<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1998
REGISTRATION NO. 333-53397
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 9511 77-0096608
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
5380 NORTH STERLING CENTER DRIVE
WESTLAKE VILLAGE, CALIFORNIA 91361
(818) 865-2205
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARVIN MEARS
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
5380 NORTH STERLING CENTER DRIVE
WESTLAKE VILLAGE, CALIFORNIA 91361
(818) 865-2205
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL D. DONAHUE, ESQ.
ASHER M. LEIDS, ESQ.
DONAHUE, MESEREAU & LEIDS LLP
1900 AVENUE OF THE STARS, SUITE 2700
LOS ANGELES, CALIFORNIA 90067
(310) 277-1441
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
- ---------------
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE FEE
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share................................ 2,820,000(1) $7.3125(2) $20,621,250(2) $6,083.27(2)(3)
- -------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Represents (i) 380,000 shares owned by Jonathan Fink; (ii) 190,000 shares
owned by Brad Billik; (iii) 200,000 shares issuable upon exercise of an
outstanding warrant, dated January 22, 1998, held by Jonathan Fink (the
"Fink Warrant") at an exercise price of $2.00 per share; (iv) 100,000 shares
issuable upon exercise of an outstanding warrant, dated January 22, 1998,
held by Brad Billik (the "Billik Warrant") at an exercise price of $2.00 per
share; (v) 1,950,000 shares issuable (A) upon conversion of 3,000 shares of
Series A Convertible Preferred Stock (the "Series A Preferred Stock") issued
in a private placement in April 1998 (the "1998 Private Placement") and (B)
upon exercise of warrants (the "Private Placement Warrants") granted to the
purchasers in the 1998 Private Placement (clauses (A) and (B) together, the
"Conversion Shares"). The Conversion Shares do not include fractional shares
of Common Stock that the Company is not required to issue upon conversion of
the Series A Preferred Stock or exercise of the Private Placement Warrants.
Although the number of Conversion Shares is currently indeterminable, for
purposes of estimating the number of shares of Common Stock included in this
Registration Statement, the Company calculated the Conversion Shares to be
registered based on 200% of the number of shares of Common Stock that would
have been issuable upon conversion of or otherwise with respect to the
Series A Preferred Stock at a conversion price of $3.875 per share, plus
300,000 shares issuable upon exercise of the Private Placement Warrants at
an exercise price of $3.875 per share. In accordance with Rule 416 of the
Securities Act of 1933, as amended ("Rule 416"). This calculation represents
the Company's good faith estimate of the additional number of shares of
Common Stock that may be issued upon conversion of the shares of Series A
Preferred Stock if the number of such shares is adjusted upward pursuant to
the floating rate conversion price mechanism as a result of a decline in the
market price of the Common Stock. Pursuant to Rule 416, this Registration
Statement also covers that number of additional shares of Common Stock that
may be offered or issued pursuant to terms which provide for a change in the
amount of shares of Common Stock being offered or issued to prevent dilution
resulting from stock splits, stock dividends or similar transactions or by
reason of reductions in the conversion price of the Series A Preferred Stock
in accordance with the terms thereof.
(2) Pursuant to Rule 457(c), the registration fee is based upon a price of
$7.3125 per share, the closing price of the Registrant's Common Stock as
reported on the over-the-counter Bulletin Board on May 19, 1998.
(3) Previously paid
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1998
PROSPECTUS
2,820,000 SHARES
ENVIRONMENTAL PRODUCTS
& TECHNOLOGIES CORPORATION
COMMON STOCK
------------------------
All of the 2,820,000 shares of Common Stock offered hereby, including
600,000 shares issuable upon exercise of warrants held by certain investors (the
"Warrants") and 1,650,000 shares issuable upon conversion of the Company's
Series A Convertible Preferred Stock (the "Series A Preferred Stock"), are being
sold by the Selling Stockholders. The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders; however, it may
receive proceeds from the exercise of the Warrants held by the Selling
Stockholders. See "Selling Stockholders" and "Plan of Distribution." The
Company's Common Stock is traded on the OTC Bulletin Board under the symbol
EPTC. The closing price of the Company's Common Stock on September , 1998 was
$ per share.
The Company is a development stage company that intends to engage in the
business of selling and marketing a closed loop waste management system.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND LIMITED
LIQUIDITY. SEE "RISK FACTORS" ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
The Company intends to furnish its stockholders annual reports containing
financial statements audited by an independent public accounting firm after the
end of each fiscal year. In addition, the Company will furnish to its
stockholders quarterly reports for the first three quarters of each fiscal year
containing unaudited financial and other information after the end of each
fiscal quarter, upon written request to the Secretary of the Company.
2
<PAGE> 4
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual events and results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Except as otherwise
indicated, all information in this Prospectus reflects a two-for-one stock split
that was effected in May 1998.
THE COMPANY
Environmental Products & Technologies Corporation (the "Company") is a
development stage company that intends to engage in the business of selling and
marketing a closed loop waste management system. A closed loop waste management
system is a fully contained and monitored system designed to process
environmentally-harmful animal, human and agricultural waste products which then
produces pathogen-free, heavy metal reduced, high nutrient value and
environmentally beneficial soil amendment. The Company is a Delaware corporation
formed in 1983. Its address is 5380 North Sterling Center Drive, Westlake
Village, California 91361 and its telephone number is (818) 865-2205.
THE OFFERING
BY SELLING STOCKHOLDERS....... 2,820,000 shares of the Company's Common Stock,
including 600,000 shares issuable upon the
exercise of warrants held by certain investors
(the "Warrants") and 1,650,000 shares issuable
upon the conversion of the company's Series A
Preferred Stock. The Company will not receive
any proceeds from the sale of these shares.
However, if the Selling Stockholders who hold
Warrants determine to exercise their Warrants
in order to sell shares hereunder, the Company
will receive the net proceeds of the exercise
of the Warrants. If all of the Warrants were
exercised, the Company would receive proceeds
of $1,762,500.
COMMON STOCK CURRENTLY
OUTSTANDING................... 8,567,148 shares, excluding the 600,000 shares
issuable upon exercise of the Warrants and the
1,650,000 shares issuable upon conversion of
the Company's Series A Preferred Stock.
RISK FACTORS.................. The securities involve a high degree of risk
and limited liquidity. See "Risk Factors."
3
<PAGE> 5
SELECTED FINANCIAL DATA
Unless otherwise specified, the following selected financial data has been
derived from the Company's audited financial statements included elsewhere
herein.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WEIGHTED AVERAGE OUTSTANDING SHARES):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
SEPTEMBER 30, NINE MONTHS ENDED
---------------------- ------------------------------
1996 1997 JUNE 30, 1997 JUNE 30, 1998
--------- --------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales.................................. $ -0- $ -0- $ -0- $ -0-
Gross profit (loss)........................ -0- -0- -0- -0-
Loss from operations....................... (275) (388) (249) (865)
Net Loss................................... (274) (404) (262) (841)
Net loss per common share.................. (0.04) (0.06) (.04) (.51)
Weighted average common shares
outstanding.............................. 6,156,132 7,182,690 7,213,426 8,129,370
</TABLE>
BALANCE SHEET DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
---------------- --------------------------
1996 1997 1997 1998
----- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total assets...................................... $ 273 $ 312 $ 59 $ 2,567
Total liabilities................................. $ 149 $ 223 $ 185 $ 254
Accumulated deficit............................... $(969) $(1,405) $(1,232) $(5,892)
</TABLE>
4
<PAGE> 6
PROSPECTUS-INTRODUCTION
This Prospectus relates to the offer and sale from time to time of up to
2,820,000 shares (the "Shares") of common stock, $.01 par value per share
("Common Stock"), of Environmental Products & Technologies Corporation, a
Delaware corporation (the "Company"), by the Selling Stockholders named herein
(the "Selling Stockholders"), or by their respective pledgees, donees,
transferees or other successors in interest that receive such Shares as a gift,
partnership distribution or other non-sale related transfer. Of the 2,820,000
Shares being offered hereby: (i) 1,650,000 Shares are issuable upon conversion
of or otherwise with respect to 3,000 shares of the Company's Series A
Convertible Preferred Stock, $.01 par value per share ("Series A Preferred
Stock"), held by two of the Selling Stockholders; (ii) 300,000 Shares are
issuable upon the exercise of certain warrants (the "Private Placement
Warrants") held by two of the Selling Stockholders, (iii) 380,000 Shares held by
Jonathan Fink; (iv) 190,000 Shares held by Brad Billik; (v) 200,000 Shares are
issuable upon the exercise of a warrant held by Jonathan Fink (the "Fink
Warrant"); and (vi) 100,000 Shares are issuable upon the exercise of a warrant
held by Brad Billik (the "Billik Warrant"). The Series A Preferred Stock and the
Private Placement Warrants were issued by the Company to the Selling
Stockholders on April 7, 1998 in a private transaction (the "1998 Private
Placement"). Jonathan Fink is the President and Brad Billik is an employee of
Strategic Planning Consultants, Inc. See "Management -- Employment and
Consulting Agreements."
The number of Shares indicated as being issuable upon conversion of or
otherwise with respect to the Series A Preferred Stock and the Private Placement
Warrants sold in the 1998 Private Placement and offered hereby represents a good
faith estimate of the number of shares of Common Stock that may be issued upon
conversion of or otherwise with respect to the Series A Preferred Stock by
reason of the floating rate conversion mechanism included in the Certificate of
Designations, Preferences and Rights for the Series A Preferred Stock. The
estimate is based on 200% of the number of shares of Common Stock issuable at a
conversion price of $3.875 per share in accordance with Rule 416 ("Rule 416") of
the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to Rule
416, the number of shares of Common Stock underlying the Series A Preferred
Stock and offered for sale hereby includes an indeterminate number of shares as
may be issued or issuable upon conversion of or otherwise with respect to the
Series A Preferred Stock by reason of the floating rate conversion price
mechanism and other adjustment mechanisms described in the Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock (the
"Certificate of Designations"), or by reason of any stock splits, stock
dividends or similar transactions involving the Common Stock, in order to
prevent dilution. Although the Company will receive the exercise price of any
Warrants which are exercised, the Company will not receive any of the proceeds
from the sale of the Shares by the Selling Stockholders. The expenses of
registration of the Shares which may be offered hereby under the Securities Act
will be paid by the Company.
The Shares covered under the Registration Statement of which this
Prospectus is a part may be offered for sale from time to time by or for the
account of the Selling Stockholders, or their pledgees, donees, transferees or
other successors in interest, in the open market, in the over the counter market
on the electronic bulletin board (the "Bulletin Board") or on one or more
exchanges on which the Shares are then listed, in privately negotiated
transactions, in an underwritten offering, in a combination of such methods, or
by any other legally available means, at market prices prevailing at the time of
such sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices. The Shares are intended to be sold through one or
more broker-dealers or directly to purchasers. Such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders, their successors in interest and/or the purchasers of the
Shares for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). The Selling Stockholders, their successors
in interest and/or any broker-dealers acting in connection with the sale of the
Shares hereunder may be deemed to be underwriters within the meaning of Section
2(11) of the Securities Act, and any commissions or other compensation received
by them and any profits realized by them on the resale of the Shares as
principals may be deemed underwriting compensation under the Securities Act. See
"Selling Stockholders" and "Plan of Distribution."
5
<PAGE> 7
RISK FACTORS
The securities offered hereby are speculative in nature and an investment
in the Shares offered hereby involves a high degree of risk. In addition to the
other information contained in this Prospectus, prospective investors should
carefully consider the following risk factors in evaluating whether to purchase
the Shares offered hereby.
Accumulated Deficit; History of Operating Losses; Expectation of Future
Losses. The Company has experienced significant operating losses since its
inception. At June 30, 1998, the Company had an accumulated deficit of
approximately $5,892,000. The Company incurred an operating loss of
approximately $(388,000) for the fiscal year ended September 30, 1997, and has
incurred an operating loss of approximately $(841,000) for the nine months ended
June 30, 1998. Such losses have resulted principally from no revenues from
operations and costs associated with the acquisition of the Company's
technologies and general and administrative expenses. The Company has generated
no revenues from operations and incurred increased losses to date and expects
that it will continue to incur losses until such time, if ever, as revenues from
product sales are sufficient to fund its continuing operations. The Company's
profitability will depend on its ability to commercialize its waste management
system. There can be no assurance that the Company will ever generate sufficient
revenues to achieve profitability. See "Management's Discussion and Analysis or
Plan of Operations."
Development Stage Company. The Company is designated by its independent
auditors as a development stage company in accordance with SFAS 7 "Accounting
and Report by Development Stage Enterprises." Under this statement, a
development stage company is an enterprise that is devoting substantially all of
its time to establishing a new business and planned operations have not
commenced. At this stage there is no assurance that the Company will be able to
raise sufficient capital and develop a profitable market for its planned
product.
Capital Intensive Business; Need for Additional Financing. The Company's
business is capital intensive. The proceeds of this offering will be received by
the Selling Stockholders. While the Company may receive cash from the exercise
of warrants held by the Selling Stockholders, there can be no assurance that the
Company will derive any specific amount of proceeds from this offering.
Developments in the Company's business and possible expansion into other markets
could indicate that the Company should expand its business at a faster rate than
that currently planned for. Moreover, there can be no assurance that the Company
will not encounter unforeseen difficulties that may deplete its capital
resources more rapidly than anticipated, which would require that the Company
seek additional funds through equity, debt or other external financing. In any
event, it is likely that the Company will attempt to raise additional capital to
meet its obligations and to accelerate its growth. There can be no assurance
that any additional capital resources which the Company may need will be
available to the Company if and when required, or on terms that will be
acceptable to the Company. If additional financing is required, or desired, the
Company may be required to forgo a substantial interest in its future revenues
or dilute the equity interests of existing stockholders, and a change in control
of the Company may result. Further, if the Company is unable to obtain necessary
financing, it may be required to significantly curtail its activities or cease
operations. See "Management's Discussion and Analysis or Plan of Operations" and
"Use of Proceeds."
