its
officers and directors to generate sales. Historically, the Company's
principal method of marketing has been through direct sales by officers of
the Company and independent commissioned sales representatives worldwide.
The Company believes its active participation in trade shows and trade
organizations is providing strong industry connections and marketing
opportunities. The Company is also advertising in technical and trade
journals and articles and on the Company's new website. Finally, the
Company believes its Poseidon facility will provide an excellent marketing
platform for the sale of the Company's products and technologies.
13
The Company is a member of a number of associations related to the
tire, rubber and recycling industries including the Rubber Pavements
Association located in Mesa, Arizona, the International Tire and Retreading
Association, headquartered in Louisville, Kentucky (ITRA), ETRA (the
"European Tire Recycling Association") headquartered in Paris, France and
is a founding member of the International Recycling Federation located in
Bonn, Germany. In addition, the Company is listed in the Scrap Tire Users
Directory, an Recycling Research Institue annual publication which is a
business reference guide to the tire recycling industry.
Despite significant effort, to date the Company has been unable to
establish consistent sales volume. The Company credits this to a number of
factors. First, although the problem of waste tires has existed for
decades, the tire recycling industry is still in its early stages of
development worldwide. No single response to the problem of waste tires
has become generally accepted. While momentum in the industry seems to
favor tire recycling, which reclaims the rubber resource, no single
technology or method has achieved market dominance. Under these
conditions, potential purchasers are slow to buy. Second, because of
limited sales, manufacturers of recycling equipment do not carry large
inventories of equipment, which significantly lengthens the sales cycle.
Third, due to inconsistent sales volume, the Company has had limited
capital and has maintained only a limited marketing and sales staff.
While these factors have made it difficult for the Company to create
consistent cash flow and compete successfully in the industry, they also
form significant barriers to entry by competitors who will face many of the
same challenges.
As part of its strategic reorganization during the third quarter 2000,
the focus of the Company's business will be technology acquisition and
development driven. The Company will seek to vertically integrate these
technologies into its own planned operations in Germany and the United
States, thus providing multiple potential revenue streams in the future.
Employees
Currently the Company has five employees other than its officers and
directors, its independent outside sales persons and an outside consultant.
The Company relies heavily on the efforts of its President and Chief
Operating Officer, Keith J. Fryer. It also relies upon the services of
John F. Pope, the Company's Treasurer, a Vice President and Director, and
Ehrenfried Liebich, the Company's Chief Executive Officer and Chairman of
the Board.
Scientific Advisory Board
Consistent with the Company's goal to become a leader in the
development and commercialization of technologies for the scrap tire
recycling and crumb rubber modified asphalt paving, the Company has
established a Scientific Advisory Board to assist it in the evaluation and
development of new technologies. The following individuals currently serve
on the Company's Scientific Advisory Board: Victor F. Petrenko, Ph.D.,
Jagdish Dhawan, Ph.D., Pawan Agarwal, Ph.D. and Nicholas D. Sylvester,
Ph.D. The members of the Scientific Advisory Board are not employees of
the Company, and each maintains full-time employment with other
organizations.
13
Initially, Dr. Petrenko will be compensated for his services to the
Company by Dartmouth College pursuant to the $200,000 pre-paid research and
development credit with Dartmouth College acquired by the Company when it
purchased TDI. The other Scientific Advisory Board members each received
Company common stock for services to be rendered to the Company.
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ITEM 2. DESCRIPTION OF PROPERTY
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On March 1, 2000, the Company renewed its lease agreement to lease an
industrial condominium in a multi-tenant building for use as its principal
executive office. The Company pays $3,821.00 per month for 4,495 square
foot facility. The lease expires on February 28, 2002 and has a renewal
option for an additional year. The building is located at Park Irvine
Business Center, 14771 Myford Road, Building B, Tustin, California 92780.
The space the Company is leasing is sufficiently large to accommodate all
of its administrative and storage needs.
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ITEM 3. LEGAL PROCEEDINGS
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Tyre's Ecology S.r.l.
The litigation between Eurectec and Tyre's Ecology S.r.l., in the
Court in Pistoia, Italy, is ongoing. The next hearing scheduled in this
matter has been set for January 10, 2002. The parties are currently
attempting to negotiate a settlement in this matter.
Veplas Manufacturing, Ltd.
The Company has initiated a lawsuit against Veplas Manufacturing,
Ltd., and is seeking the return of the purchase price of equipment. The
Company claims misrepresentation on the acidity and performance of the
equipment purchased from Veplas. At the time Veplas Manufacturing, Ltd.,
answered the Company's Complaint, Veplas made various counterclaims against
the Company. These claims include a claim for $27,081.46, which Veplas
claims is the balance due pursuant to the Agreement signed between the
parties, a claim for $2,387.69 for shipping costs paid by Veplas on the
Company's behalf; and unspecified claims for costs for special damages.
The Company refutes Veplas' counterclaims and will continue to pursue this
matter.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITIES HOLDERS
--------------------------------------------------------------------------
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of the fiscal year ending December 31, 2000.
14
In January 2001, in accordance with the Company's Articles of
Incorporation, its Bylaws and Section 78.325 of the Nevada Revised
Statutes, the shareholders, by written shareholder consent, without a
meeting approved the following actions: 1) that the Company amend its
Articles of Incorporation to effect a name change to Advanced Recycling
Sciences, Inc.; 2) in connection with the name change, the Company obtain a
new CUSIP number and a new trading symbol, "ARYC." The Company received
7,619,603 votes in favor of the above actions. No votes were cast against
the actions.
The shareholders were not asked to vote on directors.
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------
The Company's common stock is listed on the NASD OTC Bulletin Board
under the symbol "ARYC." The Company's common stock is also listed on the
Third Segment of the Frankfurt Stock Exchange under German Securities Code
Number 882879. As of March 28, 2001, the Company had 463 shareholders
holding 14,197,281 common shares. Of the issued and outstanding common
stock, 3,987,406 are free trading, the balance are "restricted securities"
shares as that term is defined in Rule 144 promulgated by the Securities
and Exchange Commission . The Company has never declared a dividend on its
common shares.
The published bid and ask quotations for the previous two fiscal years
are included in the chart below. These quotations represent prices between
dealers and do not include retail markup, markdown or commissions. In
addition, these quotations do not represent actual transactions.
BID PRICES ASK PRICES
HIGH LOW HIGH LOW
1999
First Quarter ended March 31 4.25 3.0625 .50 3.375
Second Quarter ended June 30 3.125 2.50 3.50 2.875
Third Quarter ended Sept. 30 3.25 2.65625 3.375 3.00
Fourth Quarter ended Dec. 31 3.00 1.4375 3.15625 1.5625
2000
First Quarter ended March 31 2.50 1.25 2.75 1.4375
Second Quarter ended June 30 2.50 1.25 2.6875 1.375
Third Quarter ended Sept. 30 2.125 .78125 2.25 .96875
Fourth Quarter ended Dec. 31 1.6875 .4375 1.78125 .59375
16
The foregoing figures were furnished to the Company by the National
Quotation Bureau, 11 Penn Plaza, 15th Floor, New York, New York 10001.
Recent Sales of Unregistered Securities
No instruments defining the rights of the holders of any class of
registered securities have been materially modified, limited or qualified.
The following securities, which are not registered under the
Securities Act of 1933, were issued since the Company's last quarterly
report for the quarter ended September 30, 2000.
During the quarter ended September 30, 2000, the Company sold
1,357,108 shares of its common stock to non United States citizens in
Germany. The shares were valued at $1.00 per share. The Company paid
commissions of $298,564. These shares were sold pursuant to Regulation S
promulgated by the Securities and Exchange Commission under the Securities
Act of 1933. The Company did not offer the securities to any person in the
United States, any identifiable groups of U.S. citizens abroad, or to any
U.S. Person as that term is defined in Regulation S. At the time the buy
orders were originated, the Company reasonably believed the Buyers were
outside of the United States and were not U.S. Persons. The Company
reasonably believed that the transaction had not been pre-arranged with a
buyer in the United States. The Company has not nor will engage in any
"Directed Selling Efforts" and reasonably believes the Buyers have not nor
will engage in any "Directed Selling Efforts." The Company reasonably
believed the Buyers purchased the securities for their own accounts and for
investment purposes and not with the view towards distribution or for the
account of a U.S. Person.
On October 13, 2000, the Company issued 11,428 restricted shares each
to Dr. Pawan Agarwal and Dr. Nicholas Sylvester for their participation on
the Company's Scientific Advisory Board. The Company received no cash for
these shares. The shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
On November 14, 2000, the Company issued 40,000 restricted common
shares to Doris Schmidt for services rendered by her in overseeing the
business and development matters of the Poseidon Facility. The Company
received no cash for these shares. The shares were issued pursuant to an
exemption from registration under Section 4(2) of the Securities Act of
1933.
On November 20, 2000, the Company issued 50,000 restricted common
shares to Richard Collette for investment marketing and analysis services
Mr. Collette provides to the Company. The Company received no cash for
these shares. The shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
On November 28, 2000, the Company issued 11,428 restricted common
shares to Dr. Jagdish Dhawan for his participation on the Company's
Scientific Advisory Board. The Company received no cash for these shares.
The shares were issued pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933.