Limited Operating History; New Business; No Product Sales. The Company has
a limited operating history and has not generated any revenues to date. There
can be no assurance that the Company will be able to successfully market its
waste management system, products and services. While attempting to
commercialize its products, the Company will be subject to risks inherent in a
new business. Such risks include unanticipated problems relating to
environmental regulatory compliance, the competitive environment in which the
Company operates and marketing problems, and additional costs and expenses that
may exceed current estimates. There can be no assurance that, even after the
expenditure of substantial funds and efforts, the Company will ever achieve or
maintain a substantial level of sales of its products. The failure to
successfully market its products and services will have a material adverse
effect on the Company's financial condition, business and results of operations.
6
<PAGE> 8
Effect of Conversion of Preferred Stock and Exercise of Warrants. This
Prospectus relates to the offer and sale from time to time of up to 2,820,000
shares of Common Stock of the Company, by the Selling Stockholders, or by their
respective pledgees, donees, transferees or other successors in interest that
receive such Shares as a gift, partnership distribution or other non-sale
related transfer. Of the 2,820,000 Shares being offered hereby: (i) 1,650,000
Shares are issuable upon conversion of or otherwise with respect to 3,000 shares
of the Company's Series A Preferred Stock, held by two of the Selling
Stockholders; (ii) 300,000 Shares are issuable upon the exercise of certain
warrants (the "Private Placement Warrants") held by two of the Selling
Stockholders, (iii) 380,000 Shares held by Jonathan Fink; (iv) 190,000 Shares
held by Brad Billik; (v) 200,000 Shares are issuable upon the exercise of a
warrant held by Jonathan Fink (the "Fink Warrant"); and (vi) 100,000 Shares are
issuable upon the exercise of a warrant held by Brad Billik (the "Billik
Warrant"). The Series A Preferred Stock and the Private Placement Warrants were
issued by the Company to the Selling Stockholders on April 7, 1998 in a private
transaction (the "1998 Private Placement"). Jonathan Fink is the President and
Brad Billik is an employee of Strategic Planning Consultants, Inc. See
"Management -- Employment and Consulting Agreements."
The number of Shares indicated as being issuable upon conversion of or
otherwise with respect to the Series A Preferred Stock and the Private Placement
Warrants sold in the 1998 Private Placement and offered hereby represents a good
faith estimate of the number of shares of Common Stock that may be issued upon
conversion of or otherwise with respect to the Series A Preferred Stock by
reason of the floating rate conversion mechanism included in the Certificate of
Designations, Preferences and Rights for the Series A Preferred Stock. The
estimate is based on 200% of the number of shares of Common Stock issuable at a
conversion price of $3.875 per share in accordance with Rule 416 ("Rule 416") of
the Securities Act of 1933, as amended (the "Securities Act"). Pursuant to Rule
416, the number of shares of Common Stock underlying the Series A Preferred
Stock and offered for sale hereby includes an indeterminate number of shares as
may be issued or issuable upon conversion of or otherwise with respect to the
Series A Preferred Stock by reason of the floating rate conversion price
mechanism and other adjustment mechanisms described in the Certificate of
Designations, or by reason of any stock splits, stock dividends or similar
transactions involving the Common Stock, in order to prevent dilution. Although
the Company will receive the exercise price of any warrants which are exercised,
the Company will not receive any of the proceeds from the sale of the Shares by
the Selling Stockholders. The expenses of registration of the Shares which may
be offered hereby under the Securities Act will be paid by the Company.
As noted above, the exact number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and exercise of the Private Placement
Warrants cannot currently be determined but such issuances will vary inversely
with the market price of the Common Stock. The current holders of Common Stock
will be diluted by issuances of Common Stock upon conversion of the Series A
Preferred Stock and exercise of the warrants being registered hereby, to an
extent that depends on the future market price of the Common Stock, the Company
complying with the terms of its agreements with the holders of the Series A
Preferred Stock and the Private Placement Warrants and the timing of conversions
of the Series A Preferred Stock and exercise of the Private Placement Warrants.
The potential effects of such dilution on the existing stockholders of the
Company include the significant diminution of the current stockholders' economic
and voting interests in the Company. In addition, pursuant to the terms of the
Series A Preferred Stock Purchase Agreement and the Certificate of Designations,
which have been filed as exhibits to the Company's Registration Statement of
which this Prospectus forms a part, and depending upon various factors as
specified therein, the Company may be required to register additional shares of
Common Stock to cover the conversion of the Series A Preferred Stock and
exercise of the Private Placement Warrants. The registration and sale of such
additional shares of Common Stock of the Company, or the prospect thereof, could
have a material adverse affect on the market price of the Common Stock. See
"Description of Capital Stock -- Series A Convertible Preferred Stock" and
"Appendix A."
The Shares covered under the Registration Statement of which this
Prospectus is a part may be offered for sale from time to time by or for the
account of the Selling Stockholders, or their pledgees, donees, transferees or
other successors in interest, in the open market, in the over the counter market
on the Bulletin Board or on one or more exchanges on which the Shares are then
listed, in privately negotiated transactions, in
7
<PAGE> 9
an underwritten offering, in a combination of such methods, or by any other
legally available means, at market prices prevailing at the time of such sale,
at prices related to such prevailing market prices, at negotiated prices or at
fixed prices. The Shares are intended to be sold through one or more
broker-dealers or directly to purchasers. Such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders, their successors in interest and/or the purchasers of the
Shares for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). The Selling Stockholders, their successors
in interest and/or any broker-dealers acting in connection with the sale of the
Shares hereunder may be deemed to be underwriters within the meaning of Section
2(11) of the Securities Act, and any commissions or other compensation received
by them and any profits realized by them on the resale of the Shares as
principals may be deemed underwriting compensation under the Securities Act. See
"Selling Stockholders" and "Plan of Distribution."
Uncertain Market Acceptance of the Company's Products. To date, the Company
has had no sales of its waste management system. There can be no assurance that
significant, or any, sales will occur or that the Company's waste management
system will obtain broad, or even limited, market acceptance. The decision by a
potential customer to utilize the Company's waste management system is, among
other things, technical in nature, requiring the customer to make an evaluation
as to whether changes in its capital equipment or operating procedures will be
required in order to realize the performance benefits of the Company's products.
There can be no assurance that potential customers will choose to change their
equipment or established procedures or be willing to incur any necessary costs
to make such changes or that the benefits derived from utilizing the Company's
waste management system will outweigh the costs incurred to make such changes.
Further, there can be no assurance that all customers will experience the
performance and cost advantages expected by the Company. For example, a
by-product of the Company's waste management system is the ability to convert
the methane by-product into electricity. Such ability may be of little or no
interest to consumers at a time when electricity is relatively inexpensive. If
the Company is not successful in marketing its waste management system, its
ability to generate revenues will be greatly diminished and the Company will be
dependent on other future products and services that may be developed or
otherwise obtained by the Company. There can be no assurance that the Company's
waste management system will be successfully marketed or that future products
and services will be developed or obtained.
Development Risks. Environmental Products and Technologies is a development
stage company. The Company has products in various stages of development, and no
revenue has been recognized from the sale of its products. The Company has
developed and plans to market new products and new applications of technology
and, accordingly, is subject to risks associated with such ventures. To date,
the Company has assembled one prototype waste management system. The probability
of success of the Company must be considered in light of the expenses and delays
frequently encountered in connection with the operation of a new business and
the development of practical production techniques for new products.
No Independent Certification as to the Effectiveness of the Company's
Products. The Company has only recently completed development of its closed loop
waste management system and has assembled one complete system. The Company
intends to assemble three additional waste management systems within the next
three to six months. The Company has not yet tested its waste management system
under commercial circumstances. No assurance can be given that the Company's
waste management system will perform as anticipated under commercial conditions
or that substantial reengineering, redesign and/or redevelopment work will not
be required for the Company's waste management system to operate as anticipated.
Further, the Company has not submitted its waste management system to an
independent laboratory for testing to ensure that its system is effective.
Equipment Failure; Limited Engineering, Design and Construction Experience;
Limited Manufacturing Experience. The Company has completed assembly of and
operated since March 1, 1998 one waste management system. The Company commenced
demonstrations to dairies on April 24, 1998. With the proceeds from the 1998
Private Placement (as hereinafter defined), the Company intends to manufacture
three additional demonstration units of its waste management system. From time
to time, the Company has experienced mechanical or technical difficulties with
such waste management system which has required
8
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repairs and maintenance. Any such mechanical or technical difficulties with its
systems in the future could result in an interruption in the Company's ability
to manufacture and sell such systems. The failure of the Company to effect
prompt repairs and otherwise keep its waste management systems operating at
targeted capacities could have a material adverse effect on the business,
financial condition and results of operations of the Company. The Company may
experience problems associated with the manufacturing, assembling and
engineering of additional waste management systems, including, without
limitation, cost overruns, start-up delays and technical or mechanical problems.
To date, the Company has engaged in only limited manufacturing and there can be
no assurance that the Company's efforts to expand its manufacturing capabilities
will not exceed estimated costs or take longer than expected, or that other
unanticipated problems will not arise that would materially adversely affect the
Company's business and prospects. See "Management's Discussion and Analysis or
Plan of Operations" and "Business."
Dependence on Major Subcontractors and Suppliers. The Company relies on
subcontractors and suppliers to manufacture, subassemble and perform certain
testing of all of the components of the Company's waste management system. The
Company plans to outsource the manufacture of major components and complete
final assembly and testing of its waste management systems at its customers
operations. The inability to develop relationships with, or the loss of,
subcontractors or suppliers, or the failure of its subcontractors or suppliers
to meet the Company's price, quality, quantity and delivery requirements, could
require the Company to reduce or eliminate expenditures for research and
development, production or marketing of its products, or otherwise to curtail or
discontinue its operations, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Suppliers."
Product Warranty. The Company intends to warrant its waste management
systems to be free of defects in workmanship and materials for 90 days from
installation at the location of the end user. There can be no assurance that the
Company will not experience warranty claims or parts failure rates in excess of
those which it has assumed in pricing its products and spare parts. Any such
excess warranty claims or spare parts failure rates could have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company currently has no experience with warranty claims
relating to its products.
Dependence on a Single Product Line. The Company anticipates that it will
derive substantially all of its revenue in the foreseeable future from sales of
its waste management systems, related consumables and spare parts. If the
Company is unable to generate sufficient sales of its waste management systems
due to market conditions, manufacturing difficulties or other reasons, it may
not be able to continue its business. Similarly, if purchasers of its waste
management systems were to continue utilizing current waste management
practices, the Company's business, results of operations and financial condition
could be materially adversely affected. Dependence on a single product line
makes the Company particularly vulnerable to the successful introduction of
competitive products.
No Product Liability Insurance. The Company could be subject to product
liability claims in connection with the use of the products that it sells. There
can be no assurance that the Company would have sufficient resources to satisfy
any liability resulting from these claims or would be able to have its customers
indemnify or insure the Company against such claims. The Company does not
currently carry product liability insurance and there can be no assurance that
such coverage, if obtainable, would be adequate in terms and scope to protect
the Company against material adverse effects in the event of a successful
product liability claim. Accordingly, any product liability claim brought
against the Company could, and probably would, have a material adverse effect on
the Company's business, financial condition and results of operations.
Risks Inherent in International Operations. The Company intends to market
its products and services internationally and plans to seek opportunities
overseas, either independently or through joint ventures or other collaborative
arrangements with strategic partners. To the extent that the Company operates
its business overseas and/or sells its products in foreign markets, it will be
subject to all of the risks inherent in international operations and
transactions, including the burdens of complying with a wide variety of foreign
laws and regulations, exposure to fluctuations in currency exchange rates and
tariff regulations, potential economic instability and export license
requirements. In addition, international environmental regulations and
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enforcement of such regulations vary by country and are subject to changes which
may adversely affect the Company's operations. See "Business."
Competition. The Company will directly and indirectly compete with other
businesses, including businesses in the solid waste collection and disposal
business. In many cases, these potential competitors are larger and more firmly
established than the Company. In addition, many of such potential competitors
have greater marketing and development budgets and greater capital resources
than the Company. Accordingly, there can be no assurance that the Company will
be able to achieve and maintain a competitive position in the businesses in
which it will compete. See "Business -- Competition."
Dependence on Patents and Proprietary Technology; Reliance on Licensed
Technology. The Company's success will depend, in part, on its ability to
maintain protection for its products and processes under United States and
foreign patent laws, to preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. Currently, a portion of the
Company's technology for its waste management system is licensed from third
parties and the Company has not obtained indemnification from the licensors of
such technology. Accordingly, if the technology licensed by such licensors to
the Company infringes the rights of third parties, the Company could be held
liable for damages to such third party and could not seek reimbursement from the
licensor. The Company does not maintain any insurance to protect against such
occurrence and, if such a claim were made against the Company it could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not possess any patents and does not
have any applications pending. There can be no assurance that any patent
applications, if applied for, will result in issued patents, that any issued
patents will afford adequate protection to the Company or not be challenged,
invalidated, infringed or circumvented or that any rights thereunder will afford
competitive advantages to the Company. Furthermore, there can be no assurance
that others have not independently developed, or will not independently develop,
similar products and technologies or otherwise duplicate any of the Company's
products and technologies.
There can be no assurance that the validity of any patent issued to the
Company or any licensor of technology to the Company would be upheld if
challenged by others in litigation or that the Company's activities would not
infringe patents owned by others. The Company could incur substantial costs in
defending itself in suits brought against it, or in suits in which the Company
seeks to enforce its patent and/or license rights against others. Should the
Company's products or technologies be found to infringe patents issued to third
parties, the Company would be required to cease the manufacture, use and sale of
the Company's products and the Company could be required to pay substantial
damages. In addition, the Company may be required to obtain licenses to patents
or other proprietary rights of third parties in connection with the development
and use of its products and technologies. No assurance can be given that any
such licenses required would be made available on terms acceptable to the
Company, or at all.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its employees,
consultants, advisors and others. There can be no assurance that such parties
will maintain the confidentiality of such trade secrets or proprietary
information, or that the trade secrets or proprietary information of the Company
will not otherwise become known or be independently developed by competitors in
a manner that would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Intellectual
Property."
Dependence on Environmental Regulation. Federal, state and local
environmental legislation and regulations mandate stringent waste management and
operations practices, which require substantial capital expenditures and often
impose strict liabilities for non-compliance. Environmental laws and regulations
are, and will continue to be, a principal factor affecting demand for the
technology and services being developed or offered by the Company. The level of
enforcement activities by federal, state and local environmental protection and
related agencies, and changes in regulations and waste generator compliance
activities, will also affect demand. To the extent that the burdens of complying
with such laws and regulations may be eased as a result of, among other things,
political factors, or that producers of industrialized farm waste find
alternative means to comply with applicable regulatory requirements, demand for
the Company's products and services could be adversely affected, which could
have a material adverse effect on the Company's business, financial
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condition and results of operations. Any changes in these regulations which
increase compliance standards may require the Company to change or improve its
operating procedures. To the extent the Company conducts its business overseas,
international environmental regulations will be applicable. Such regulations
vary by country and are subject to changes which may adversely affect the
Company's operations. See "Business -- Environmental Matters."
Regulatory Status of Operations. The Company and its customers operate in a
highly regulated environment, and the Company's potential customers and/or the
Company's products and services may be required to have various federal, state
and/or local government permits and authorizations, registrations and/or
exemptions. Any of these permits or approvals may be subject to denial,
revocation or modification under various circumstances. Failure to comply with
the conditions of such permits, approvals, registrations, authorizations or
exemptions may adversely affect the installation or operation of the Company's
waste management system and may subject the Company to federal, state or
locally-imposed penalties. The Company's ability to satisfy the permitting
requirements for a particular installation does not assure that permitting
requirements for other installations will be satisfied. In addition, if new
environmental legislation is enacted or current regulations are amended or are
interpreted or enforced differently, the Company or its customers may be
required to obtain additional operating permits, registrations, certifications,
exemptions or approvals. There can be no assurance that the Company or its
customers will meet all of the applicable regulatory requirements.
Potential Environmental Liability. The Company's business exposes it to the
risk that harmful substances may be released or escape into the environment from
its processes or equipment, resulting in potential liability for the clean-up or
remediation of the release and/or potential personal injury associated with the
release. Liability for investigation and/or clean-up and corrective action costs
exists under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), and corresponding state laws.
Additionally, the Company is potentially subject to regulatory liability for the
generation, transportation, treatment, storage or disposal of hazardous waste if
it does not act in accordance with the requirements of federal or state
hazardous waste regulations or facility specific regulatory determinations,
authorizations or exemptions. The Company is also potentially subject to
regulatory liability for releases into the air or water under the Clean Air Act
of 1970, as amended, and the Federal Water Pollution Control Act of 1972, as
amended (hereinafter the "Clean Water Act"), and analogous state laws and
regulations and various other applicable federal or state laws and regulations
if it does not comply with those requirements.
Dependence on Key Management and Personnel. The Company is highly dependent
upon the efforts of its senior management and, effective April 15, 1998, entered
into a four-year employment agreement with Marvin Mears, the Company's President
and Chief Executive officer. The Company does not possess any key-man life
insurance on Mr. Mears but intends to apply for a $1 million key-man life
insurance policy on him. No assurance can be given that the Company will be able
to obtain such a policy or, if obtainable, that it will be on terms favorable to
the Company. The Company is also dependent upon its other management personnel,
as well as certain scientific advisors and consultants. The loss of the services
of one or more of these individuals could have a material adverse effect upon
the Company. The Company's future success will depend in large part upon its
ability to attract and retain additional highly skilled scientific, managerial,
manufacturing and marketing personnel. The Company faces competition for hiring
such personnel from other companies, research and academic institutions,
government agencies and other organizations. There can be no assurance that the
Company will continue to be successful in attracting and retaining such
personnel. See "Management."
Prior Legal Actions Involving Chief Executive Officer and Principal
Stockholders. On March 12, 1993, the United States District Court for the
Central District of California permanently enjoined Mr. Marvin Mears, the
President, Chief Executive Officer, Director and a major stockholder of the
Company, from, among other things, future violations or aiding and abetting
violations of the antifraud provisions of the Securities Act of 1933, as amended
(the "1933 Act"), and the Securities Exchange Act of 1934 (the "1934 Act"), as
amended. Further, Mr. Mears was permanently restrained and enjoined from making
any untrue statement of a material fact in any registration statement,
application, report, account, record or other
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document filed or transmitted pursuant to the Investment Company Act of 1940, or
omitting to state therein any fact necessary in order to prevent the statements
made therein, in light of the circumstances under which they were made, from
being materially misleading in violation of the Investment Company Act of 1940.
In addition, by order dated February 27, 1996, Mr. Mears, without admitting or
denying any of the findings contained in an order issued by the Securities and
Exchange Commission, consented to the entry of an Order Making Findings and
Imposing Sanctions Pursuant to Section 9(b) of the Investment Company Act of
1940 whereby Mr. Mears agreed to be barred from association with any investment
advisor or investment company. See "Management -- Executive Officers and
Directors."
In February 1993, the United States District Court for the Central District
of California permanently enjoined Mr. Morris Lerner, a major stockholder of the
Company and formerly an officer and director of the Company, from, among other
things, future violations or aiding and abetting violations of the antifraud
provisions of the 1933 Act and the 1934 Act. In addition, Mr. Lerner was
permanently restrained and enjoined from making any untrue statement of a
material fact in any registration statement, application, report, account,
record or other document filed or transmitted pursuant to the Investment Company
Act of 1940, or omitting to state therein any fact necessary in order to prevent
the statements made therein, in light of the circumstances under which they were
made, from being materially misleading in violation of the Investment Company
Act of 1940.
Control by Existing Management. The Company's executive officers and
directors currently beneficially own approximately 45.74% of the outstanding
shares of Common Stock. These persons, if acting in concert, will have
significant voting power with respect to the election of directors and, in
general, the outcome of any other matter submitted to a vote of stockholders.
See "Principal Stockholders."
Potential Adverse Effects of Preferred Stock. The Company's Certificate of
Incorporation authorizes the issuance of shares of "blank check" preferred
stock, which will have such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the Common
Stock. The preferred stock could be utilized to discourage, delay or prevent a
change in control of the Company. Although the Company has no present intention
to issue any shares of preferred stock other than the shares of Series A
Preferred Stock currently outstanding, there can be no assurance that the
Company will not do so in the future. See "Description of Capital
Stock -- Preferred Stock."
No Dividends. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future. The Company intends to retain earnings, if any, to provide
funds for the expansion of the Company's business. So long as any shares of
Series A Convertible Preferred Stock are outstanding, the Company may not,
without first obtaining the approval of the holders of 67% of the then
outstanding shares of Series A Convertible Preferred Stock, redeem, declare or
pay any dividend or distribution with respect to shares of Common Stock. See
"Dividend Policy."
Outstanding Warrants and Options; Exercise of Registration Rights. The
Company has outstanding (i) warrants to purchase an aggregate of 300,000 shares
of Common stock at an exercise price of $2.00 per share; (ii) the Private
Placement Warrants to purchase 300,000 shares of Common Stock at an exercise
price of $3.875 per share; and (iii) options to purchase an aggregate of 330,000
shares of Common Stock granted under the Company's 1996 Stock Option Plan at an
exercise price of $.1875 per share. The Company has reserved an aggregate of
400,000 shares of Common Stock for issuance under its stock option plan as of
the date of this Prospectus. Holders of such warrants and options are likely to
exercise them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided by such warrants and
options. Further, while these warrants and options are outstanding, the
Company's ability to obtain additional financing on favorable terms may be
adversely affected.
General Risks of Business. Any future success that the Company might enjoy
will depend upon many factors, including factors which may be beyond the control
of the Company or which cannot be predicted at this time. These factors may
include technological advances or product obsolescence, increased levels of
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competition, including the entry of additional competitors and increased success
by existing competitors, changes in general economic conditions, increases in
operating costs including costs of supplies, personnel, and equipment, reduced
margins caused by competitive pressures and other factors, and changes in
governmental regulation imposed under federal, state or local laws.
Risks Associated with Management of Potential Growth. The Company's growth
is expected to place a significant strain on its managerial, operation,
financial and information systems resources. To accommodate its current size and
manage growth, the Company must continue to implement and improve its
operational, financial and information systems, and expand, train and manage its
employee base. Additionally, expansion of the Company's information and network
systems is required to accommodate its growth. There can be no assurance that
the Company will be able to effectively manage the expansion of its operations,
or that the Company's facilities, systems, procedures or controls will be
adequate to support the Company's operations. The inability of the company to
manage effectively its future growth would have a material adverse effect on the
Company's business, financial condition and results of operations. This problem
may be exacerbated to the extent the Company continues to acquire additional
technologies, as each such technology must then be integrated into the Company's
operations and systems.
Delaware Anti-Takeover Statute; Issuance of Preferred Stock; Barriers to
Takeover. The Company is a Delaware corporation and thus, upon the consummation
of the Offering will become subject to the prohibitions imposed by Section 203
of the Delaware General Corporation Law, which is generally viewed as an
anti-takeover statute. In general, this statute will prohibit the Company, once
public, from entering into certain business combinations without the approval of
its Board of Directors and, as such, could prohibit or delay mergers or other
attempted takeovers or changes in control with respect to the Company. Such
provisions may discourage attempts to acquire the Company. In addition, the
Company's authorized capital consists of 40,000,000 shares of capital stock of
which 20,000,000 shares are designated as Common Stock and 20,000,000 shares are
designated as preferred stock. The Board of Directors, without any action by the
Company's stockholders, is authorized to designate and issue shares in such
classes or series (including classes or series of preferred stock) as it deems
appropriate and to establish the rights, preferences and privileges of such
shares, including dividends, liquidation and voting rights. The rights of
holders of preferred stock and other classes of Common Stock that may be issued
may be superior to the rights granted to the holders of the existing classes of
Common Stock. Further, the ability of the Board of Directors to designate and
issue such undesignated shares could impede or deter an unsolicited tender offer
or takeover proposal regarding the Company and the issuance of additional shares
having preferential rights could adversely affect the voting power and other
rights of holders of Common Stock. Issuance of preferred stock, which may be
accomplished through a public offering or a private placement, may dilute the
voting power of holders of Common Stock (such as by issuing preferred stock with
super voting rights) and may render more difficult the removal of current
management, even if such removal may be in the stockholders' best interests. Any
such issuance of preferred stock could prevent the holders of Common Stock from
realizing a premium on their shares. See "Description of Securities."
Risks Associated with Forward-Looking Statements Included in this
Prospectus. This Prospectus contains certain forward-looking statements
regarding the plans and objectives of management for future operations. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. The Company's plans and
objectives are based, in part, on assumptions involving the Company's ability to
successfully integrate the various technologies it has licensed, the Company's
ability to market successfully its waste management system and insecticide
products, increased governmental regulation of livestock and poultry operations
and that there will be no unanticipated material adverse change in the Company's
business. Assumptions relating to the foregoing, among others, involve judgments
with respect to, among other things, future economic, competitive, regulatory
and market conditions and future business decisions, all of which are difficult
or impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Prospectus will prove to be accurate. In light of
the significant uncertainties inherent in the forward-looking statements
included
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herein, particularly in view of the Company's early stage operations, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
Limited Market for the Common Stock. The Company's Common Stock is traded
on the OTC Bulletin Board, but is not listed on any stock exchange or on NASDAQ.
Trading volume in the Common Stock has fluctuated considerably in the recent
past. The Company has filed for the registration of the entire class of its
Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act" ), in order to make the Company a "reporting
company" in that it will be required to file all of the reports, proxy
statements and other information required to be filed with the Securities and
Exchange Commission (the "Commission") under the Exchange Act. In this regard,
the Company will be a "reporting Company" concurrently with the declaration of
the effectiveness the Registration Statement of which this Prospectus is a part.
Possible Volatility of Stock Prices; Penny Stock Rules. The
over-the-counter markets for securities such as the Company's Common Stock
historically have experienced extreme price and volume fluctuations during
certain periods. These broad market fluctuations and other factors, such as new
product developments and general trends in the investment markets, as well as
general economic conditions and quarterly variations in the Company's results of
operations, may adversely affect the market price of the Company's Common Stock.
Moreover, unless and until it is approved for quotation on NASDAQ, the Company's
Common Stock could become subject to rules adopted by the Commission regulating
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
NASDAQ, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or the NASDAQ
system). Unless an exemption from the definition of a "penny stock" were
available, any broker engaging in a transaction in the Company's Common Stock
would be required to provide any customer with a risk disclosure document,
disclosure of market conditions, if any, disclosure of the compensation of the
broker-dealer and its salesperson in the transaction, and monthly accounts
showing the market values of the Company's Common Stock held in the customer's
account. The bid and offer quotation and compensation information must be
provided prior to effecting the transaction and must be contained on the
customer's confirmation. It may be anticipated that a number of brokers may be
unwilling to engage in transactions in the Company's Common Stock because of the
need to comply with the "penny stock" rules, thereby making it more difficult
for purchasers of Common Stock offered hereby to dispose of their shares. The
Company's Common Stock is covered by a Securities and Exchange Commission rule
that imposes additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors (generally institutions with assets in excess of $5,000,000 or
individuals with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchaser's written agreement to the transaction prior
to the sale. Consequently, the rule may affect the ability of broker-dealers to
sell the Company's securities and also may affect the ability of purchasers in
this offering to sell their shares in the secondary market.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock and does
not expect to declare or pay any cash or other dividends in the foreseeable
future. The Company intends to retain earnings, if any, to provide funds for the
expansion of the Company's business. See "Risk Factors -- Dividend Policy."