16
During 2000 the Company established FaRReach Internet Advisors, Inc.,
a wholly owned subsidiary, with the intent of entering into the web
development and internet support business. As part of is corporate
restructuring, the Company decided not to pursue the FaRReach concept. On
December 15, 2000, 15,000 restricted shares of Company common stock were
issued to Chris Meehan, an employee of the Company, in lieu of an equity
interest he had been promised in FaRReach. The Company received no cash
for these shares. The shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
On December 31, 2000, a non United States person in Germany converted
a Company note due him of $118,308 for 473,232 shares of Company common
stock. The share were valued at $.25 per share and were delivered in
February and March 2001. These shares were issued pursuant to Regulation S
promulgated by the Securities and Exchange Commission under the Securities
Act of 1933. The Company did not offer the securities to any person in
the United States, any identifiable groups of U.S. citizens abroad, or to
any U.S. Person as that term is defined in Regulation S. At the time the
conversion originated, the Company reasonably believed the noteholder
was outside of the United States and was not U.S. Persons. The Company
reasonably believed that the transaction had not been pre-arranged with a
buyer in the United States. The Company has not nor will it engage in any
"Directed Selling Efforts" and reasonably believes the noteholder has not
nor will engage in any "Directed Selling Efforts." The Company reasonably
believed the noteholder acquired the securities for its own accounts and
for investment purposes and not with the view towards distribution or for
the account of a U.S. Person.
On January 9, 2001, the Company issued options to purchase 442,969
shares of restricted common stock to certain officers, directors, employees
and consultants of the Company. Some of the options were issued in
exchange for said officers, directors, employees and consultants
surrendering options previously issued to them by the Company. The Company
received no cash for issuing these options. These options were issued
pursuant to exemptions from registration under Section 3 and Section 4(2)
of the Securities Act of 1933.
On February 19, 2001, the Company issued 1,446,153 restricted common
shares to UTEK Corporation to acquire Technology Development, Inc., a
wholly owned subsidiary of UTEK. The Company received no cash for these
shares. The shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
During February and March 2001, the Company sold 473,233 shares of its
common stock to non United States citizens in Germany. The shares were
valued at $.25 per share. The Company paid commissions of $47,323. These
shares were sold pursuant to Regulation S promulgated by the Securities and
Exchange Commission under the Securities Act of 1933. The Company did not
offer the securities to any person in the United States, any identifiable
groups of U.S. citizens abroad, or to any U.S. Person as that term is
defined in Regulation S. At the time the buy orders were originated, the
Company reasonably believed the Buyers were outside of the United States
and were not U.S. Persons. The Company reasonably believed that the
transaction had not been pre-arranged with a buyer in the United States.
The Company has not nor will engage in any "Directed Selling Efforts" and
reasonably believes the Buyers have not nor will engage in any "Directed
Selling Efforts." The Company reasonably believed the Buyers purchased the
securities for their own accounts and for investment purposes and not with
the view towards distribution or for the account of a U.S. Person.
The Company hereby incorporates by reference the Form 10-QSBs it filed
on May 22, 2000, August 14, 2000, and November 14, 2000, for information
regarding sales of unregistered securities made during the first three
quarters of 2000.
17
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ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL STATEMENTS AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------
Liquidity and Capital Resources
As of December 31, 2000, the Company had cash on hand of $15,321. The
Company raised $1,177,046 during 2000 in a Regulation S offering. The
Company anticipates an additional $500,000 to $600,000 will be received at
the end of March, 2001, as the initial receipt of funds for a 2001
Regulation S offering. The 2001 Regulation S offering is anticipated to
raise a total of between $1,500,000 and $2,500,000 depending on market
conditions. The Company also has a commitment with a overseas investment
banking firm with whom the Company has a long term relationship to raise
$800,000 either through a private placement of shares in its subsidiary,
Tires2Oil, Inc., or a Regulation S offering of the Company's common stock
to be determined upon finalization of a definitive underwriting agreement.
The majority of the funds from this offering will be used for the building
of the pilot plant referred to in the Company Subsidiary section and the
Products section of this form 10K-SB. The proceeds from this private
placement are anticipated during the second quarter of 2001. The Company
is in discussion with several domestic investment banking firms regarding
raising additional funds. This funding, should it materialize, would be
utilized to implement the Company's business development strategy.
Results of Operations
Comparison of the year ended December 31, 2000, and the year ended
December 31, 1999
The Company generated a loss of $2,007,696 in the year ended December
31, 2000, compared to a loss of $2,642,390 for the year ended December 31,
1999. This $634,694 (24%) reduction in loss is a result of general
reductions in General and Administrative expenses and the closing of the
Company's subsidiary operation in San Diego, California. Company had no
significant sales in either year. The Company had $31,709 in equipment
sales and $82,003 in crumb rubber and crumb rubber product sales for the
twelve months ended December 31, 2000. $12,500 in consulting fees was
generated in the U.S. operations and $70,615 was earned in Poseidon
(Germany) during the year ended December 31, 2000, compared to $17,821 in
domestic consulting fees in 1999. The Company had no revenue from sales of
equipment in 1999. No revenue from license fees was generated in either the
year ended December 31, 2000 or 1999. Due to the emphasis on technology
transfer, no license fee income is anticipated until a full scale
Tires2Oil plant is operational. Such plant will not be begun until and in
less the pilot plant proves successful.
Historically, the majority of the Company's equipment sales were
recorded when equipment was shipped and title passed to the buyer. Typical
sales were by letter of credit, with the funds released by the bank when
the equipment was placed for shipment with the carrier. Historically,
payment for the Company's equipment sales have been made on the basis of
10% due at the time of sale, 80% due on shipment of the equipment and 10%
due on the completion of installation. This has resulted in the Company
receiving its revenue in large lump sums at irregular intervals rather than
18
smaller amounts at frequent intervals. Equipment purchased for the use of a
subsidiary or joint venture is recorded as a purchase of assets with no
revenue or inter-company profit generated upon the transfer to the
operating entity. The Company revised its equipment sales approach during
2000. In the future, the Company will receive fees for the design,
configuration and specification of certain pieces of equipment. The sale
will be made directly from the specified supplier to the client. The
manufacturer will warrant its equipment directly to the buyer. In addition
to the acquisition of the Tires2Oil technology and the de-icing technology
direct the Company's future revenue generation activities to a technology
transfer emphasis rather than equipment sales.
Net cash used in operations was $1,458,733 during the year ended
December 31, 2000 compares to $836,692 in the year ended December 31, 1999.
During 2000, Accounts receivable increased by $33,748, Equipment increased
by $248,245. Inventory decreased $101,941. Customer deposits decreased
$295.183 and deposits decreased by $687,487. Cash used in operations in
1999 was from an increase in Accounts Receivable of $2,747,576. Deposits
decreased by $755,717, offset by an decrease in Customer Deposits of
$1,897,779. Accrued Expensed decreased by $366,041 while Accounts Payable
decreased by $71,684.
Equipment increased due to the purchase of equipment for the QCAL
facility . This equipment is now in storage, awaiting shipment to Germany
for use in the Poseidon Project.
During the year ended December 31, 2000 the Company acquired two major
pieces of tire recycling and after market product manufacturing equipment
from Fonds Concepts, in Atzendorf, Germany for shares and credit against
the deposits account. This equipment is being held in Germany pending
shipment to the Poseidon project in Penkun, Germany. The equipment is
valued at $1,835,211. No comparable transaction occurred in 1999.
Inventory consists of purchased crumb rubber originally intended for
the Company's QCAL San Diego facility. This crumb rubber was purchased from
the Company's licensee in Mexico. With the closing of the San Diego
facility, the crumb rubber inventory was written down to current market
wholesale values. The inventory was sold in the first quarter of 2001.
Franchise Taxes payable balance at December 31, 1999 was $103,548. The
Company had delayed payment of this balance pending clarification of
certain collections and timing differences. The Company resolved the timing
difference and collection questions during the year ended December 31, 2000
and eliminated the reserve.
Accrued expenses decreased in the year ended December 31, 2000 by
$74,806 compared to a decrease of $366,041 in the year ended December 31,
1999. Accounts payable declined $201,429 in the year ended December 31,
2000 compared to a decrease of $71,684. These reductions are primarily due
to the availability of funds as a result of the 2000 Regulation S offering.
19
The carrying value of the land owned by the Poseidon joint venture was
reduced to $149,119 at December 31, 2000 from $157,753 at December 31,
1999. This reduction is as a result of the decline in valuation of the
German Mark against the US Dollar. As this re-valuation is of an existing
asset, no loss is reported for operating statement purposes
Depreciation Expense of $275,886 for the year ended December 31, 2000,
exceeds the 1999 expense of $144,222 by $131,664. This is due to the
equipment purchased and manufactured for the QCAL operation.
Travel expenses of $91,161 for the year ended December 31, 2000,
decreased by 45% or $76,113 compared to $167,274 for the year ended
December 31, 1999. This decrease is due to eliminating marketing activities
in support of the QCAL operation.
Professional fees increased from $210,483 for the twelve months ended
December 31, 1999, to $239,823 for 2000. This increase is due, primarily,
to the legal activities regarding patents and related matters for both the
Tires2Oil license and the preparatory work for the purchase of the de-
icing technology license in the first quarter of 2001. Additionally, legal
support for the Company's current and in-formation overseas joint venture
were increased as these projects move closer to maturity.
Office expenses of $115,293 for the twelve months ended December 31,
2000, are a $17,937 increase from the 1999 expenses of $97,356. This
increase is primarily due to expenses at the QCAL operation in the first
half of 2000.
Administrative expenses of $293,282 for the year ended December 31,
2000 are significantly lower than the $814,361 for the comparable 1999
period. This reduction is due to closing the San Diego operation in mid
year 2000, and cessation of QCAL marketing activities.
Consulting expenses of $793,890 for the year ended December 31, 2000
increased from the year ended December 31, 1999 expense of $715,663 by
$78,227. This increase is primarily due to the hiring of a consultant for
the Tires2Oil project, offset by the reduction of consultants associated
with the QCAL marketing activities and fee increases from the Company's
Vice President-Finance.
Options expense of $39,067 was recognized in 1999 as a result of the
Board of Directors approval of the 1999 employee incentive stock option
program. Options expense of $19,146 was recognized in the year ended
December 31, 2000, for the 2000 employee incentive stock option program.
The year 2000 expense is less than the 1999 expense due to the reduced
price of the Company's stock and slightly fewer options issued.
20
Comparison of the year ended December 31, 1999, and the year ended
December 31, 1998
The Company generated a loss of $2,642,390 in the year ended December
31, 1999, compared to a loss of $100,691 for the year ended December 31,
1998. The primary reason for the differences is that the Company had no
revenue from sales of equipment in 1999 to unrelated third parties. The
1998 revenue from equipment sales was $2,882,007 with a gross profit of
$1,191,125. During 1999 the Company concentrated on the purchase and
manufacture of equipment for its QCAL subsidiary operation and delayed
sales efforts to other customers until equipment package specification were
modified and updated and until the QCAL facility was operational. The1999
loss includes an Accounts Receivable write off of $347,220, the 1998 loss
included an accounts receivable write off of $100,000. No revenue from
license fees was generated in either the year ended December 31, 1999 or
1998.
Net cash used in operations was $836,692 during the year ended
December 31, 1999, compares to $1,334,685 in the year ended December 31,
1998. During 1999, Accounts receivable decreased by $2,747,576. Furniture
and fixtures increased by $35,443 Equipment increased by $1,414,664.
Inventory increased $120,044, Customer deposits decreased $1,897,779 and
Deposits decreased by $775,717. Cash used in operations in 1998 was from an
increase in Accounts Receivable of $2,354,061. Deposits increased by
$1,804,508, offset by an increase in Customer Deposits of $2,190,462.
$179,309 was used for the purchase of land. Accrued Expensed decreased by
$102,315 while Accounts Payable increased by $585,185.
Accounts Receivable decreased in the year ended December 31, 1999, by
$2,747,576. This decrease was from the payments received from customers of
$1,724,810, the return, cancellation, and crediting of a sale of $675,546
and the write off of $347,220. The write off is of all remaining balances
on the Mexico project. The Company believes that as a result of
difficulties with the Cisap equipment, combined with other factors, the
financial viability of the Mexico project is so low that collection of the
outstanding balances is unlikely. The return involved a piece of equipment
sold to, but not yet installed, in Germany. The customer returned the
equipment to the Company who in turn installed it in the QCAL San Diego
plant.
Furniture and fixtures increased by $35,443 due to furniture purchased
for the QCAL facility and for the Quantum Group corporate offices.
Equipment increased due to the purchase of Equipment for the QCAL
facility and from the manufacturing costs of completing the Impact 500, and
transferring the 1998 balance of $63,203 for the prototype to equipment
upon its installation in San Diego.
Customer deposits decreased upon applying the deposits to invoices
upon the completion of installation and testing at customer sights.
Deposits with vendors decreased as the deposits were applied to the
Company's liability upon installation and upon receipt of equipment for the
QCAL San Diego facility
21
Inventory consists of purchased crumb rubber on site at the Company's
QCAL San Diego facility. This crumb was purchased from Mexico to provide
safety stock raw materials and to facilitate crumb rubber re-sales prior
the San Diego facility reaching full capacity production.
Franchise Taxes payable balance at December 31, 1999 and 1998 of
$103,548 consists of $70,691 Federal taxes and $32,857 in California state
taxes. Although the Company has a Net Operating Loss Carry Forward for
Federal Income Tax purposes, the law provides that the utilization of the
NOL is a preference item triggering the Alternative Minimum Tax. The State
of California does not have a NOL Carry Forward. The Company has delayed
payment of this balance pending clarification of certain collections and
timing differences. This issue was resolved in the year ended December 31,
2000.
Accrued expenses decreased in the year ended December 31, 1999 by
$383,578 compared to a decrease of $102,315 in the year ended December 31,
1998. Accounts payable declined $71,684 in the year ended December 31, 1999
compared to an increase of $585, 185. The 1998 increase relates to the open
invoices for a two large sales shipped just prior to yearend. Aside from
those two open items, the general reduction of accrued expenses and
accounts payable is a result of more timely disbursements.
Minority interest was $9,463 at the end of December, 1998. That
interest represents the remaining balance of the German investment in the
Poseidon joint venture project after giving effect to their 20% portion of
the 1998 operating loss. The loss for the year ended December 31, 1999
exceeds the minority interest equity, which was accordingly reduced to
zero.
The carrying value of the land owned by the Poseidon joint venture was
reduced to $157,753 at December 31, 1999 from $179,309 at December 31,
1998. This reduction is as a result of the decline in valuation of the
German Mark against the US Dollar. As this re-valuation is of an existing
asset, no loss is reported for operating statement purposes
Depreciation Expense of $144,222 for the year ended December 31, 1999
exceeds the 1998 expense of $96,531 by $65,069. This is due to the
equipment purchased and manufactured for the QCAL operation.
Travel expenses of $167,274 for the year ended December 31, 1999
increased by 8% or $11,832 compared to the year ended December 31, 1998.
This increase is due to increased marketing activities in support of the
QCAL operation.
Professional fees increased from $56,978 for the twelve months ended
December 31, 1998 to $210,483 for 1999. This increase is due to the legal
activities involving the CISAP litigation and in resolving the concerns of
the various projects utilizing the cisap equipment.
Office expenses of $97,356 for the twelve months ended December 31,
1999 are a slight reduction from the 1998 expenses of $98,139.
22
Administrative expenses of $814,361 for the year ended December 31,
1999 are significantly higher than the $249,909 for the comparable 1998
period. This included the start up cost of the QCAL operation and increased
personnel in marketing and office support of the QCAL product sales effort.
Consulting expenses of $715,663 for the year ended December 31, 1999
increased from the year ended December 31, 1998 by $266,155. This increase
is primarily due to added use of consultants on the reconfiguration of the
Company's equipment packages and fee increases from the Company's president
and executive vice president.
Options expense of $39,067 was recognized in 1999 as a result of the
Board of Directors approval of the 1999 employee incentive stock option
program. No comparable expense was incurred in 1998.
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ITEM 7. FINANCIAL STATEMENTS
--------------------------------------------------------------------------
The following financial statements of the Company are filed as a part
of this report:
Report of Crouch, Bierwolf & Associates, Certified Public Accountants;
Balance Sheets as of December 31, 2000 and December 31, 1999;
Statements of Operations for the years ended December 31, 2000
and 1999;
Statements of Stockholders' Equity from January 1, 1999 to
December 31, 2000;
Statements of Cash Flows for the years ended December 31, 2000,
and 1999;
Notes to Financial Statements.
There are no financial statement schedules included as part of this
report. The financial statements of the Company are set forth immediately
following the signature page to this Form 10-KSB/A.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------
During 2000, the Company's Certified Public Accountant, Darrell
Schvaneveldt of Schvaneveldt and Company died. His practice was acquired
by Crouch, Bierwolf & Associates, the Company's current Certified Public
Accountants.
23
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PART III
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ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
--------------------------------------------------------------------------
The following table sets forth as of December 31, 1999 the name, age,
and position of each executive officer and director and the term of office
of each director of the Corporation.
Name Age Position Director or Officer Since
-------------------------------------------------------------------------------
Ehrenfried Liebich 58 Chief Executive Officer March 1989
Director March 1989
Keith J. Fryer 51 President October 2000
Chief Operating Officer October 2000
Secretary July 1997
Director March 1995
John F. Pope 58 Vice President January 1991
Treasurer January 1991
Director March 1989
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All officers hold their positions at the will of the Board of
Directors. All directors hold their positions for one year or until their
successors are elected and qualified.
Set forth below is certain biographical information regarding each of
the Company's executive officers and directors:
Ehrenfried Liebich. Mr. Liebich is the Chief Executive Officer and
Chairman of the Board of Directors of the Company. Mr. Liebich first
became involved with the Company in March 1989. Mr. Liebich was born and
educated in Germany. After his formal secondary education in Germany he
joined the Merchant Marine, which he left as a Ship's Officer with the
Court Line, London, U.K. Mr. Liebich immigrated to Canada in 1965 where he
started various businesses in the areas of real estate, investment,
chemical distribution and electronics. In March of 1989 he became the
President, a Director and controlling shareholder of the Company.
Following a management reorganization in October 2000, Mr. Liebich became
the Chief Executive Office and Chairman of the Board of Directors.
24
Keith J. Fryer. Mr. Fryer is the President, Chief Operating Officer,
Secretary and a Director of the Company. Mr. Fryer first became involved
with the Company in August 1992. Mr. Fryer was educated in England and
graduated from the Cheshire College of Further Education with a City and
Guild of London Institute Diploma in Construction and Site Surveying. He
also studied at Cranfield and Dunchurch UK Management Colleges and became a
Member of the Institute of Marketing London in 1974. Mr. Fryer became a
Chartered Member of the Institute in 1989. He is a life member of the Wig
& Pen Club, The Strand, London. Mr. Fryer successfully operated Keith
Fryer Associates England, a business he formed in 1986, that provided
marketing consulting services in various business areas. In 1992, Mr.
Fryer established Keith Fryer Associates California, Inc., a marketing
consulting firm. Following a management reorganization in October 2000,
Mr. Fryer became the President and Chief Operating Officer of the Company.
He became the Secretary in July 1997, and a Director of the Company in
March 1995.
John F. Pope. Mr. Pope is the Treasurer, a Vice President and a
Director of the Company. Mr. Pope began his professional career in 1963 as
an auditor in public accounting and subsequently on the corporate staff of
Olivetti Underwood in New York. He joined Burger King Corporation in
Miami, Florida, in 1968 and progressed to the position of Controller,
Company Stores Division. He joined Orange Julius International, Inc.,
Santa Monica, California, in 1974 as Vice President, Finance and a Director
for the parent company and its national and international subsidiaries.