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USE OF PROCEEDS
The Company will not receive the proceeds of sales of shares by the Selling
Stockholders. However, if the Selling Stockholders who hold Warrants determine
to exercise their Warrants in order to sell shares hereunder, the Company will
receive the proceeds of the exercise of the Warrants. If all of the Warrants
were exercised, the Company would receive net proceeds of $1,762,500. The
Company plans to use any such net proceeds for advertising and marketing and as
working capital. The amounts actually expended for each such use, if any, are at
the discretion of the Company and may vary significantly depending upon a number
of factors, including the amount of such proceeds, future revenue growth and the
amount of cash generated by the Company's operations. To the extent such
proceeds are not utilized immediately, they will be invested in United States
government or governmental agency securities or short-term insured certificates
of deposit.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Company was incorporated in 1983 as CCRS, III, Inc. In 1989, the
Company changed its name to Central Corporate Reports Services, Inc., merged
with Information Bureau Inc. and operated in the financial public relations
business until March 1990 when the Company became inactive. In 1990 the Company
changed its name to Combined Assets, Inc. and in 1991 changed its name to ACP
International, Inc. and in 1994 changed its name back to Combined Assets, Inc.
In January 1995, the Company's name was changed to Environmental Products &
Technologies Corporation.
At the end of 1995, the Company commenced development of a waste management
system to control odors and solid stream waste in the farming industry. In
addition, the Company is developing organic based insecticides for agricultural,
commercial and residential use.
The Company is currently in the development stage of operations and, to
this time, has devoted its time to raising capital, product and supplier
development and marketing future products. No products have been assembled,
manufactured or marketed at this time, except that the Company has assembled one
prototype closed loop waste management system for demonstration purposes and
three prototype systems for operation by various universities.
The Company has projected expenses of $1,800,000 through June 1999. The
Company currently has approximately $2,330,000 of cash and cash equivalents and
accordingly, even if the Company were to generate no revenues through June 1999,
the Company would not need to seek additional financing to satisfy its cash
requirements. The Company intends to continue its research and development
activities during the next twelve months.
The Company intends to continue product development with the test of three
full-scale systems to be operated at Utah State University, Cal Poly-Pomona and
Washington State University. The portable units will be employed for continued
demonstrations and sales activity. The goal of such tests is to refine the
process from a batch load to a continuous feed system. At the same time the
development of an input/feed conveyor system and a variable discharge rate screw
mechanism to load and unload the bioreactor needs to be completed. In addition,
a solids waste process will also need to be developed.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
The Company recognized no revenue for the nine months ended June 30, 1998
(the "1998 Period") and for the nine months ended June 30, 1997 (the "1997
Period"). During each of the 1997 and 1998 Periods, the Company's efforts were
directed at researching, designing, developing and testing its closed loop waste
management system.
Research and development expenses primarily consist of the cost of
personnel and equipment needed to conduct the Company's research and development
efforts. Research and development expenses for the 1998 Period increased
$287,660, or approximately 850%, to $321,490 from $33,830 for the 1997 Period.
This increase in research and development expenses reflects additional expenses
associated with the design, development and testing of prototype systems, the
increase in personnel and purchase of components for the Company's currently
operating prototype waste management systems.
General and administrative expenses primarily consist of general and
administrative costs related to the salaries of the Company's administrative
personnel and associated costs. General and administrative expenses for the 1998
Period increased by $327,543, or approximately 152%, to $543,025 from $215,482
for the 1997 Period.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1996
The Company generated no revenue for the fiscal year ended September 30,
1997 ("Fiscal 1997") and for the fiscal year ended September 30, 1996 ("Fiscal
1996").
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Research and development expenses for Fiscal 1997 increased by $69,238, to
$69,238 from -0- for Fiscal 1996. This increase in research and development
expenses for Fiscal 1997 reflects expenses associated with the research, design
and development of the Company's closed loop waste management system.
General and administrative expenses for Fiscal 1997 increased by $44,035,
or approximately 16%, to $319,144 from $275,109 for Fiscal 1996. This increase
in general and administrative expenses was primarily the result of increased
salaries and rental expense which was partially offset by decreased consulting
and other expenses.
Interest expense for Fiscal 1997 was $18,310 compared to -0- for Fiscal
1996. Interest expense for Fiscal 1997 related to the note payable to Ronald
Knudsen, formerly the Director of Product Development of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the design and
development of its prototype closed loop waste management system. The Company's
primary sources of liquidity have been private placements of equity and debt
securities and loans from officers/stockholders on an as needed basis.
Between October and December 1995, the Company sold 100,000 shares of
Common Stock for an aggregate of $10,000, or $.10 per share. Between January and
March 1996, the Company sold 400,000 shares of Common Stock for an aggregate of
$189,650, or approximately $.47 per share. Between April and June 1996, the
Company sold 40,000 shares of Common Stock for an aggregate of $35,000, or $.87
per share. Between July and September 1996, the Company sold 480,000 shares of
Common Stock for an aggregate of $149,200, or approximately $.31 per share.
Between June and September 1997, the Company sold 550,000 shares of Common Stock
for an aggregate of $337,925, or approximately $.614 per share. The figures in
this paragraph do not give effect to the two-for-one forward stock split that
was effected by the Company in May 1998.
In April 1998, the Company sold 3,000 shares of Series A Preferred Stock
together with warrants (the "Private Placement Warrants") to purchase 300,000
shares of Common Stock (the "1998 Private Placement") for gross proceeds of
$3,000,000. The net proceeds to the Company of approximately $2,675,000 will be
used for continued research and development, working capital and general
corporate purposes. The Private Placement Warrants have an initial exercise
price of $3.875 per share. Private Placement Warrants expire on March 31, 2003.
The Private Placement Warrants contain provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon exercise under
certain circumstances, including without limitation, stock dividends, stock
splits, reorganizations, reclassifications, consolidations, certain dilutive
sales of securities for which the Private Placement Warrants are exercisable
below the then existing Market Price (as defined) and failure to maintain a
sufficient number of authorized shares of Common Stock for issuance and delivery
upon exercise of the Private Placement Warrants. See "Description of
Securities -- Preferred Stock" and "-- Warrants."
The Company also has commitments under (i) an employment agreement with
Marvin Mears, the Company's President and Chief Executive Officer, (ii) a
consulting agreement with Strategic Planning Consultants, Inc., a consultant to
the Company and (iii) a note payable to Donald Knudson, formerly a Manager of
Product Development of the Company. See "Management -- Employment and Consulting
Agreements" and "Certain Transactions."
Based on its current operating plan, the Company anticipates that
additional financing will be required to finance its operations and capital
expenditures. The Company's currently anticipated levels of revenues and cash
flow are subject to many uncertainties and cannot be assured. Further, the
Company's business plan may change, or unforseen events may occur, requiring the
Company to raise additional funds. The amount of funds required by the Company
will depend upon many factors, including without limitation, the extent and
timing of sales of the Company's waste management system, future product costs,
the timing and costs associated with the establishment and/or expansion, as
appropriate, of the Company's manufacturing, development, engineering and
customer support capabilities, the timing and cost of the Company's product
development and
17
<PAGE> 19
enhancement activities and the Company's operating results. Until the Company
generates cash flow from operations which will be sufficient to satisfy its cash
requirements, the Company will need to seek alternative means for financing its
operations and capital expenditures and/or postpone or eliminate certain
investments or expenditures. Potential alternative means for financing may
include leasing capital equipment, obtaining a line of credit, or obtaining
additional debt or equity financing. There can be no assurance that, if and when
needed, additional financing will be available, or available on acceptable
terms. The inability to obtain additional financing or generate sufficient cash
from operations could require the Company to reduce or eliminate expenditures
for capital equipment, research and development, production or marketing of its
product, or otherwise curtail or discontinue its operations, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, if the Company raises funds through the sale
of additional equity securities, the Common Stock offered hereby may be further
diluted.
INFLATION
Although certain of the Company's expenses increase with general inflation
in the economy, inflation has not had a material impact on the Company's
financial results to date.
18
<PAGE> 20
SELECTED FINANCIAL DATA
The data set forth below is qualified by reference to, and should be read
in conjunction with, the financial statements of the Company and related notes
thereto and "Management's Discussion and Analysis or Plan of Operations"
included elsewhere in this Prospectus. The following selected financial data of
the Company for the fiscal years ended September 30, 1997 and 1996 are derived
from the financial statements of the Company audited by Clumeck, Stern, Phillips
& Schenkelberg, independent accountants. The balance sheets at September 30,
1997 and 1996 and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the fiscal years ended
September 30, 1997 and 1996, respectively, and notes thereto are included
elsewhere in this Prospectus. The selected financial data as of June 30, 1998
and 1997, and for the nine-month periods ended June 30, 1998 and 1997 have been
derived from the Company's unaudited financial statements which, in the opinion
of management, reflect all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of the results of operations for such periods.
The results of the interim periods are not necessarily indicative of the results
of a full year.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA AND WEIGHTED AVERAGE OUTSTANDING SHARES):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
---------------------- --------------------------------
1996 1997 1997 1998
--------- --------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales............................... $ -0- $ -0- $ -0- $ -0-
Gross profit (loss)..................... -0- -0- -0- -0-
Loss from operations.................... (275) (388) (249) (865)
Net Loss................................ (274) (404) (262) (841)
Net loss per common share............... (0.04) (0.06) (.04) (.51)
Weighted average common shares
outstanding........................... 6,156,132 7,182,690 7,213,426 8,129,370
</TABLE>
BALANCE SHEET DATA (IN THOUSANDS):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------------ --------------------
1996 1997 1997 1998
----- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total assets................................... $ 273 $ 312 $ 59 $ 2,567
Total liabilities.............................. $ 149 $ 223 $ 185 $ 254
Accumulated deficit............................ $(969) $(1,405) $(1,232) $(5,892)
</TABLE>
19
<PAGE> 21
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the OTC Bulletin Board under the
symbol EPTC. The following table sets forth the range of high and low bid
quotation per share for the Common Stock as reported by the OTC Bulletin Board
during the calendar years indicated. The bid price reflects inter-dealer prices
and does not include retail mark-up, markdown, or commission. The Company
effected a 2 for 1 forward stock split that became effective on May 12, 1998.
The following table does not give effect to such stock split except as
indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1996
Third Quarter............................................. $ 5.50 $ 2.00
Fourth Quarter............................................ 5.00 1.125
1997
First Quarter............................................. 4.25 1.875
Second Quarter............................................ 2.125 0.563
Third Quarter............................................. 3.188 0.625
Fourth Quarter............................................ 4.188 1.000
1998
First Quarter............................................. 10.375 2.313
Second Quarter............................................ 13.000 7.625
Second Quarter (after May 11, 1998)....................... 9.125 7.250
</TABLE>
The Company has never declared or paid a cash dividend on its Common Stock
and does not expect to pay any cash dividends in the foreseeable future. So long
as any shares of Series A Convertible Preferred Stock are outstanding, the
Company may not, without first obtaining the approval of the holders of 67% of
the then outstanding shares of Series A Convertible Preferred Stock, redeem,
declare or pay any dividend or make any distribution with respect to shares of
Common Stock.
20
<PAGE> 22
BUSINESS
GENERAL
Environmental Products and Technologies Corporation was established to
solve environmental problems regarding the safe disposal of waste created by
large livestock, hog, poultry and other similar operations. The Company has
developed a system that converts animal wastes into commercial quantities of a
pathogen-free, nutrient-rich, soil-building medium.
Over the past few years, there has been an increasing concern regarding the
potential for animal waste pollution from intensive livestock and poultry
operations. The concentration of animal waste from larger and larger operations
have lead to more complaints about odor, greater challenges for animal waste
management and a growing public opinion that more environmental protections are
needed.
Nationwide, 130 times more animal waste is produced than human waste -- 5
tons for every United States citizen -- with some livestock and poultry
operations producing as much waste as a town or even a city! As animals become
increasingly concentrated in certain regions of the country and on larger
operations, there is not always enough fallow land to use all of the manure as
fertilizer. These increasing concentrations of manure mean that the risk of
water pollution from waste spills, runoff from fields and leakage from storage
facilities is also increasing.
Currently, Federal regulations do not address the handling, storage, land
application or disposal of manure. The Inspector General of the Environmental
Protection Agency (the "EPA") recently reported that "Federal regulations
inadequately protect water quality from animal waste."
To respond to these problems, Senator Tom Harkin recently introduced the
Animal Agriculture Reform Act in the United States Senate, as the first bill of
its kind introduced in Congress, to serve as a national approach to animal waste
problems. This bill would set environmental standards for animal waste handling
by large livestock and poultry operations, and require those operations to
follow waste management plans approved by the United States Department of
Agriculture.
To address these problems the Company has developed its closed loop waste
management system. This system is comprised of four basic components: a waste
separator, an anaerobic digester, a bio-reactor and a co-generation system.
The Company currently has one prototype waste management system and intends
to develop three additional systems within the next three to six months. With
these systems, the Company expects to test its systems in, among other places,
Chino, California with the assistance of a professor from the California State
University at Pomona ("Cal Poly Pomona"), Logan, Utah with the assistance of
Utah State University and Pullman, Washington with the assistance of Washington
State University. The Company does not currently have any agreements with any of
the above mentioned universities and, although the Company is currently in
discussions with each such university and believes that an oral understanding
has been reached with each such university to participate in tests of the
Company's waste management system, no assurance can be given as to whether the
oral understanding will lead to a binding agreement for any of such universities
to participate in the testing of the Company's waste management systems. In
August 1998, the Company commenced tests of two of its waste management systems,
with one system being tested at Utah State University and the other system being
tested at Cal Poly Pomona. The Company expects that the pilot systems will run
for approximately three to six months.
BACKGROUND
In November 1994, the Company became involved in odor control and animal
factories producing food for human consumption. In the hog industry in North
Carolina, certain farmers were involved in court proceedings over odor control
threatening closure of their farms. The Company succeeded in demonstrating to
the court, the plaintiffs, and the defendants in the court actions, that an odor
solution existed. The Company came to conclude, however, that farmers that were
not engaged in legal proceedings, would not spend money to solve their odor
problems.
21
<PAGE> 23
The Company then realized that the real problem was bigger than just odor
control. It was the animal waste. The Company set its sights on the bigger
problem. The resulting focus led to the development of the Company's current
products and methods of waste management.
Currently, the Company has developed a closed-loop waste management system
that addresses all areas of waste management in a wide variety of animal and
vegetable food production waste problems, including odor control. This system is
comprised of four parts, starting with a Separator that separates solids from
liquids. Solids are processed in an Aerobic Bioreactor tank that eliminates
extent pathogens and converts the waste to a non-toxic, nutrient-rich soil
amendment. Liquids are processed in an Anaerobic Digester, a series of tanks
where methane is drawn off and the liquids filtered of heavy metals and further
processed for reuse as wash water. In the fourth part, the Cogeneration System,
methane combines with diesel fuel in a dual-fuel engine that drives a generator
to provide electrical power to the facilities.
The first full system installation is at the University of Utah, in Logan,
to provide quantitative and qualitative data to support sales and further
research.
TYPICAL ANIMAL WASTE MANAGEMENT PRACTICES
Animal waste mainly consists of manure and urine from cows, hogs, chickens,
turkeys, mink and other animals that are raised for food or other purposes.
These materials are potential sources of crop nutrients, but also can pose
environmental threats.
The composition of animal waste depends on both the kind of animal and the
way the waste is handled. For example, poultry operations typically produce dry
litter with about 15% to 25% moisture content, that may be mixed with straw or
another dry material for easier handling. The removed litter is stacked or
stored in metal or wooden structures or on the ground on a temporary basis.
Hogs and cattle generate a manure that is more liquid and typically water
is used to flush the manure out of the barns and into storage facilities. The
resulting "slurry" is up to 97% liquid, and most commonly stored in earthen
lagoons. An alternative storage method now being adopted more widely is the
"slurry tank," which offers a greater level of structural stability and
environmental protection.
In the lagoons or tanks, many of the solids settle into a sludge at the
bottom. A farmer who utilizes the animal waste for nutrients pumps the liquid
out for nutrients or irrigation and may agitate the sludge at pumping time to
capture the nutrients that otherwise would remain behind.
The problem with these methods is that as the number of animals raised has
increased and the amount of land utilized has decreased, there is an
insufficient amount of fallow land available for the farmer to utilize the waste
produced by the animals. Accordingly, the animal waste is building up on the
farm causing various health hazards such as run-off and leaching. Further,
manure cannot be spread on land when a crop is growing.
THE ENVIRONMENTAL PRODUCTS & TECHNOLOGIES SOLUTION
The Company has developed a closed loop waste management system to provide
for the safe disposal of waste created by large livestock, poultry, hog and
other similar operations. In addition, the Company's waste management system
converts animal wastes into commercial quantities of a pathogen-free,
nutrient-rich, soil-building medium. Further, if the Company's co-generation
product is utilized, the Company is able to take the methane that is produced by
the Company's system and use it for producing energy for the farmer's property.
The Company's closed loop waste management system consists of the following:
The Waste Separator. The purpose of the waste separator is to pump all of
the effluent into the waste separator which then catches all of the solids,
takes them up through a set of rollers and basically squeezes the moisture out
of the solids. The moisture then goes through a belt and goes into a large tank
at the bottom where the moisture is then pumped into the anaerobic digester. The
solids go into the bio-reactor.
The Anaerobic Digester. The anaerobic digester is sized to eliminate the
lagoon. The anaerobic digester can handle from anywhere between 10,000 and
30,000 gallons of fluid. The anaerobic digester is made out of
22
<PAGE> 24
fiberglass and, in its typical configuration, is about eight feet in diameter
and 42 feet long for a tank that can hold up to 30,000 gallons of effluent. In
that tank, the Company has isolated a set of proprietary enzymes which excite
off the methane. The methane is then captured and pulled off the tank and used
to run an engine which is able to produce electricity which the farmer can use
in his or her operations.
The anaerobic digester handles all of the fluids. From that methane is
excited off which runs the co-generation system. It goes through a series of
three tanks and in the last tank the liquid is processed. Finally, the liquid is
put through a filter system from which non-potable, re-useable, re-cyclable
water is available for use for irrigation and/or for washing and flushing and
using again to clean out the barns and wash the animals and basically used
without having to repump or use fresh water.
In the first tank, any solids that are not consumed by the enzymes
basically settle to the bottom of the tank. On a regular interval, the solids
that have settled at the bottom of the tank are flushed into the bio-reactor.
In the second set of tanks, all of the solids are settled out. In the third
tank, the clarifier, the water is filtered and then reused.
The Enzymes. The Company employs enzymes for the purpose of exciting the
methane from the animal waste in the anaerobic digester. The Company has tested
this methane producing technology with its enzymes. According to the Company,
the enzymes work best in temperatures ranging from 90 degrees to 105 degrees F.
The Technology. The Company relies, among other things, on technology that
was designed by Lifeline Enterprises L.L.C., a Utah limited liability company
("Lifeline"). Pursuant to a restated letter of understanding dated May 18, 1998,
Lifeline agreed to transfer to the Company all rights, title and interest in and
to the anaerobic digester, the bio-reactor and the biologicals used therewith.
Patents are currently pending on the co-generation technology and the
bio-reactor. There can be no assurance that a patent will be issued on either
the co-generation technology or the bio-reactor, that such products do not or
will not infringe on the intellectual property rights of others or that if a
patent is issued that it will not be invalidated later. In consideration for
this transfer, the Company issued 100,000 shares of Common Stock to Lifeline and
has agreed to issue an additional 50,000 shares of Common Stock upon assignment
to the Company of all patents to the bio-reactor. In addition, the Company has
agreed to issue to Lifeline an aggregate of 320,000 shares of Common Stock,
payable 80,000 shares on each of October 15, 1999, 2000, 2001 and 2002. Gary
Roberts, Linda Roberts and Bob Crouch are principals of Lifeline and Gary
Roberts and Bob Crouch are employees of the Company.
The Bio-reactor. Finally, the bio-reactor takes all of the solids. The
bio-reactor is basically a steel vessel that will be sized to the requirements
of the particular application. The tank is rotated and the Company's
biologicals, including enzymes, are introduced into the tank through a computer
controlled process. The purpose of this process is to compost the solid
materials and at the end of the process, the Company is left with useable soil,
which it intends to use for compost. The Company then intends to add biologicals
and fungi based upon established formulae for various groups of vegetable,
fruits, and vines and sell the compost to end users. By way of comparison, the
process that the Company is using is, basically, an acceleration of the process
utilized by nature. For example, windrow composting generally takes between 90
to 100 days, whereas the Company produces a stable product in less than one
week.
THE COMPANY'S STRATEGY
The Company's strategy is to enter into agreements with various
universities located in the states of California, Utah and Washington in order
to verify the utility of the Company's waste management system. The Company is
engaging in discussions with professors at Utah State University, Cal
Poly-Pomona, and Washington State University. The purpose of these placements is
to obtain third-party data that can be used by the Company to verify its
preliminary testing and, eventually, in its marketing endeavors. The Company
intends to use various vegetable crop residuals and dairy solids in the testing
program.
Pursuant to preliminary discussions with Utah State University, the Company
intends to place one of its waste management systems at Utah State University.
The Company believes that Utah State University is an ideal testing grounds for
its waste management system because Utah State University owns a dairy of 225
23
<PAGE> 25
cows. Utah State University utilizes these cattle for manufacturing and
processing its own milk and cheese for use on campus and for sale at retail. It
is the Company's intention to make arrangements with a professor at Utah State
University, to operate one of its waste management systems. From this, the
Company expects to publish test data by October 1998. There can be no assurance
that the Company will be successful in completing arrangements with Utah State
University, or if successful, that the data developed from this test will be
favorable to the Company or of sufficient quality for use by the Company to
verify the utility of its system or in its marketing endeavors.
In addition, the Company is in the process of making arrangements to test
its waste management system at a dairy located in Chino, California and to have
graduate students from Cal Poly-Pomona operate the system and compile data for
use by the Company. The Company believes that Chino, California provides a
perfect environment for testing its waste management system. According to the
Company, there are approximately 274 dairies located within a five square mile
area in Chino. There are approximately 300,000 dairy cows located in the Chino,
California area, comprising the largest concentration of cows in the United
States. There can be no assurance that the Company will be successful in
completing negotiations for placing its waste management system in Chino,
California.
SUPPLIERS
It is the Company's intention not to manufacture on its own any of the
components necessary to produce its waste management system. The Company intends
to utilize third party suppliers to provide the products necessary to complete
its waste management systems. While the Company believes that there are a
variety of suppliers for most of the components that will comprise its waste
management system, there are certain components of the waste management system
that will only be available from one or possibly two suppliers. In this regard,
the Company will be reliant on Lifeline for the co-generation technology,
Vineyard Technologies for the dual fuel engine, and RBR Technologies and Fan
Systems, Inc. for the waste separator. The Company does not have any agreements
or arrangements with any of the above-mentioned companies to provide the Company
with the products that the Company will need to assemble a full waste management
system. However, the Company believes that it will be able to purchase the
products that it needs from each of these companies. There can be no assurance,
however, that the Company will be able to purchase the components from the
above-mentioned companies, or if it is able to purchase such components, that it
will be able to do so on terms that are satisfactory to the Company.
ASSEMBLY
The Company currently contemplates that once it has proven the utility of
its waste management system that it will contract with the various suppliers of
the constituent components of the waste management system to deliver them (i.e.,
dropship) to sites specified by the Company. The Company will then provide for
the assembly of the components into the waste management system for use at the
specified location. There can be no assurance that the Company will be
successful in coordinating the various deliveries of the component parts of its
waste management system, or that it will be successful in assembling the
component parts in the field, as currently contemplated.
COMPETITION
The Company will directly and indirectly compete with other businesses,
including businesses in the solid waste collection and disposal business,
including Bion Environmental Technologies, Inc. and Thermo Tech Technologies
Inc., both of which companies engage in organic waste conversion. In many cases,
these potential competitors are larger and more firmly established than the
Company. In addition, many of such potential competitors have greater marketing
and development budgets and greater capital resources than the Company.
Accordingly, there can be no assurance that the Company will be able to achieve
and maintain a competitive position in the businesses in which it will compete.
See "Risk Factors -- Competition."
24
<PAGE> 26
INTELLECTUAL PROPERTY
The Company's success will depend, in part, on its ability to maintain
protection for its products and processes under United States and foreign patent
laws, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. Currently, a portion of the Company's
technology for its waste management system is licensed from third parties and
the Company has not obtained indemnification from the licensors of such
technology. Accordingly, if the technology licensed by such licensors to the
Company infringes the rights of third parties, the Company could be held liable
for damages to such third party and could not seek reimbursement from the
licensor. The Company does not maintain any insurance to protect against such
occurrence and, if such a claim were made against the Company it could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not possess any patents and does not
have any applications pending. There can be no assurance that any patent
applications, if applied for, will result in issued patents, that any issued
patents will afford adequate protection to the Company or not be challenged,
invalidated, infringed or circumvented or that any rights thereunder will afford
competitive advantages to the Company. Furthermore, there can be no assurance
that others have not independently developed, or will not independently develop,
similar products and technologies or otherwise duplicate any of the Company's
products and technologies.
There can be no assurance that the validity of any patent issued to the
Company or any licensor of technology to the Company would be upheld if
challenged by others in litigation or that the Company's activities would not
infringe patents owned by others. The Company could incur substantial costs in
defending itself in suits brought against it, or in suits in which the Company
seeks to enforce its patent and/or license rights against others. Should the
Company's products or technologies be found to infringe patents issued to third
parties, the Company would be required to cease the manufacture, use and sale of
the Company's products and the Company could be required to pay substantial
damages. In addition, the Company may be required to obtain licenses to patents
or other proprietary rights of third parties in connection with the development
and use of its products and technologies. No assurance can be given that any
such licenses required would be made available on terms acceptable to the
Company, or at all.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its employees,
consultants, advisors and others. There can be no assurance that such parties
will maintain the confidentiality of such trade secrets or proprietary
information, or that the trade secrets or proprietary information of the Company
will not otherwise become known or be independently developed by competitors in
a manner that would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Dependence
on Patents and Proprietary Technology; Reliance on Licensed Technology."
ENVIRONMENTAL MATTERS
Federal, state and local environmental legislation and regulations mandate
stringent waste management and operations practices, which require substantial
capital expenditures and often impose strict liabilities for non-compliance.
Environmental laws and regulations are, and will continue to be, a principal
factor affecting demand for the technology and services being developed or
offered by the Company. The level of enforcement activities by federal, state
and local environmental protection and related agencies, and changes in
regulations and waste generator compliance activities, will also affect demand.
To the extent that the burdens of complying with such laws and regulations may
be eased as a result of, among other things, political factors, or that
producers of industrialized farm waste find alternative means to comply with
applicable regulatory requirements, demand for the Company's products and
services could be adversely affected, which could have a material adverse effect
on the Company's business, financial condition and results of operations. Any
changes in these regulations which increase compliance standards may require the
Company to change or improve its operating procedures. To the extent the Company
conducts its business overseas, international environmental regulations will be
applicable. Such regulations vary by country and are subject to changes which
may adversely affect the Company's operations.