In 1980, Mr. Pope became President of Inflation Management, Inc., Los
Angeles, California. From February 1982 until February 1984 he was Vice
President, Finance of Aerobic Dancing, Inc. In 1984 he became Senior Vice
President of Animated Playhouses Incorporated and Subsidiaries, before
moving to become Executive Vice President Finac International, Inc., an
investment and venture capital firm in Torrance, California.
From 1986 through November 1987, Mr. Pope acted as Vice President
Finance and Administration for ASI Sign Systems of Marina Del Rey, Inc.
After leaving ASI Sign Systems in late 1987, Mr. Pope became an independent
financial consultant assisting a number of domestic and international
public and private companies in franchising, financial structure, and
internal and SEC reporting. He continues to serve on the Board of
Directors of several companies he helped to become public companies,
including currently serving as the interim President and a Director of the
New Anaconda Company.
In 1989, Mr. Pope became a founding member of the Board of Directors
of the Quantum Group, Inc. Mr. Pope is a Certified Management Accountant
(CMA) and serves on the National Board of Directors of The Institute of
Management Accountants, where he serves on the National Strategic Planning
Committee. He has also been Certified in Financial Management (CFM) by the
same institute. He is a Certified Public Accountant (CPA) and a member of
the American Institute of Certified Public Accountants (AICPA). He has
been a member of a number of other professional and civic organizations,
including the Curriculum Steering Committee, School of Accountancy,
University of Southern California.
25
Key Employees
Sudheer Helekar. Mr. Helekar received a Masters Degree in Mechanical
Engineering from Worchester Polytechnic Institute, Massachusetts, in 1968.
Mr. Helekar has 37 years experience in developing new technologies to
commercial hardware. He developed the Solar Stirling Engine from concept
to commercial hardware within eighteen months. He has also helped develop
various solar and ethanol plant concepts, as well as, several turbines and
energy systems. He also has experience with cryogenic systems,
conventional pyrolysis, carbon activation and power generation. Prior to
joining the Company, Mr. Helekar spent eight years as an environmental
consultant for Alton Geoscience, where he was primarily responsible for
environmental audits, environmental energy and conversion of bio-waste to
energy and chemicals.
Scientific Advisory Board
Victor F. Petrenko, Ph.D. Dr. Petrenko received a Masters Degree in
Engineering Physics and Electronics from the Moscow Institute of Physics
and Technology, Moscow, U.S.S.R. in 1970. He earned a Ph.D. in
Experimental Physics from the Institute of Physical Problems, Academy of
Science, Moscow, U.S.S.R. in 1974. Since 1991, D. Petrenko has worked as a
Research Professor of Engineering at the Thayer School of Engineering,
Dartmouth College. Dr. Petrenko has been closely involved with the
research, development and patenting of the novel ice adhesion modification
or "de-icing" technology recently acquired by the Company. Dr. Petrenko
holds six U.S. and two International patents.
Jagdish Dhawan, Ph.D. Dr. Dhawan received a Masters Degree in
Chemical Engineering from the University of Kanpur, India in 1969. He
earned a Ph.D. in Chemical Engineering from the University of Mississippi
in 1974. Dr. Dhawan is a Professor at the University of South Alabama,
where he has taught since 1983. From 1995 to 1998, he also served as a
consultant to the Center for Legislative Energy & Environmental Research,
Irving Texas. Dr. Dhawan is the primarily responsible for developing the
Tires2Oil recycling process.
Pawan Agarwal, Ph.D. Dr. Agarwal received his Ph.D. from the
Department of Metallurgical and Materials Science and Engineering,
University of Pittsburgh in 1975. He has been employed with Exxon-Mobil
Chemical Company for the past 20 years, where he has held a variety of
positions. Currently, he is oversees the research work of 12 scientists at
the Baytown Polymers Center of Exxon-Mobil. Dr. Agarwal is known for his
work in the field of rubber chemicals and polymers. He currently holds 33
U.S. patents.
Nicholas D. Sylvester, Ph.D. Dr. Sylvester received his Ph.D. in
Chemical Engineering from Carnegie-Mellon University in 1968. Since 1996,
Dr. Sylvester has been employed as a professor of chemical engineering at
the University of South Alabama, where he teaches at both graduate and
undergraduate levels. He is also a special member of the College of
Engineering Strategic Planning Committee. Prior to joining the University
of South Alabama, Dr. Sylvester held numerous positions at the University
of Akron and the University of Tulsa.
26
There are no family relationships between any of the Company's
officers and directors. In addition, none of the officers and directors
have been involved in legal proceeding which require disclosure in this
annual report of the Company.
Compliance with Section 16(a) of the Exchange Act
Directors and executive officers are required to comply with Section
16(a) of the Securities Exchange Act of 1934, which requires generally that
such persons file reports regarding ownership of and transactions in
securities of the Company on Forms 3, 4, and 5. A Form 3 is an initial
statement of ownership of securities, which is to be filed by the officers
and directors owning shares in the Company within 10 days after the
effective date of the Company's filing on Form 10-SB. Form 4 is to
report changes in beneficial ownership and is due on or before the tenth
day of the month following any month in which they engage in any
transaction in the Company's common stock. Form 5 covers annual statement
of changes in beneficial ownership which is due 90 days after the fiscal
year end of the Company.
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year, and Forms 5
and amendments thereto furnished to the Company with respect to the most
recent fiscal year, it appears all Forms 3, 4 and 5 were timely filed.
--------------------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------------------------------------------------
The following table sets forth certain summary information concerning the
compensation paid or accrued over each of the Registrant's last three
completed fiscal years to the Company's, or its principal subsidiaries,
chief executive officers during such period (as determined at December 31,
2000 the end of the Registrant's last completed fiscal year).
27
Summary Compensation Table
----------------------------
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ --------
Other Restri
Name and Annual -cted All
Principal Compen Stock Options LTIP Other
Position Year Salary Bonus -sation Awards$ /SARS# Payout
------------------------------------------------------------------------------------
Ehrenfried
Liebich 2000 $ -0- $ -0- $129,956 $ -0- 52,666 -0- -0-
CEO/Director 1999 -0- -0- 169,573 -0- 52,696 -0- -0-
1998 -0- -0- 72,806 -0- -0- -0- -0-
Keith Fryer(1) 2000 -0- -0- 132,750 -0- 36,259 -0- -0-
President/COO/ 1999 -0- -0- 95,000 -0- 36,198 -0- -0-
Secretary/
Director 1998 -0- -0- 105,000 -0- -0- -0- -0-
John F.
Pope (2) 2000 -0- -0- 50,000 -0- 15,108 -0- -0-
Vice President 1999 -0- -0- 27,500 -0- 14,999 -0- -0-
Treasurer/
Director 1998 -0- -0- 30,000 -0- -0- -0- -0-
------------------------------------------------------------------------------------
(1) In 1998 and 1999, Keith Fryer provided consulting services to the
Company through Keith Fryer Associates California, Inc., his private
consulting business. The salary figures represent amounts paid by the
Company to Keith Fryer Associates California, Inc. These services were
provided on terms at least as favorable as could have been negotiated with
an independent third party.
(2) John Pope provided consulting services to the Company through his
private consulting business, John F. Pope, Inc. The salary figures
represent amounts paid by the Company to John F. Pope, Inc., for Mr. Pope's
services to the Company as an officer and director overseeing the financial
affairs of the Company. These services were provided on terms at least as
favorable as could have been negotiated with an independent third party.
Bonuses and Deferred Compensation
The Company does not have any bonus, deferred compensation or
retirement plan. Such plans may be adopted by the Company at such time as
deemed reasonable by the board of directors. The Company does not have a
compensation committee, all decisions regarding compensation are determined
by the board of directors.
Stock Option and Stock Appreciation Rights Plans
On January 9, 2001, all persons holding stock options granted under
The Quantum Group, Inc., 1999 Stock Option Plan, and The Quantum Group,
Inc., 2000 Stock Option Plan surrendered those options and the Company
canceled those stock option plans. On that same date, the Company
implemented the Advanced Recycling Sciences Stock Option Plan and allocated
1,000,000 shares of common stock of the Company to be available for grants
under the plan.
28
In consideration of the option holders surrendering their outstanding
options, the Company issued options under the Advanced Recycling Sciences,
Inc. Stock Option Plan ("Replacement Options"). The Company agreed to
waive the vesting schedule on all Replacement Options. The Company had
granted options to purchase 146,321 and 153,168 restricted common shares
respectively under the 1999 and 2000. This included options to purchase
52,696 shares and 52,666 shares granted to Ehrenfried Liebich, options to
purchase 36,198 and 36,259 shares granted to Keith J. Fryer, and options to
purchase 14,999 and 15,108 shares granted to John F. Pope in 1999 and 2000
respectively. These options were replaced with Replacement Options. The
Replacement Options are exercisable at $0.79 per share. The Replacement
Options expire on January 9, 2006. To date, none of the Replacement
Options has been exercised.
In addition to the Replacement Options, the Company granted additional
options ("New Options") to purchase 143,480 restricted shares to its
officers, directors, employees and consultants. The New Options are
exercisable at $0.79 per share. The New Options vest and become exercisable
six months from the grant date and expire five years from the date of
grant. To date, none of the New Options have vested or been exercised.
The officers and directors received options as follows: Ehrenfried Liebich
received an option to purchase 36,996 shares; Keith Fryer received an
option to purchase 36,996 shares; John Pope received an option to purchase
30,389 shares.