25
<PAGE> 27
The Company and its customers operate in a highly regulated environment,
and the Company's potential customers and/or the Company's products and services
may be required to have various federal, state and/or local government permits
and authorizations, registrations and/or exemptions. Any of these permits or
approvals may be subject to denial, revocation or modification under various
circumstances. Failure to comply with the conditions of such permits, approvals,
registrations, authorizations or exemptions may adversely affect the
installation or operation of the Company's waste management system and may
subject the Company to federal, state or locally-imposed penalties. The
Company's ability to satisfy the permitting requirements for a particular
installation does not assure that permitting requirements for other
installations will be satisfied. In addition, if new environmental legislation
is enacted or current regulations are amended or are interpreted or enforced
differently, the Company or its customers may be required to obtain additional
operating permits, registrations, certifications, exemptions or approvals. There
can be no assurance that the Company or its customers will meet all of the
applicable regulatory requirements.
The Company's business exposes it to the risk that harmful substances may
be released or escape into the environment from its processes or equipment,
resulting in potential liability for the clean-up or remediation of the release
and/or potential personal injury associated with the release. Liability for
investigation and/or clean-up and corrective action costs exists under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), the Resource Conservation and Recovery Act of 1976, as
amended ("RCRA"), and corresponding state laws. Additionally, the Company is
potentially subject to regulatory liability for the generation, transportation,
treatment, storage or disposal of hazardous waste if it does not act in
accordance with the requirements of federal or state hazardous waste regulations
or facility specific regulatory determinations, authorizations or exemptions.
The Company is also potentially subject to regulatory liability for releases
into the air or water under the Clean Air Act of 1970, as amended, and the
Federal Water Pollution Control Act of 1972, as amended (hereinafter the "Clean
Water Act"), and analogous state laws and regulations and various other
applicable federal or state laws and regulations if it does not comply with
those requirements. See "Risk Factors -- Dependence on Environmental
Regulations," "-- Regulatory Status of Operations" and "-- Potential
Environmental Liability."
DIATOMACEOUS EARTH
In conjunction with its waste management efforts, the Company has also
resolved to develop a non-toxic, environmentally friendly insecticide and
application system. In connection with such effort, the Company recently
acquired four diatomaceous earth ("DE") claims in Eastern Oregon from Applied
Earth Technologies, Inc. ("Applied") for an aggregate of $40,000. Each claim is
comprised of 160 acres and will provide the Company a long-term supply of DE,
which is a basic insecticide ingredient. DE is a component of the Company's
waste management system in that it will be used to filter out hazardous elements
in the waste stream processing. In addition, DE provides water retention and
insecticide capability when mixed into the soil amendment.
Further, the Company intends to provide insect control with application of
DE-based insecticides. The Company intends to seek third-party validation that
DE will be an effective weapon in insect control, though no assurance can be
given that DE will be effective or if effective, that it will be cost effective.
It is the Company's intent to use DE as a replacement for organophosphates and
chemical agents that are considered harmful to humans as well as insects.
The Company does not have the expertise or equipment to mine the DE from
the claims. Accordingly, the Company has held discussions with Terra Minerals
Corporation ("Terra") of Salt Lake City to act as its mining consultant and
operator. However, the Company does not intend to develop or promote this
business for the next 12 months, instead, focusing its efforts and resources on
the development of its closed loop waste management systems.
There are no affiliations between the Company or Applied and Terra.
26
<PAGE> 28
FACILITIES
The Company's facilities are located at 5380 North Sterling Center Drive,
Westlake Village, California and presently consist of approximately 3,150 sq.
ft. The Company believes that these facilities will meet the Company's needs.
The Company leases this facility under a lease that expires on December 31,
1999. The base rent for the leased premises is $2,520 per month. The Company has
the option to extend the lease for an additional two-year period on the same
terms and conditions except that the monthly rental payment for the first year
of any such extension would be $2,674 and $2,754 for the second year.
PERSONNEL
As of August 14, 1998, the Company employed eight people on a full-time
basis. In addition the Company utilizes on a regular basis the services of 14
consultants and part-time employees. The Company believes that its future
success will depend, in part, on its ability to continue to attract, hire and
retain qualified personnel. The competition for such personnel is intense and no
assurance can be given that the Company will be successful in attracting such
personnel, particularly considering the low unemployment rate currently being
experienced across the United States. None of the Company's employees is
represented by a labor union and the Company has never experienced a work
stoppage. The Company believes that its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings, and is not aware of
any pending or threatened litigation against the Company.
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<PAGE> 29
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Marvin Mears.... 64 President, Chief Executive Officer and Director
Joel G. 38 Chief Financial Officer and Secretary
Wadman........
</TABLE>
Two directors of the Company recently resigned and the Company is currently
seeking replacements. The Company anticipates that the Board of Directors will
consist of five members and that four additional members will be nominated and
appointed within 120 days after the date of this Prospectus during which time
the Company expects to amend its Certificate of Incorporation and Bylaws to
provide for indemnification, to the fullest extent possible under Delaware law,
for the Company's officers, directors, employees and agents. See "Description of
Capital Stock -- Limitations on Liability."
Marvin Mears has been the President, Chief Executive Officer and a director
of the Company since December 1994. From March 1993 to November 1994, Mr. Mears
was President of Combined Assets, Inc., a privately-held consulting company.
From January 1991 to February 1993, Mr. Mears was the President of Corporate
Capital Resources, Inc. and prior thereto, from November 1986 to January 1991,
Mr. Mears was the Vice President -- Corporate Development and a member of the
Valuation Committee of Corporate Capital Resources, Inc., a publicly-traded
venture capital company that specialized in early stage and start-up companies.
Mr. Mears also currently serves on the Board of Directors of Chatsworth Products
Inc., a privately-held company engaged in manufacturing hardware for computer
networks and Robert T. Dorris and Associates, a privately-held company that
provides employee assistance programs to large corporations.
On March 12, 1993, the United States District Court for the Central
District of California permanently enjoined Mr. Mears from, among other things,
future violations or aiding and abetting violations of the antifraud provisions
of the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended. Furthermore, Mr. Mears was permanently restrained and enjoined
from making any untrue statement of a material fact in any registration
statement, application, report, account, record or other document filed or
transmitted pursuant to the Investment Company Act of 1940, or omitting to state
therein any fact necessary in order to prevent the statements made therein, in
light of the circumstances under which they were made, from being materially
misleading in violation of the Investment Company Act of 1940. In addition, by
order dated February 27, 1996, Mr. Mears, without admitting or denying any of
the findings contained in an order issued by the Securities and Exchange
Commission, consented to the entry of an Order Making Findings and Imposing
Sanctions Pursuant to Section 9(b) of the Investment Company Act of 1940 whereby
Mr. Mears agreed to be barred from association with any investment advisor or
investment company. See "Risk Factors -- Prior Legal Actions Involving Chief
Executive Officer and Principal Stockholders."
Joel G. Wadman has been the Chief Financial Officer of the Company since
July 1997 and became Secretary of the Company in May 1998. Mr. Wadman is not
employed by the Company full time and currently devotes approximately 40 hours
per month to the Company's business. Since January 1994 Mr. Wadman has been a
consultant to SRS Consulting specializing in system development and forensic
accounting. From February 1990 to December 1993, Mr. Wadman was the Vice
President and Controller of WCT Communications, Inc. Mr. Wadman received a B.S.
in Finance from Brigham Young University in 1989.
28
<PAGE> 30
EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid or accrued by the
Company during the years ended September 30, 1996 and September 30, 1997 to its
President and Chief Executive Officer (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Marvin Mears, President and CEO................ 1966 -0- -0- -0-
1997 -0- -0- -0-
</TABLE>
1996 STOCK OPTION PLAN
On December 29, 1995 the Board of Directors adopted and, on December 29,
1995 the shareholders approved, the Company's 1996 Stock Option Plan (the
"Option Plan") under which a total of 400,000 shares of Common Stock has been
reserved for issuance. The Option Plan terminates on September 30, 2006, unless
sooner terminated by the Board of Directors.
Options granted under the Option Plan may be either "incentive stock
options" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or nonstatutory stock options and become exercisable in accordance with
terms approved at the time of grant. Options may be granted to any employee of
or consultant to the Company or any parent, subsidiary or successor of the
Company, including employees who are also officers or directors, selected by the
Board of Directors in its discretion. The Option Plan is currently administered
by the board of directors which has the authority to determine optionees, the
number of shares covered by each option, the type of option (i.e., incentive or
nonstatutory), the applicable vesting schedule, the exercise price, the method
of payment and certain other option terms.
The exercise price of an option granted under the Option Plan may not be
less than 85%, in the case of a nonstatutory stock option, or 100%, in the case
of an incentive stock option, of the fair market value of the Common Stock
subject to the option on the date of the option grant. To the extent that the
aggregate fair market value of the stock subject to incentive stock options that
become exercisable for the first time during any one calendar year exceeds
$100,000 (as determined at the grant date) plus fifty percent (50%) of any
unused limit carryover from prior years, the options in excess of such limit
shall be treated as nonstatutory stock options. Options may be granted under the
Option Plan for terms of up to ten years and will typically be exercisable in
installments in accordance with a vesting schedule approved by the board of
Directors at the time an option is granted. Options are not transferable other
than upon death or between spouses incident to divorce. Options may be exercised
at various periods up to 12 months after the death or disability of the optionee
or up to three months after the termination of employment of the optionee, to
the extent the option was then exercisable.
With Respect to the Option Plan, the board of directors has the discretion
to subject any options granted under the Option Plan to a right of repurchase in
favor of the Company, which right may be exercised by the Company upon the
termination of employment of any employee or consultant who was granted options
under the Option Plan at a price equal to the option exercise price. In
addition, the Company has been granted a right of first refusal by each optionee
pursuant to which each optionee has agreed to provide the Company with the right
to purchase from such optionee any shares acquired by such optionee upon the
exercise of options on the same terms and conditions as such optionee was
proposing to sell such shares.
As of May 19, 1998, options to acquire 330,000 shares of Common Stock were
outstanding under the Option Plan. Such options have an exercise price of
$0.1875 per share and expire in July 2006. Holders of 280,000 of such options
have agreed not to exercise such options prior to July 15, 1999.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company entered into a four-year employment agreement with Marvin Mears
effective as of April 15, 1998 (the "Mears Employment Agreement"). The Mears
Employment Agreement provides, among
29
<PAGE> 31
other things, that the Company shall pay and/or provide to Mr. Mears: (i) a
fixed annual salary of $96,000 in year one, $120,000 in year two, $144,000 in
year three and $168,000 in year four, payable in each case in equal bi-monthly
installments; (ii) all fringe benefits which the Company or any subsidiary may
make available from time-to-time for persons with comparable positions and
responsibilities; (iii) medical group insurance coverage or equivalent coverage
for Mr. Mears and his dependents, which coverage shall commence on December 31,
1998 and continue throughout the term of employment; (iv) reimbursement for
reasonable and necessary business expenses incurred by Mr. Mears in the course
of his duties as Chief Executive Officer of the Company; and (v) $750.00 per
month as an automobile allowance. The company may terminate Mr. Mears'
employment "for cause" provided the Company provides Mr. Mears with 30 days
notice and an opportunity to cure any alleged breach or violation of the
agreement. Further, Mr. Mears may be terminated if he commits gross negligence
in the performance of his duties under the agreement or breaches his fiduciary
duties to the Company. If Mr. Mears is disabled to a degree that he is unable to
fulfill his duties then the Company will pay his full salary for the first 12
months of his disability, 75% of salary for the second twelve months and 50% of
salary for the next twenty-four months; provided, however, that any such
disability payment will cease on April 14, 2002, regardless of when any such
disability commenced. If Mr. Mears is terminated without cause upon a change of
control, all of the Mr. Mears' converted stock options will immediately vest and
Mr. Mears will also be entitled to receive $250,000 and an amount of money
sufficient to allow him to exercise all unexercised options and to pay any taxes
due therefor.
Pursuant to a letter agreement (the "SPC Agreement") dated January 22,
1998, the Company retained the services of Strategic Planning Consultants, Inc.
("SPC") pursuant to which SPC has agreed to provide the Company with general
business consulting services, including without limitation, strategic planning
and analyzing the Company's capital structure. The SPC Agreement is for a period
of 360 days from January 22, 1998. In consideration for entering into the SPC
Agreement, the Company agreed to provide to the principals of SPC warrants to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$2.00 per share, the underlying shares of which are being registered under the
Registration Statement of which this Prospectus is a part. In addition, the
Company has agreed to pay SPC $3,000 per month for a period of 24 months and to
reimburse SPC for pre-approved expenses. SPC's services include consulting to
management on strategic planning, acquisitions, corporate structure and
management compensation.
CERTAIN TRANSACTIONS
The Company has an employment agreement with Marvin Mears. See
"Management -- Employment and Consulting Agreements."
On November 13, 1997, Morris Lerner, formerly a director and secretary of
the Company, borrowed $12,115.88 from the Company (the "Lerner Note"). The
Lerner Note bears interest at the rate of 9% per annum and matures on November
12, 1999.
On November 1, 1995, a company controlled by Marvin Mears, the Chief
Executive Officer, President and a Director of the Company, issued a note to the
Company in the original principal amount of $35,000 (the "Mears Note"). The
Mears Note bears interest at the rate of 9% per annum and matures on November 1,
1998. Interest has not been paid on the Mears Note and as of September 30, 1997,
accrued interest on the Mears Note totaled $4,329.
In August 1996, in satisfaction for acquiring odor control application
technology from Ronald Knudsen, formerly a Manager of Product Development of the
Company, the Company issued to Mr. Knudsen a promissory note in the original
principal amount of $125,000 (the "Knudsen Note"). The Knudsen Note bears
interest at the rate of 12% per annum and matures on August 1, 1998. The Knudsen
Note contains an acceleration clause that requires full principal and interest
payments within ten business days of the completion of a secondary offering to
the public of at least $3,000,000. The Company is currently in default of the
Knudsen Note.
30
<PAGE> 32
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1998 by each director and
executive officer of the Company, each person known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, and all
directors and executive officers of the Company as a group. Except as otherwise
indicated below, each person has sole voting and investment power with respect
to the shares owned, subject to applicable community property laws.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
(INCLUDES EXERCISABLE
OPTIONS)(2)
----------------------
NAME AND ADDRESS(1) NUMBER PERCENT
------------------- ---------- --------
<S> <C> <C>
Marvin Mears............................................. 3,868,412 45.15%
Morris L. Lerner......................................... 562,000 6.56%
Joel G. Wadman........................................... 50,000 0.58%
All directors and executive officers of the Company as a
group (2 persons)...................................... 3,918,412 45.74%
</TABLE>
- ---------------
(1) The address of each such person is 5380 North Sterling Center Drive,
Westlake Village, California 91361.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, shares of Common Stock subject
to options held by that person that are currently exercisable, or become
exercisable within 60 days from the date hereof, are deemed outstanding.
However, such shares are not deemed outstanding for purposes of computing
the percentage ownership of any other person. Percentage ownership is based
on 8,567,148 shares of Common Stock outstanding as of June 30, 1998.
SELLING STOCKHOLDERS
The Shares being offered for resale by the Selling Stockholders were
acquired in connection with the 1998 Private Placement, previous exercise of
warrants, and the execution of the SPC Agreement, consist of the shares of
Common Stock issuable upon the conversion of or otherwise with respect to the
Series A Preferred Stock, upon exercise of the Private Placement Warrants and
upon exercise of the Fink Warrant and the Billik Warrant that were issued
pursuant to the SPC Agreement. In connection with the 1998 Private Placement,
the Company granted the Selling Stockholders who purchased the shares of Series
A Preferred Stock and the Private Placement Warrants certain registration rights
pursuant to which the Company agreed to keep the Registration Statement, of
which this Prospectus is a part, effective until the date that all of such
Shares have been sold pursuant to the Registration Statement. The Company has
agreed to indemnify the Selling Stockholders and each of their officers,
directors, members, employees, partners, agents and each person who controls any
of the Selling Stockholders against certain expenses, claims, losses, damages
and liabilities (or action, proceeding or inquiry by any regulatory or
self-regulatory organization in respect thereof). The Company has agreed to pay
its expenses of registering the Shares under the Securities Act, including
registration and filing fees, blue sky expenses, printing expenses, accounting
fees, administrative expenses and its own counsel fees.
The following table sets forth the name of each Selling Stockholder, the
number of shares of Common Stock beneficially owned by such Selling Stockholder
as of May 21, 1998 and the number of Shares being offered by each Selling
Stockholder. The Shares being offered hereby are being registered to permit
public secondary trading, and the Selling Stockholders may offer all or part of
the Shares for resale from time to time. However, such Selling Stockholders are
under no obligation to sell all or any portion of such Shares nor are such
Selling Stockholders obligated to sell any Shares immediately under this
Prospectus. All information with respect to share ownership has been furnished
by the Selling Stockholders. Because the Selling Stockholders may sell all or
part of their Shares, no estimates can be given as to the number of Shares that
will
31
<PAGE> 33
be held by any Selling Stockholders upon termination of any offering made
hereby. See "Plan of Distribution."
In the case of the Shares underlying the Series A Preferred Stock, the
number of Shares owned and offered for sale hereby represents an estimate of the
number of shares of Common Stock issuable upon conversion of or otherwise with
respect to the Series A Preferred Stock, based on 200% of the number of shares
of Common Stock issuable at a conversion price of $3.875 in accordance with Rule
416 and in certain other events described in the Certificate of Designation.
Pursuant to Rule 416 under the Securities Act, the Selling Stockholders may also
offer and sell Shares issued with respect to the Series A Preferred Stock and/or
the Private Placement Warrants as a result of (i) stock splits, stock dividends
or similar transactions, (ii) the effect of antidilution provisions contained in
the Certificate of Designation of the Series A Preferred Stock and in the
Private Placement Warrants and (iii) by reason of changes in the conversion
price of the Series A Preferred Stock in accordance with the terms thereof. This
is not intended to constitute a prediction as to the number of Shares into which
the Series A Preferred Stock will be converted and the Private Placement
Warrants will be exercised.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES OWNED
OWNED PRIOR TO SHARES TO BE AFTER THE
NAME OF SELLING STOCKHOLDER THE OFFERING(1) SOLD IN THE OFFERING OFFERING (1)(2)
--------------------------- ------------------- -------------------- ---------------
<S> <C> <C> <C>
JNC Opportunity Fund, Ltd.(4)........... 1,787,500(3) 1,787,500 -0-
Diversified Strategies Fund, L.P.(4).... 162,500(3) 162,500 -0-
Jonathan Fink........................... 580,000 580,000 -0-
Brad Billik............................. 290,000 290,000 -0-
</TABLE>
- ---------------
(1) Except as set forth in footnote (3) below, beneficial ownership is
determined in accordance with Rule 13d-3 of the Exchange Act. The persons
named in the table above have sole voting and investment power with respect
to all shares of Common Stock shown as beneficially owned by them.
(2) Assumes all Shares offered hereby are sold in the offering.
(3) In accordance with Rule 416, the number of shares of Common Stock set forth
in the table represents an estimate of the number of shares of Common Stock
to be offered by the Selling Stockholders, based on 200% of the number of
shares of Common Stock that would have been issuable upon conversion of or
otherwise with respect to the Series A Preferred Stock at a conversion price
of $3.875 per share in accordance with Rule 416 (1,650,000 shares). In
addition, the Registration Statement also covers up to 300,000 shares that
may become issuable upon the exercise of the Private Placement Warrants. The
actual number of shares of Common Stock issuable upon conversion of the
Series A Preferred Stock is determined by a formula based on the market
price at the number depending on factors which cannot be predicted by the
Company. Specifically, at any given time, the Series A Preferred Stock is
convertible into a number of shares of Common Stock determined by dividing
the sum of (a) the stated value of the Series A Preferred Stock, (b) a
premium amount equal to 6% (on an annualized basis) of the stated value of
the Series A Preferred Stock and (c) any Conversion Default amount (as
defined in the Certificate of Designation), by the then applicable
conversion price (calculated generally as the lesser of (i) $3.875 and (ii)
80% of the average of the five (5) lowest closing bid prices of the Common
Stock for the fifteen (15) consecutive trading days immediately preceding
the date of determination) subject to certain restrictions and adjustments.
The Shares offered hereby, and included in the Registration Statement of
which this Prospectus is a part, include such additional number of shares of
Common Stock as may be issued or issuable upon conversion of the Series A
Preferred Stock by reason of the floating rate conversion price mechanism or
other adjustment mechanisms described in the Certificate of Designation for
the Series A Preferred Stock, or by reason of any stock split, stock
dividend or similar transaction involving the Common Stock, in order to
prevent dilution, in accordance with Rule 416. Pursuant to the terms of the
Series A Preferred Stock and the Private Placement Warrants, the shares of
Series A Preferred Stock and the Private Placement Warrants are convertible
or exercisable by any holder only to the extent that the number of shares of
Common Stock thereby issuable, together with the number of shares of Common
Stock owned by such holder and its affiliates (but not including shares of
Common Stock underlying unconverted shares of Series A Preferred Stock or
the unexercised portion of
32
<PAGE> 34
the Private Placement Warrants) would not exceed (except in certain limited
circumstances) 4.99% of the then outstanding Common Stock as determined in
accordance with Section 13(d) of the Exchange Act. Accordingly, the number
of Shares set forth in the table for a Selling Stockholder may exceed the
number of Shares that such Selling Stockholder could own beneficially at any
given time through such Selling Stockholder's ownership of the Series A
Preferred Stock and the Private Placement Warrants. In this regard,
beneficial ownership of such Selling Stockholder set forth in the table is
not determined in accordance with Rule 13d-3 under the Exchange Act. The
above-mentioned 4.99% restriction can be changed upon the approval of each
holder of Series A Preferred Stock and a majority of the outstanding shares
of Common Stock. Further, a holder of shares of Series A Preferred Stock may
waive the above-referenced restriction upon not less than 61 days prior
written notice to the Company. Such restriction would apply if the Selling
Stockholders were to transfer the securities owned by them.
(4) JNC Opportunity Fund Ltd. ("JNC") and Diversified Strategies Fund L.P.
("DSP") are the beneficial owners of the shares to be sold by them under the
Registration Statement of which this Prospectus forms a part. They do not
hold these shares as nominee for any other person or entity. Encore Capital
Management, L.L.C. ("Encore") is a registered investment adviser under the
Investment Advisers Act of 1940, as amended, and acts as investment adviser
to, and manager of, each of JNC and DSP. James Q. Chau and Neil T. Chau are
the managing members of Encore.
USE OF PROCEEDS
All the Shares offered hereby are being offered for the account of the
Selling Stockholders. Accordingly, the Company will not receive any proceeds of
any sales made hereunder, but will receive the exercise price of any Warrants
exercised by the Selling Stockholders. Any proceeds received from the exercise
of Warrants will be used for working capital and general corporate purposes. See
"Use of Proceeds."
PLAN OF DISTRIBUTION
The Shares may be sold or distributed from time to time by the Selling
Stockholders or by pledgees, donees or transferees of, or successors in interest
to, the Selling Stockholders, directly to one or more purchasers (including
pledgees) or through brokers, dealers or underwriters who may act solely as
agents or may acquire Shares as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices, which may be changed. The distribution of the Shares
may be effected in one or more of the following methods: (i) ordinary brokers
transactions, which may include long or short sales, (ii) purchases by brokers,
dealers or underwriters as principal and resale by such purchasers for their own
accounts pursuant to this Prospectus, (iii) "at the market" to or through market
makers or into an existing market for the Common Stock, (iv) in other ways not
involving market makers or established trading markets, including direct sales
to purchasers or sales effected through agents, (v) through transactions in
options, swaps or other derivatives (whether exchange listed or otherwise), or
(vi) any combination of the foregoing, or by any other legally available means.
In addition, the Selling Stockholders or their successors in interest may enter
hedging transactions with broker-dealers who may engage in short sales of Shares
of Common Stock in the course of hedging the positions they assume with the
Selling Stockholders. The Selling Stockholders or their successors in interest
may also enter into option or other transactions with broker-dealers that
require that delivery by such broker-dealers of the Shares, which Shares may be
resold thereafter pursuant to this Prospectus.
Brokers, dealers, underwriters or agents participating in the distribution
of the Shares may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of Shares for
whom such broker-dealers may act as agent or to whom they may sell as principal,
or both (which compensation as to a particular broker-dealer may be in excess of
customary commission). Any broker-dealer acting in connection with the sale of
the Shares hereunder may be deemed to be underwriters within the meaning of
Section 2(11) of the Securities Act, and any commissions received by them and
any profit realized by them on the resale of Shares as principals may be deemed
underwriting compensation under the Securities Act. Neither the Company nor any
Selling Stockholder can presently estimate the amount of
33
<PAGE> 35
such compensation. The Company knows of no existing arrangements between any
Selling Stockholder and any such stockholder, broker, dealer, underwriter or
agent relating to the sale or distribution of the Shares.
Each Selling Stockholder and any other person participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, Selling Stockholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.
Any securities covered by this Prospectus that qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under that Rule rather than
pursuant to this Prospectus.
There can be no assurance that the Selling Stockholders will sell any or
all of the Shares of Common Stock offered by them hereunder.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and material
provisions of the Certificate of Incorporation (the "Certificate") and
Certificate of Designations is a summary and is qualified in its entirety by the
provisions of the Certificate and Certificate of Designations, which has been
filed as an exhibit to the Company's Registration Statement of which this
Prospectus is a part. For convenience of reference, the Certificate of
Designations is included in this Prospectus as Appendix A.
The authorized capital stock of the Company currently consists of
20,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"), of
which 8,017,148 are currently outstanding, and 20,000,000 shares of Preferred
Stock, $.01 par value per share, of which 3,000 shares have been designated as
Series A Convertible Preferred Stock (the "Series A Preferred Stock"), all of
which shares are currently outstanding. As of May 14, 1998, there were 989
record and beneficial holders of the Common Stock and two record and beneficial
holders of the Series A Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. There is no
cumulative voting with respect to the election of directors. The holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of this offering will be, fully
paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 20,000,000 shares of Preferred Stock, $.01 par
value per share, in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without further vote or action by stockholders. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock.
34
<PAGE> 36
SERIES A CONVERTIBLE PREFERRED STOCK
The following is a brief summary of the material rights, preferences,
privileges, restrictions and limitations of the outstanding shares of Series A
Preferred Stock. For a more detailed explanation of the rights, preferences,
privileges, restrictions and limitations of the outstanding shares of Series A
Preferred Stock, you are encouraged to, and should, refer to the Certificate of
Designations attached as Appendix A to this Prospectus.
Dividends. The holders of shares of Series A Preferred Stock are not
entitled to any dividends.
Liquidation Preference. In the event of a liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Stock are
entitled to a cash payment equal to the Liquidation Preference (as defined
below) for each share held, before any distribution of the Company's assets to
holders of the Common Stock. The "Liquidation Preference" per share means an
amount equal to (i) $1,000.00 plus (ii) a premium equal to (.06)x(N/365)x(1000),
where N equals the number of days from the date the shares of Series A Preferred
Stock were issued.
Voluntary Conversion. Each share of Series A Preferred Stock is, at the
option of the holder, convertible into such number of shares as results from
dividing 1,000 by the Conversion Price then in effect. The Conversion Price
means, with respect to any Conversion Date (as defined in the Certificate of
Designations) the lower of the Variable Conversion Price (as defined) and the
Fixed Conversion Price (as defined) but in no event less than $1.00 per share
unless certain specified events shall have occurred and be then continuing. The
Conversion Price is currently $3.875 per share.