Option / SAR Grants
Individual Grants
Name Number of % of Total Exercise Expiration Grant
Securities Options/SARs or Base Date Date
Options/SARs Granted to Price Present
Granted Employees ($/share) Value ($)
------------------------------------------------------------------------------------
Ehrenfried Liebich 142,358 32.14% $0.79 2006 $112,463
Keith J. Fryer 109,453 24.71 0.79 2006 86,468
John Pope 60,496 13.66 0.79 2006 47,792
------------------------------------------------------------------------------------
Termination of Employment and Change of Control Arrangement
There are no compensatory plans or arrangements, including payments to
be received from the Company, with respect to any person named in cash
compensation set out above which would in any way result in payments to any
such person because of his resignation, retirement, or other termination of
such person's employment with the company or its subsidiaries, or any
change in control of the Company, or a change in the person's
responsibilities following a changing in control of the Company.
29
-------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
-------------------------------------------------------------------------
The following table sets forth as of March 28, 2001 the name and the
number of shares of the Registrant's Common Stock, par value $0.001 per
share, held of record or beneficially by each person who held of record, or
was known by the Registrant to own beneficially, more than 5% of the
14,197,281 issued and outstanding shares of the Registrant's Common Stock,
and the name and shareholdings of each director and of all officers and
directors as a group.
Title of Amount and Nature of
Class Name of Beneficial Owner Beneficial Ownership Percentage of Class
--------- --------------------------- -------------------- ---------------------
Common Ehrenfried Liebich 2,126,290(1) 16.69%
14771 Myford Road
Building B
Tustin, California 90744
Common Keith J. Fryer 614,621(2) 4.76%
14771 Myford Road
Building B
Tustin, California 90744
Common John F. Pope (2) 49,607(3) 0.04%
14771 Myford Road
Building B
Tustin, California 90744
Common UTEK Corporation 2,377,153 16.68%
202 South Wheeler Street
Plant City, Florida 33566
------------------------------------------------------------------------------------
Common All Officers and Directors
as a Group:(4 persons) 2,790,518 19.58%
------------------------------------------------------------------------------------
(1) This includes options to purchase up to an additional 105,362 common
shares within 60 days of the date of this Form 10-KSB/A.
(2) This includes 15,000 shares held of record by his three children and
37,666 held of record by Keith Fryer Associates, California, Inc., all of
which he may be deemed to be a beneficial owner of. This figure also
includes options to purchase up to an additional 272,455 common shares
within 60 days of the date of this Form 10-KSB/A.
(3) This includes 19,500 shares which are held of record by John F. Pope,
Inc. Mr. Pope may be deemed to be a beneficial owner of the shares because
he has shared investment power of the shares. This figure also includes
options to purchase up to an additional 30,107 common shares within 60 days
of the date of this Form 10-KSB/A.
30
--------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------
In August 1998 and January 1999, the Company loaned $30,000 and
$10,000 respectively, to John Pope, a director and officer of the Company.
Both notes are at an interest rate of 9% per annum. Both notes have been
extended and are now due and payable on December 31, 2001. As of March 28,
2001, Mr. Pope had repaid $32,500. Mr. Pope may be deemed to have control
over John F. Pope, Inc., in as much as he may be considered to have
qualified investment power over the shares held by John F. Pope, Inc.
Compensation paid to John F. Pope, Inc. is identified under the
compensation table.
In August 1999, the Company loaned $25,000 to Keith Fryer, a director
and officer of the Company. The note is at an interest rate of 9% per
annum. The due date of this note was extended to December 31, 2001.
During March 2001, Mr. Fryer paid off the outstanding balance of the note.
Keith Fryer, an officer and director of the Company, is the owner of Keith
Fryer Associates California, Inc., ("KFA") a consultant to the Company.
Compensation paid to KFA is identified under the compensation table.
There were no other related party transactions during 2000.
--------------------------------------------------------------------------
PART IV
--------------------------------------------------------------------------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------
(a) Reports on Form 8-K.
None.
(b) Exhibits. The following exhibits are included as part of this report:
SEC Exhibit
Exhibit Reference
Number Number Title of Document Location
------- --------- ----------------- ---------
3.01 3 Articles of Amendment to the Incorporated by
Articles of Incorporation reference*
3.02 3 Articles of Incorporation Incorporated by
reference*
3.03 3 Bylaws Incorporated by
reference*
10.01 10 The Quantum Group, Inc., 2000 Attached
Stock Option Plan
10.02 10 Advanced Recycling Sciences, Attached
Inc., 2001 Stock Option Plan
23.01 23 Consent of Accountant Attached
* Incorporated by reference from the Registrant's registration statement on
Form 10-SB, as amended, filed with the Commission, SEC File No. 0-23812.
31
--------------------------------------------------------------------------
SIGNATURES
--------------------------------------------------------------------------
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
Dated: May 14, 2001 Advanced Recycling Sciences, Inc.
a Nevada corporation
By: /s/ Keith J. Fryer
------------------
Keith J. Fryer, President
DATE NAME AND TITLE SIGNATURE
May 14, 2001 Keith J. Fryer By: /s/ Keith J. Fryer
------------------
President/COO/ Keith J. Fryer
Director/Secretary
May 14, 2001 John F. Pope By: /s/ John F. Pope
-----------------
Vice President/ John F. Pope
Treasurer/Director
32
ADVANCED RECYCLING SCIENCES, INC. AND SUBSIDIARIES
(Formerly The Quantum Group, Inc., and Subsidiaries)
FINANCIAL STATEMENTS
DECEMBER 31, 2000
&
DECEMBER 31, 1999
/Letterhead/
Independent Auditors' Report
-----------------------------
Board of Directors
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
We have audited the accompanying balance sheets of Advanced Recycling
Sciences, Inc., and Subsidiaries (a California Corporation), as of December
31, 2000, and the related statements of operations, stockholders' equity,
and cash flows for the year ended December 31, 2000. These financial
statements are the responsibility of the Company's management. The
financial statements of Advanced Recycling Sciences, Inc., and
Subsidiaries, as of December 31, 1999, were audited by other auditors whose
report dated April 12, 2000, expressed an unqualified opinion on those
statements. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatements. 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 the significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the aforementioned financial statements present fairly, in
all material respects, the financial position of Advanced Recycling
Sciences, Inc., and Subsidiaries, as of December 31, 2000, and the results
of its operations and its cash flows for the years ended December 31, 2000,
in conformity with generally accepted accounting principles.
/S/ Crouch, Bierwolf & Associates
Salt Lake City, Utah
March 27, 2001
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Balance Sheets
December 31
2000 1999
----------- ----------
Assets
Current Assets
--------------
Cash $ 15,321 $ 242,934
Accounts Receivable 59,949 317,464
Interest Receivable 722 -
Inventory 37,528 139,469
Equipment Inventory 1,835,211 -
Deposit 31,409 317,003
Note & Interest Receivable - Officer 34,000 69,253
Prepaid Expenses 139,444 26,944
----------- -----------
Total Current Assets 2,153,584 1,113,067
Property & Equipment
--------------------
Furniture & Fixtures 33,339 66,780
Equipment 1,732,639 1,414,664
Vehicles 81,485 81,485
Land 149,119 157,753
Websites 9,650 9,650
----------- -----------
Total Property & Equipment 2,006,232 1,730,332
Less Accumulated Depreciation (416,809) (144,221)
----------- -----------
Net Property & Equipment 1,589,423 1,586,111
Other Assets
License Rights 377,859 442,611
Patent Rights 1,715,000 -
Deposit - 687,487
----------- -----------
Other Assets 2,092,859 1,130,098
----------- -----------
Total Assets $5,835,866 $ 3,829,276
=========== ===========
Continued
F-3
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Balance Sheets
December 31
2000 1999
----------- -----------
Liabilities & Stockholders' Equity
Current Liabilities
-------------------
Accrued Expenses $ 9,237 $ 84,043
Accounts Payable 452,088 653,517
Notes Payable (Current Portion) 98,953 272,240
Interest on Note Payable 3,637 -
Customer Deposits - 295,183
Franchise Taxes Payable - 103,548
----------- -----------
Total Current Liabilities 563,915 1,408,531
Long Term Liabilities
---------------------
Capital Lease 31,475 67,631
Note Payable 605,937 10,198
----------- -----------
Total Long Term Liabilities 637,412 77,829
Stockholders' Equity
--------------------
Common Stock 50,000,000 Shares Authorized;
Par Value of $0.001 Per Share; 12,752,128 &
9,033,123 Shares Issued and Outstanding 12,751 9,033
Paid In Capital 11,128,925 6,692,776
Accumulated Deficit (6,507,137) (4,358,893)
----------- -----------
Total Stockholders' Equity 4,634,539 2,342,916
----------- -----------
Total Liabilities & Stockholders' Equity $5,835,866 $ 3,829,276
=========== ===========
The accompanying notes are an integral part of these financial statements
F-4
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Statements of Operations
For the Years Ended December 31
2000 1999
----------- -----------
Revenues
--------
Equipment Sales $ 31,709 $ -
Other Sales 82,003 -
Other Income 83,115 17,821
----------- -----------
Total Revenues 196,827 17,821
Cost of Sales 141,160 348
----------- -----------
Gross Profit 55,667 17,473
Expenses
--------
Commission 4,249 -
Depreciation 275,886 144,222
Amortization 64,756 64,756
Travel 91,161 167,274
Professional Fees 239,823 210,483
Office 115,293 97,356
Rent & Utilities 152,539 71,242
Administrative Expenses 303,282 814,361
Consultant Fees 793,890 715,663
Interest 13,298 19,504
Accounts Receivable Written Off - 347,220
Options Issued Expense 19,146 39,067
----------- -----------
Total Expenses 2,073,323 2,691,148
----------- -----------
Net Income (Loss) From Operations (2,017,656) (2,673,675)
Continued
F-5
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Statements of Operations
For the Years Ended December 31
2000 1999
----------- -----------
Other Income (Expenses)
-----------------------
Interest Income $ 991 $ 21,822
Leasehold Abandonment (51,218) -
----------- -----------
Total Other Income (Expense) (50,227) 21,822
----------- -----------
Net Income (Loss)
Before Minority Interest (2,067,883) (2,651,853)
Taxes & Minority Interest
Provision for Taxes - Current - -
Minority Interest - (9,463)
----------- -----------
Total Taxes & Minority Interest - (9,463)
----------- -----------
Net Income (Loss) $(2,067,883) $(2,642,390)
=========== ===========
Net (Loss) Per Share Before
Extraordinary Items $ (0.21) $ (0.30)
Net (Loss) Per Share After
Extraordinary Items $ (0.21) $ (0.30)
Weighted Average Shares Outstanding 9,940,519 8,670,366
The accompanying notes are an integral part of these financial statements
F-6
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Statements of Stockholders' Equity
From January 1, 1999 to December 31, 2000
Common Stock Paid-In Comprehensive Accumulated
Stock Amount Capital Income Deficit
-------------------------------------------------------------
Balance,
January 1, 1999 8,400,075 $ 8,400 $6,018,287 $ - $ (1,716,503)
Shares Issued
for Services
at $1.75 Per Share 363,178 363 635,480
Shares Issued
for Cash at
$1.75 Per Share 269,870 270 472,004
Cost of Shares
Issued (472,062)
Options Issued 39,067
Net Loss for
the Year Ended
December 31, 1999 (2,642,390)
-------------------------------------------------------------
Balance,
December 31, 1999 9,033,123 9,033 6,692,776 (4,358,893)
Shares issued
for Services at
$1.75 Per Share 1,515 2 2,649
Shares issued for
Patent Rights at
$1.75 Per Share 980,000 980 1,714,020
Shares issued for
Services at $0.78
Per Share 26,618 26 20,736
Shares issued for
Assets at $2.125
Per Share 577,386 577 1,226,368
Shares issued for
Services at $1.625
Per Share 10,000 10 16,240
Shares issued for
Cash at $1.00 Per
Share 1,510,970 1,511 1,509,459
Cost of Shares
Issued (332,413)
Continued
F-7
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Statements of Stockholders' Equity
From January 1, 1999 to December 31, 2000
Common Stock Paid-In Comprehensive Accumulated
Stock Amount Capital Income Deficit
-------------------------------------------------------------
Shares issued for
Services at
$1.75 Per Share 22,856 23 39,975
Shares issued for
Services at
$1.010 Per Share 40,000 40 40,360
Shares issued for
Services at
$0.687 Per Share 50,000 50 34,300
Shares issued for
Services at
$1.75 Per Share 11,428 473 117,835
Shares issued for
Conversion of Debt
at $0.250 Per Share 473,232 473 117,835
Shares issued for
Services at
$0.500 Per Share 15,000 15 7,485
Options Issued 19,146
Foreign Currency
Translation (80,361)
Net Loss for the
Year Ended
December 31, 2000 (2,067,883)
-------------------------------------------------------------
Balance,
December 31, 2000 12,752,128 $ 12,751 $11,128,925 $ (80,361) $(6,507,137)
=============================================================
The accompanying notes are an integral part of these financial statements
F-8
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Statements of Cash Flows
For the Years Ended December 31
2000 1999
------------- -------------
Cash Flows from Operating Activities
------------------------------------
Net Profit or (Loss) $ (2,067,883) $ (2,642,390)
Adjustments to Reconcile Net Profit
or (Loss) to Net Cash:
Write Off Accounts Receivable - 347,220
Options Issued 19,146 39,067
Amortization & Depreciation 340,642 208,978
Non Cash Expense 280,219 163,500
Minority Interest - 9,463
Changes in Operating Assets & Liabilities:
(Increase) Decrease in Accounts Receivable (33,748) 2,747,576
(Increase) Decrease in Interest Receivable 722 -
(Increase) Decrease in Inventory 101,941 (120,044)
(Increase) Decrease in Deposit on Inventory (31,409) (13,982)
(Increase) Decrease in Notes Receivable - Officer 35,253 (38,321)
(Increase) Decrease in Prepaid Expense (112,500) (26,504)
(Increase) Decrease in Deposits 687,487 755,717
Increase (Decrease) in Accrued Expenses (74,806) (366,041)
Increase (Decrease) in Accounts Payable (201,429) (71,684)
Increase (Decrease) in Interest on Notes Payable (3,637) -
Increase (Decrease) in Customer Deposits (295,183) (1,897,779)
Increase (Decrease) in Taxes Payable (103,548) -0-
(Increase) Decrease in Cash Pledged - 5,329
------------- -------------
Net Cash (Used) by Operating
Activities (1,458,733) (836,692)
Cash Flows from Investing Activities
------------------------------------
Purchase of Fixed Assets & Intangibles (248,245) (1,499,158)
------------- -------------
Net Cash Provided (Used) by
Investing Activities (248,245) (1,499,158)
Continued
F-9
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Statements of Cash Flows -Continued-
For the Years Ended December 31, 2000, 1999
2000 1999
------------- -------------
Cash Flows from Financing Activities
------------------------------------
Sale of Common Stock (Net) $ 1,177,046 $ 472,274
Payment on Long Term Debt (31,250) -
Increase (Decrease) in Notes Payable 333,569 324,566
------------- -------------
Net Cash Provided by Financing Activities 1,479,365 796,840
------------- -------------
Increase (Decrease) in Cash (227,613) (1,539,010)
Cash at Beginning of Period 242,934 1,781,944
------------- -------------
Cash at End of Period $ 15,321 $ 242,934
============= =============
Disclosures from Operating Activities
-------------------------------------
Interest $ 13,298 $ 19,504
Taxes - -
Significant Non Cash Transactions
---------------------------------
During 2000, the Company issued 177,417 shares of common stock in exchange for
consulting services rendered. The cost of the services has been charged to
operations, and additional paid-in capital has been increased by $181,734,
representing the excess of the cost of the services over the par value of the
common stock issued.
During the year, the company issued 1,557,386 shares of common stock to purchase
fixed assets and intangibles. Additional paid-in capital has been increased by
$2,940,388, representing the excess of the cost of the assets over the par value
of the common stock.
On December 31, 2000, a stockholder of the company converted a note due to him
of $118,308, for 473,232 shares of common stock. Accordingly, $117,735,
representing the principal amount plus accrued interest has been transferred to
additional paid-in capital.
The accompanying notes are an integral part of these financial statements
F-10
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 1 - Corporate History
--------------------------
The Company was organized on December 2, 1968, under the laws of the state
of California as Acquatic Systems, Inc. On June 27, 1989, the Company
merged with Country Maid, Inc., a Nevada Corporation, the Corporate
domicile was changed to the state of Nevada. On September 18, 1992, the
name of the Company was changed to The Quantum Group, Inc. On March 26,
2001, the Company filed an Amendment to the Articles of Incorporation
changing it's name to Advanced Recycling Sciences, Inc. The Company is
registered and qualified to do business in the state of California.
NOTE 2 - Significant Accounting Policies
----------------------------------------
A. The Company uses the accrual method of accounting.
B. Revenues and directly related expenses are recognized in the period
when the goods are shipped to the customer.
C. The Company considers all short term, highly liquid investments that
are readily convertible, within three months, to known amounts as cash
equivalents. The Company currently has no cash equivalents.
D. Primary Earnings Per Share amounts are based on the weighted average
number of shares outstanding at the dates of the financial statements.
Fully Diluted Earnings Per Shares shall be shown on stock options and
other convertible issues that may be exercised within ten years of the
financial statement dates.
E. The inventory is stated at the lower of cost or market. The inventory
is a single recycling system that the Company intends to sell as a
system. The Company is currently pursuing several prospects to sell
the system.
F. Consolidation Policies: The accompanying consolidated financial
statements include the accounts of the company and its majority -
owned subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
G. Foreign Currency Translation / Remeasurement Policy: Assets and
liabilities that occur in foreign countries are recorded at historical
cost and translated at exchange rates in effect at the end of the
year. Income Statement accounts are translated at the average
exchange rates for the year. Translation gains and losses shall be
recorded as a separate line item in the equity section of the
financial statements.
H. Depreciation: The cost of property and equipment is depreciated over
the estimated useful lives of the related assets. The cost of
leasehold improvements is depreciated (amortized) over the lesser of
the length of the related assets or the estimated lives of the assets.
Depreciation is computed on the straight line method for reporting
purposes and for tax purposes.
I Issuance of Subsidiary's Stock: The Company has elected to account for
shares issued by its subsidiary as an equity transaction.
J. 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 reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-11
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 2 - Significant Accounting Policies
----------------------------------------
K. As permitted by SFAS #123 "Accounting for Stock-Based Compensation,"
the Company has elected to account for the stock option plans as a
compensation cost when options were issued at equal to or more than
fair market value.
NOTE 3 - Notes Payable
----------------------
The Company has the following notes payable obligations 2000
------------
Note payable to bank due April 29, 2003, plus interest
payable annually at 12.32%, secured by the equipment. $ 35,649
Note payable to bank due April 29, 2002, plus interest
payable annually at 12.32%, secured by the equipment. 12,524
Various unsecured short term notes payable, non interest
bearing, due on demand 170,250
Short term note payable to a Venture Capital Group,
(Germany) 6% interest rate, due on demand 424,740
------------
Total 643,163
Less Current Maturities 27,548
------------
Total Notes Payables $ 615,615
============
Following are maturities of long-term debt for each of the next five years;
2001 $ 622,538
2002 19,065
2003 1,560
2004 -
2005 -
----------
Total $ 643,163
==========
NOTE 4 - Operating Leases
-------------------------
On March 1, 2000, the Company renewed its lease agreement to lease an
industrial condominium in a multi-tenant building for use as its principal
executive office. The Company pays $3,821 per month for a 4,495 square
foot facility. The lease expires on February 28, 2002 and has a renewal
option for an additional year. The building is located at Park Irvine
Business Center, 14771 Myford Road, Building B, Tustin, California 92780.
The space the Company is leasing is sufficiently large enough to
accommodate all of its administrative and storage needs. Prior to March 1,
2000, the Company rented the same facility on a month to month arrangement.
Total Lease Commitments Year Amount
2001 $ 45,852
2002 7,642
----------
Total $ 53,494
==========
F-12
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 5 - Depreciation
---------------------
The Company capitalizes the purchase of equipment and fixtures for major
purchases in excess of $1,000 per item. Capitalized amounts are
depreciated over the useful life of the assets using the straight-line
method of depreciation.
Scheduled below are the assets, costs and accumulated depreciations at
December 31, 2000 and 1999.
December 31, Depreciation Accumulated
2000 1999 Expenses Depreciation
Assets Cost Cost 2000 1999 2000 1999
--------------------------------------------------------------------------------
Furniture &
Fixtures $ 33,339 $ 66,780 $ 4,224 $ 8,252 $ 10,551 $ 9,626
Equipment 1,732,639 1,414,664 252,148 121,900 374,048 121,900
Vehicle 81,485 81,485 16,297 10,387 27,385 11,088
Website 9,650 9,650 3,217 1,608 4,825 1,608
-------------------------------------------------------------
Balance $1,857,113 $1,572,579 $275,886 $142,539 $416,809 $144,222
NOTE 6 - Related Party Transactions
-----------------------------------
In August 1998 and January 1999, the Company loaned $30,000 and
$10,000 respectively, to John Pope, a director and officer of the Company.
Both notes are at an interest rate of 9% per annum. Both notes have been
extended and the balance of $15,000 is due and payable on December 31,
2001.
In August 1999, the Company loaned $25,000 to Keith Fryer, a director
and officer of the Company. The note is at an interest rate of 9% per
annum. The due date of this note was extended and the balance of $19,000,
is due and payable on December 31, 2001.
There were no other related party transactions during 2000.
The Company accrued and paid interest on the two notes during the 2000
year.
In 2000, Officers of the Company loaned the Company a total of
$64,000. The note is non interest bearing and is due on demand.
F-13
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 7 - Net Operating Loss Carryforward for Income Tax Purposes
----------------------------------------------------------------
The Company has incurred losses that can be carried forward to offset
future earnings if conditions of the Internal Revenue Codes are met. These
losses are as follows:
Year of Expiration
Loss Amount Date
-------- ---------- -----------
1992 $ 440,338 2007
1993 -0- 2008
1994 198,818 2009
1995 782,181 2010
1996 241,809 2011
1997 -0- 2017
1998 80,058 2018
1999 2,642,390 2019
2000 2,067,883 2020
The Company has adopted FASB 109 to account for income taxes. The
Company currently has no issues that create timing differences that would
mandate deferred tax expense. Net operating losses would create possible
tax assets in future years. Due to the uncertainty as to the utilization
of net operating loss carryforwards an evaluation allowance has been made
to the extent of any tax benefit that net operating losses may generate.
2000 1999
------------- -------------
Current Tax Asset Value of Net Operating
Loss Carryforwards at Current Prevailing
Federal Tax Rate $ 1,882,343 $ 1,120,505
Evaluation Allowance ( 1,882,343) ( 1,120,505)
------------- -------------
Net Tax Asset $ - $ -
Current Income Tax Expense $ - $ -
Deferred Income Tax Benefit - -
F-14
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 8 - Options / Warrants for Purchase of Common Stock
--------------------------------------------------------
The Company has adopted two stock option incentive plans which provides for
the grant of options to officers, consultants, and employees to acquire
shares of the Company's common stock at a purchase price equal to or
greater than fair market value as of the date of the grant. Options are
exercisable six months after grant and expire five years from the date of
the grant. The two plans adopted are for the years 1999 and 2000. Each
plan calls for a total of 200,000 shares to be held for each plan. A
summary of activity follows:
1999 Stock Option Plan 2000 1999
--------------------- ----------------------
Weighted Weighted
Number Average Number Average
Of Exercise of Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Outstanding at beginning
of year 146,594 $ 2.89 - $ -
Granted - - 146,594 2.89
Exercise - - - -
Canceled - - - -
---------- ---------- ---------- ----------
Outstanding at end of year 146,594 $ 2.89 146,594 $ 2.89
========== ========== ========== ==========
Exercisable at end of year 146,594 2.89 146,594 2.89
========== ========== ========== ==========
2000 Stock Option Plan 2000
---------------------
Weighted
Number Average
Of Exercise
Shares Price
---------- ----------
Outstanding at beginning
of year - $ -
Granted 153,168 2.61
Exercise - -
Canceled - -
---------- ----------
Outstanding at end of year 153,168 $ 2.61
========== ==========
Exercisable at end of year 153,168 2.61
========== ==========
Compensation expense of $19,146 was recognized in the year 2000 and $39,067
in 1999.
The fair value of each option grant was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions:
2000 1999
---------- ----------
Risk-free interest rate 9.0% 8.38%
Dividend yield 0% 0%
Volatility 50% 50%
Average expected term (years to exercise date) - -
---------- ----------
F-15
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 9 - Options / Warrants for Purchase of Common Stock
--------------------------------------------------------
Employee stock options outstanding and exercisable under these plans as of
December 31, 2000 were:
Outstanding Exercisable
--------------------------- --------------------
2000 Stock Option Plan:
Weighted
Average
Weighted remaining Weighted
Range of Average Contractual Average
Exercise Exercise Life Exercise
Price Options Price (Years) Options Price
--------- --------- --------- --------- --------- ---------
$ 2.89 146,594 $ 2.625 3.91 146,594 $ 0.89
Employee stock options outstanding and exercisable under these plans as of
December 31, 1999 were:
Outstanding Exercisable
--------------------------- --------------------
1999 Stock Option Plan:
Weighted
Average
Weighted remaining Weighted
Range of Average Contractual Average
Exercise Exercise Life Exercise
Price Options Price (Years) Options Price
--------- --------- --------- --------- --------- ---------
$ 2.89 146,594 $ 2.625 3.91 146,594 $ 0.89
NOTE 10 - Other Comprehensive Income/Loss
-----------------------------------------
As of January 1, 1999, the Company adopted Statement of Financial
Accounting Standards (SFAS) No., 130, "Reporting Comprehensive Income".
SFAS No., 130, establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
statement had no impact on the Company's net income or shareholders'
equity. SFAS No., 130 requires other comprehensive income to include
foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gain or loss from available-for-sale
securities.
A summary of the components of other comprehensive income for the year
ended December 31, 2000 is as follows;
Before-Tax Income After-Tax
Amount Tax Amount
---------- ---------- ----------
Foreign Currency Translation $ 80,631 $ - $ 80,631
Net change in unrealized gain (loss)
on available-for-sale securities - - -
---------- ---------- ----------
Other Comprehensive Income $ 80,631 $ - $ 80,631
========== ========== ==========
F-16
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 11 - Capital Leases
------------------------
The Company is the lessee of a 1999 Isuzu Truck under a capital lease
expiring September 30, 2004. The assets and liabilities under this lease
are recorded at the fair market value of the asset. The asset is
depreciated over the related lease term. Deprecation of the asset under
capital lease is included in depreciation expense for 2000.
Minimum future lease payments under capital leases as of December 31, 2000,
for each of the next five year and in the aggregate are:
2001 $ 9,499
2002 9,499
2003 9,499
2004 7,124
2005 -
----------
Total Lease Payments $ 35,621
Less Amount Representing Interest (4,720)
----------
Net Lease Payments $ 30,901
==========
NOTE 12 - Net Earnings (Loss) Per Share
---------------------------------------
Basic earnings (loss) per common share (BEPS) is based on the weighted-
average number of common shares outstanding during each period. Diluted
earnings (loss) per common shares are based on shares outstanding
(computed as under BEPS) and dilutive potential common shares. Shares from
the exercise of the outstanding options were not included in the
computation of diluted loss per share, because their inclusion would have
been antidilutive for the year ended December 31, 2000 and 1999.
The following data shows the shares used in the computing loss per common
share including dilutive potential common stock;
Common shares outstanding during the entire period 9,940,519
Weighted-average shares paid for, but not
issued during the period. -
------------
Weighted-average number of common shares used in
basic EPS 9,940,519
dilutive effect of options -
------------
Weighted-average number of common shares and dilutive
potential common shares used in diluted EPS 9,940,519
============
Shares form the exercise of the outstanding options were not included
in the computation of diluted loss per share because their inclusion would
have been antidilutive for the year ended December 31, 2000.
F-17
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 12 - Equipment Inventory
-----------------------------
During 2000, the Company purchased the equipment of Fonds Concepts
(Atzendorf) through the issuance of 577,386 shares of Quantum Group's
common stock, and the application of deposits on inventory. Equipment
inventory of $1,835,211 shown on the balance sheet as a current asset
represents the inventory acquired that is expected to be placed in service
at the Poseidon Products GmbH tire recycling facility in Penkun,
Mecklenburg-Vorpommerm. The Company anticipates that the assets will be
placed in service, and the plant will be fully operational during 2001.
NOTE 13 - Patent Rights
-----------------------
On May 24, 2000, the Company purchased the patent rights to the
Tires2Oil technology. This technology was acquired from UTEK Corporation
by issuing 980,000 shares of Quantum Group, Inc's common stock. Patent
rights of $1,715,000 shown on the balance sheet as a non current asset
represents the rights acquired to the technology that will be used in the
future.
NOTE 14 - SuperCollider Impact 500 Technology
----------------------------------------------
During 1997, the Company worked on the in-house development of a
compact SuperCollider machine designed to take large mesh size crumb rubber
produced by the EGS System and buffings from tire retreading and pulverize
it into fine powder in order to open up several new markets. These markets
include extrusion products, press products and products combining super-
fine crumb and plastic. The Company finalized the engineering for the
SuperCollider and concluded the development, prototype work and initial
performance testing during 1998 and early 1999. After testing the initial
prototype, the Company decided not to sell the SuperCollider into the
market until a number of improvements could be made. During 1999, the
Company made those improvements and began additional testing. The first
SuperCollider was installed and operational at the Donovan Correctional
Facility. It has now been removed and the Company anticipates it will be
shipped and installed at the Poseidon Facility.
NOTE 15 - License Rights
------------------------
The Company is currently renegotiating its exclusive worldwide license
agreement with Faru GmbH., Dresden, Germany ("Faru"). Faru is the patent
holder of the REVULCON(R) technology. This technology enables the
production of high density, smooth finish rubber moldings and extrusions,
including new tires, by adding REVULCON(R) compound. This is done by a
process of devulcanizing the rubber, returning it to a state where it can
be utilized in new products and re-vulcanized. The reactivated rubber
waste can be processed without further additives to rubber products like
mats, plates, solid rubber tires, components for fall protection, elements
for sound and vibration deadening, blocking and insulating layers against
heat and moisture. Profiles and other goods can be made by extrusion or
injection molding when the revulcanized rubber is mixed with fresh rubber
or plastics. While there are other companies developing and marketing
competing technology, the REVULCON(R) technology is the only one that does
not introduce or use of chemicals in its process.
F-18
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 15 - License Rights
------------------------
The cost and associated amortization of the rights of the license is
as follows;
License Amortization Accumulated
Licensor Cost Expense 2000 Amortization
--------------------------------------------------------------------------
Rothbury $ 497,547 $ 49,756 $ 232,189
Faru GmbH 150,000 15,000 37,500
------------------------------------------
Total $ 647,547 $ 64,756 $ 269,689
==========================================
NOTE 16 - Joint Venture
-----------------------
Poseidon Products GmbH. ("Poseidon") was established by the Company
jointly with SteG, a German Government sponsored company. Through
Poseidon, the Company will finish construction of and operate a tire
recycling facility in Penkun, in the state of Mecklenburg-Vorpommern. This
facility will produce crumb rubber and manufacture a wide range of value-
added aftermarket products using technologies licensed or developed by the
Company.
Ground breaking on the Poseidon facility occurred on September 17,
1998. Site improvements were begun and foundations for the plant were
commenced. Due to difficulties in securing an accompanying bank to sponsor
the project, construction of the facility has been delayed. The Company
continues to negotiate funding for the facility with several German banks,
and hopes to have funding in place during the second quarter of 2001. The
Company has obtained extensions on both the EU grants and the low interest
funding commitment from the government of the state of Mecklenburg-
Vorpommern.
Poseidon currently has an office in Penkun and is developing a
marketing plan to introduce and sell its manufactured products in Germany
and Europe. Assuming sufficient funding is obtained, the Company believes
the Poseidon facility will be completed and operational by early next year.
The Company expects to have a clearer understanding as to when the Poseidon
facility will be finished and operational by the end of the second quarter
of 2001.
As the Poseidon facility will incorporate much of the tire recycling
equipment and technology the Company has to offer, the Company intends to
use the Poseidon facility as a showcase for future full scale tire
recycling plants.
F-19
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 17 - Legal Proceedings
---------------------------
The litigation between Eurectec and Tyre's Ecology S.r.l., in the Court in
Pistoia, Italy, is ongoing. The next hearing scheduled in this matter has
been set for January 10, 2002. The parties are currently attempting to
negotiate a settlement in this matter.
The Company has initiated a lawsuit against Veplas Manuracturing, Ltd., and
is seeking the return of the purchase price of equipment. The Company
claims misrepresentation on the acidity and performance of the equipment
purchased from Veplas. Veplas has made various counterclaims against the
Company. These claims include a claim for $27,081.46, which Veplas claims
is the balance due pursuant to the Agreement signed between the parties, a
claim for $2,387.69 for shipping costs paid by Veplas on the Company's
behalf; and unspecified claims for costs for special damages. The Company
refutes Veplas' counterclaims and will continue to pursue this matter.
NOTE 18 - Principles of Consolidation
-------------------------------------
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" was issued for fiscal year beginning after
December 31, 1997, with earlier application permitted. The Company has
elected to adopt SFAS No. 131, effective with the fiscal years ended
December 31, 1998. Adoption of SFAS No. 131 did not have a material impact
on the Company's financial statements.
The Company's subsidiaries are as described as follows;
Quantum Environmental Solutions & Techonologies, Inc., (QEST)
-------------------------------------------------------------
QEST is a wholly owned subsidiary of Advanced Recycling Sciences, Inc.
QEST was established pursuant to the laws of the State of Nevada on April
21, 1997. QEST was put into active operations during the fourth quarter of
1999. The primary responsibility of QEST is the marketing and sales of
tire recycling and aftermarket product equipment systems.
Advanced Surfacing Technologies, Inc. ("AST")
----------------------------------------------
AST was incorporated in Nevada in May 1997 as Quantum Modified Asphalt
Xcetera, Inc., a wholly owned subsidiary of the Company. The name was
changed to Advanced Surfacing Technologies, Inc., in March 2001.
F-20
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 18 - Principles of Consolidation
-------------------------------------
The Company believes there are opportunities in the asphalt paving
industry. Among those opportunities, is a potentially large market for
crumb rubber to be used in producing crumb rubber modified ("CRM") asphalt
paving. This will include the use of specialized mobile equipment for the
mixing of crumb rubber and asphalt at hot mix plants, overseeing technology
transfer programs to international clients, on-site project management and
seminars to educate both public and private sector engineers about the
Company's products and services. Through AST, the Company will seek to
exploit these opportunities. AST will also research, develop and market
other technologies in the asphalt paving industry, including the worldwide
exclusive licence to certain ground surface applications of a novel ice
adhesion modification or "de-icing" technology the Company received when it
acquired Technology Development, Inc., from UTEK Corporation,
http://www.utekcorp.com.
Technology Development, Inc. ("TDI")
-------------------------------------
TDI was acquired by the Company in February 2001. TDI will be
absorbed into AST, which will oversee the development and, if appropriate,
commercialization of the ground surface de-icing technology.
Tires2Oil, Inc.
---------------
Tires2Oil, Inc., is a wholly owned subsidiary of the Company.
Tires2Oil was formed as a Nevada corporation on January 17, 2001. The
primary responsibility of Tires2Oil will be the continued research,
development and exploitation of certain super critical fluid ("SCF") tire
recycling technology recently acquired by the Company. The SCF technology
is used to break down tires into a clean form of synthetic crude oil which
can be easily upgraded in existing oil refineries. This technology has
been proven on a table top scale. Tires2Oil will focus its initial
efforts into determining whether this technology can be feasible on a
commercial scale.
Advanced Environmental Technologies, Limited ("AET")
----------------------------------------------------
AET is a wholly owned subsidiary of the Company. AET was incorporated
pursuant to the laws of the province of Alberta, Canada on April 21, 1997
as QEST Industries, Inc. The Company changed the name in March 2001. AET
will provide engineering support services to tire recycling facilities in
both North and South America. These services will be provided via the
Company's strategic alliance with Sultech Engineering, a Calgary based
engineering concern. The Company pays Sultech on an as needed, job by job
basis.
F-21
Advanced Recycling Sciences, Inc., and Subsidiaries
(Formerly The Quantum Group, Inc., and Subsidiaries)
Notes to Financial Statements
NOTE 18 - Principles of Consolidation
-------------------------------------
QCAL, Inc.
----------
"QCAL" is a wholly owned subsidiary of The Quantum Group, Inc. QCAL
rescinded its joint venture agreement with the State of California
Department of Corrections ("CDC") and has closed down its tire crumbing
facility at the Richard J. Donovan Correctional Facility at Rock Mountain
in San Diego County, California ("Donovan Correctional Facility"). QCAL
made the decision to close down the San Diego plant due to insufficient
funds to purchase all of the equipment necessary to manufacture crumb
rubber products and the fact that the installation of the appropriately
sized granulator for shredding and granulating tires proved to be
impractical at the prison facility. In July 2000, Thomas Driscoll resigned
as an officer of the Company. QCAL has completed its exit from the Donovan
Correctional Facility, and all obligations of the Company relative thereto
have been satisfied in full.
The Company plans to ship the Press and the C3000 granulator installed
at the Donovan Correctional Facility to Germany to be installed at the
Posiedon Facility.
With the completion of its exit from the Donovan Correctional
Facility, the Company anticipates it will discontinue all operations in its
QCAL subsidiary.
Modified Asphalt Technologies, Inc. ("MAT")
-------------------------------------------
In January 2001, the Company and MAT mutually agreed to rescind the
MAT Purchase Agreement entered into by the parties in January 2000. The
Company no longer owns any interest in MAT.
Eurectec, Inc. ("Eurectec")
----------------------------
Eurectec is a wholly owned subsidiary of The Quantum Group, Inc.
Through Eurectec, the Company entered into a certain license agreement with
CISAP SpA of Italy. Unfortunately, CISAP could not provide equipment that
operated to its represented specifications. As a result, the Company no
longer markets or sells CISAP equipment, nor does it intend to do so in the
future. The Company is currently involved in litigation with CISAP.
Beyond dealing with the CISAP litigation, the Company anticipates little,
if any business will be transacted through Eurectec in the future.
F-22