Automatic Conversion. Subject to certain limitations and provided that all
shares of Common Stock issuable upon conversion of all outstanding shares of
Series A Preferred Stock are then (i) authorized and reserved for issuance, (ii)
registered under the Act for resale by the holders of such shares of Series A
Preferred Stock and (iii) eligible to be publicly traded, each share of Series A
Preferred Stock issued and outstanding on April 7, 2000 automatically shall be
converted at the Conversion Price then in effect.
Redemption. Except upon an Event of Default (as defined in the Certificate
of Designations), the holders of Series A Preferred Stock have no right to
require the Company to effect a redemption of their outstanding shares so long
as the Company (i) has not decreased the number of shares of Common Stock
reserved for issuance to the holders of Series A Preferred Stock to an amount
below 1,650,000 (the "Reserved Amount"), (ii) the Company takes immediate action
following the applicable Authorization Trigger Date (as defined) to increase the
Reserved Amount to 200% of the number of shares of Common Stock then issuable
upon conversion of the outstanding Series A Preferred Stock and (iii) the
Company continues to use its good faith best efforts to increase the Reserved
Amount to 200% of the number of shares of Common Stock then issuable upon
conversion of the outstanding Series A Preferred Stock. Please refer to the
Certificate of Designations for a more detailed explanation of the redemption
rights of holders of the Series A Preferred Stock.
Voting Rights. The holders of Series A Preferred Stock have no voting
rights except as otherwise provided by the Delaware General Corporation Law (the
"Business Corporation Law") and as follows:
So long as any shares of Series A Preferred Stock are outstanding, the
Company shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Law) of the holders of 67% then
outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
capital stock of the Company as to affect adversely the Series A Preferred
Stock;
(c) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets
upon liquidation, dissolution or winding up of the Company ("Senior
Securities");
35
<PAGE> 37
(d) create any new class or series of capital stock ranking pari passu
with the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Company ("Pari Passu
Securities");
(e) increase the authorized number of shares of Series A Preferred
Stock;
(f) issue any shares of Senior Securities or Pari Passu Securities;
(g) issue any additional shares of Series A Preferred Stock;
(h) redeem, or declare or pay any cash dividend or distribution on,
any Junior Securities (as defined); or
(i) increase the par value of the Common Stock.
Registration Rights. The Company has agreed to register for resale shares
of Common Stock (i) issuable upon exercise of the Series A Preferred Stock, (ii)
issuable upon exercise of the Private Placement Warrants and (iii) issuable upon
exercise of warrants previously granted to consultants to the Company. If the
Company is unable to effectuate the registration of the shares of Common Stock
issuable to the holders of Series A Preferred Stock and the Private Placement
Warrants within 123 days from March 31, 1998 or if certain other events, as
specified in the Registration Rights Agreement that was filed as an exhibit to
the Registration Statement of which this Prospectus forms a part, occur, then
the Company will be obligated to make payments to such holders of an amount
equal to the product of (i) the aggregate Purchase Price (as defined) of the
Series A Preferred Stock and accompanying warrants multiplied by (ii) two
hundredths (.02), for each thirty day period specified in the Registration
Rights Agreement. Any such amounts shall be paid in cash or, at such holder's
option may be convertible into Common Stock at the "Conversion Price" (as
defined in the "Certificate of Designation") then in effect.
WARRANTS
As of March 31, 1998, the Company had outstanding warrants to purchase
300,000 shares of Common Stock at an exercise price of $2.00 per share. The
warrants expire on January 21, 2001. Each warrant contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon the exercise of the warrant under certain circumstances, including stock
dividends, stock splits, reorganizations, reclassifications, and consolidations.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for a description of
the Private Placement Warrants that have been issued to the investors in the
Private Placement.
ANTI-TAKEOVER PROVISIONS
The Company is a Delaware corporation and is subject to Section 203
("Section 203") of the Delaware General Corporation Law (the "DGCL"). In
general, Section 203 prevents an "interested stockholder" (defined generally as
a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination" (as defined) with a Delaware corporation
for three years following the time such person became an interested stockholder
unless: (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (iii) at the time of or following the time of the transaction in which such
person became an interested stockholder, the business combination was approved
by the board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66 2/3% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. Under
36
<PAGE> 38
Section 203, the restrictions described above also do not apply to certain
business combinations proposed by an interested stockholder following the
announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors who
were directors prior to any person becoming an interested stockholder during the
previous three years or were recommended for election or elected to succeed such
directors by a majority of such directors.
Section 203 defines a business combination to include: (i) any merger or
consolidation of the corporation with the interested stockholder; (ii) any sale,
transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
In addition, certain of the Company's executive officers that have entered
into employment agreements with the Company will be entitled to receive certain
bonuses in cash or Common Stock upon a change in control of the Company in such
amounts that, in the aggregate, could have an adverse effect on the Company's
liquidity and capital resources. Accordingly, such provisions could discourage
or prevent bids to takeover the Company and decrease values that would otherwise
be obtained by stockholders for their Common Stock. See
"Management -- Employment Agreements."
The Commission has indicated the use of authorized unissued shares of
voting stock could have an anti-takeover effect. It has not been management's
intent to install an anti-takeover device nor is it expected that the Company's
authorized but unissued shares of common and preferred stock would be used for
that purpose. Any business combination, as that term is used in Section 203,
would be reviewed by the Company's Board of Directors for its impact on the
Company.
EFFECT OF THE CALIFORNIA CORPORATIONS CODE
The California Corporations Code includes provisions designed to apply
certain aspects of California Law to corporations organized outside California
where, in general, such corporations are doing more than 50% of their business
in California and have more than 50% of their outstanding voting securities held
of record by persons residing in California (the "California Test"). These
provisions, which are generally more restrictive than their counterparts under
Delaware Law, currently apply to the Company.
Among the provisions of the California Law which will apply are limitations
on corporate dividends and other distributions and rights of stockholders to
cumulate votes in the election of directors. Numerous other provisions which are
listed in Section 2115 of the California General Corporation Law could also
apply. In some cases, these provisions are in conflict with the laws of
Delaware. The following summarizes some of the principal differences which could
apply to the Company:
Under both Delaware and California Law, cumulative voting for the election
directors is permitted. However, under Delaware law cumulative voting must be
expressly authorized in the Certificate of Incorporation. Both Delaware and
California Law allow a classified Board of Directors, however, Delaware Law
requires that it be authorized in the Certificate of Incorporation or the Bylaws
and California Law does not permit staggered classes for smaller corporations,
such as the Company, and directors must be elected at each annual meeting of
stockholders. Under Delaware Law, the Certificate of Incorporation or Bylaws may
limit the removal of directors for cause only while under California Law,
stockholders may remove directors without cause. Pursuant to Delaware Law, the
directors may amend the Bylaws to change the number of authorized directors.
Under California Law, subject to limited circumstances, any amendment to the
Bylaws changing the number of authorized directors requires stockholder
approval.
37
<PAGE> 39
Under Delaware Law, a director is obligated to discharge his or her duties
in good faith and to inform himself or herself about all material information
reasonably available to him or her before making a business decision. Pursuant
to California Law, a director is obligated to discharge his or her duties in
good faith, and to exercise such care, including reasonable inquiry, as an
ordinarily prudent person in a similar position would use under similar
circumstances. Whereas California Law specifically prohibits a corporation from
limiting or eliminating a director's liability for reckless disregard or
abdication of these duties, Delaware Law contains no such prohibition.
California Law also requires stockholder approval for certain
sale-of-assets and stock-for-stock reorganizations, whereas Delaware Law does
not. Delaware Law permits the payment of dividends out of paid-in and earned
surplus or out of net profits for the current and preceding fiscal years and the
repurchase or redemption of shares out of earned, paid-in or reduction surplus.
Under California Law, any such distributions cannot be made unless retained
earnings equals or exceeds the amount of the distributions, or if after giving
effect to the distribution, the corporation's tangible assets are less than 125%
of its liabilities, the corporation's current liabilities exceed its current
assets, the corporation's average operating income for the two most recently
completed fiscal years is less than 125% of its current liabilities or the
corporation would be unable to meet its liabilities as they mature.
At such time as the Company has any class of securities listed on the New
York Stock Exchange or the American Stock Exchange, or approved for inclusion on
the Nasdaq National Market System, and the Company has at least 800 holders of
its equity securities, or the Company no longer satisfies each of the elements
of the California Test, the Company will be exempt from the provisions of
Section 2115. No assurance can be given that the Company will ever satisfy any
exemption from Section 2115.
LIMITATIONS ON LIABILITY
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit available relief to equitable
remedies such as injunction or rescission. Although the Company's Certificate of
Incorporation ("Certificate of Incorporation") does not limit the liability of
directors of the Company to the fullest extent permitted by Delaware law the
Company intends to seek stockholder approval in order to amend its Certificate
of Incorporation to provide for such limitation. Specifically, if the
Certificate of Incorporation is so amended, directors of the Company will not be
personally liable for monetary damages for breach of a director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit.
The inclusion of this provision in any such amended Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
the Company and its stockholders. The amended Certificate of Incorporation will
also provide indemnification to its officers and directors and certain other
persons with respect to certain matters, and the Company intends to enter into
agreements with each of its directors and executive officers providing for
indemnification with respect to certain matters.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Common Stock is American
Stock Transfer and Trust Company.
38
<PAGE> 40
LEGAL MATTERS
The validity of the shares of the Company's Common Stock offered hereby
will be passed upon for the Company by Donahue, Mesereau & Leids LLP, Los
Angeles, California.
EXPERTS
The audited financial statements of the Company as of September 30, 1997
and 1996 and the related statements of operations, shareholders' equity and cash
flows for the fiscal years ended September 30, 1997 and 1996, included elsewhere
in this Prospectus, have been so included in reliance on the report of Clumeck,
Stern, Phillips & Schenkelberg, independent certified public accountants, given
on the authority of such firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act of 1933, as
amended, with respect to the securities offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits and
financial statements filed therewith. Statements contained in this Prospectus as
to the contents of any contract or other documents are not necessarily complete,
and in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each statement being
qualified in its entirety by such reference. All of these documents may be
obtained upon payment of the prescribed fees or examined without charge at the
office of the Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, or by way of the Commission's Internet address,
http://www.sec.gov.
39
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL REPORT
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements
Balance Sheet............................................. F-3
Statements of Stockholders' Equity........................ F-4
Statements of Operations.................................. F-5
Statements of Cash Flows.................................. F-6
Notes to Financial Statements............................. F-7
Financial Statements (unaudited) for the nine months ended
June 30, 1998
Balance Sheet............................................. F-11
Statement of Stockholders' Equity......................... F-12
Statement of Operations................................... F-13
Statement of Cash Flows................................... F-14
Notes to Financial Statements............................. F-15
Financial Statements (unaudited) for the nine months ended
June 30, 1997
Balance Sheet............................................. F-19
Statement of Stockholders' Deficit........................ F-20
Statement of Operations................................... F-21
Statement of Cash Flows................................... F-22
Notes to Financial Statements............................. F-23
</TABLE>
F-1
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Environmental Products & Technologies Corporation
Thousand Oaks, California
We have audited the balance sheet of Environmental Products & Technologies
Corporation (a development stage company), as of September 30, 1997 and the
related statements of stockholders' equity, operations and cash flows for the
years ended September 30, 1997 and 1996. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Environmental Products &
Technologies Corporation as of September 30, 1997 and the results of its
operations and its cash flow for the years ended September 30, 1997 and 1996 in
conformity with generally accepted accounting principles.
CLUMECK, STERN, PHILLIPS & SCHENKELBERG
Certified Public Accountants
Encino, California
December 18, 1997, except for Notes 12 and 13, as
to which the date is May 18, 1998
F-2
<PAGE> 43
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $ 271,360 $ 11,871
Prepaid expenses.......................................... -- 9,500
Interest receivable....................................... 4,329 1,372
Due from stockholders..................................... -- 209,200
---------- ----------
Total Current Assets.............................. 275,689 231,943
---------- ----------
EQUIPMENT................................................... 1,093 --
---------- ----------
OTHER ASSETS
Note receivable -- related party.......................... 34,850 30,850
Deposits.................................................. 700 10,200
---------- ----------
Total Other Assets................................ 35,550 41,050
---------- ----------
TOTAL ASSETS................................................ $ 312,332 $ 272,993
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 17,383 $ 36,016
Accrued salaries.......................................... 68,000 --
Accrued interest.......................................... 7,320 --
Settlement payable........................................ 27,005 --
Note payable -- related party............................. 103,000 --
---------- ----------
Total Current Liabilities......................... 222,708 36,016
---------- ----------
LONG TERM DEBT
Note payable -- related party............................. -- 113,000
---------- ----------
TOTAL LIABILITIES........................................... 222,708 149,016
---------- ----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 20,000,000
shares; issued and outstanding 7,607,148 shares (1997)
and 7,396,148 shares (1996)............................ 38,035 36,980
Preferred stock, $.01 par value, authorized 20,000,000
shares; no shares issued or outstanding................ -- --
Additional paid in capital................................ 1,402,286 1,056,186
Additional paid in capital -- stock options............... 54,450 --
Retained (Deficit)........................................ (695,452) (695,452)
Deficit accumulated during development stage.............. (709,695) (273,737)
---------- ----------
89,624 123,977
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 312,332 $ 272,993
========== ==========
</TABLE>
(See Notes to Financial Statements)
F-3
<PAGE> 44
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL DEFICIT RETAINED
COMMON STOCK PAID-IN ACCUMULATED DEFICIT
------------------------- ADDITIONAL CAPITAL DURING THE PRIOR TO THE
NUMBER OF PAID-IN STOCK DEVELOPMENT DEVELOPMENT
SHARES AMOUNT CAPITAL OPTIONS STAGE STAGE
----------- ----------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance -- September 30,
1995........................ 5,356,148 $ 26,780 $ 673,306 $(695,452)
----------- ----------- ----------
Common stock issued for cash
Oct. -- Dec., 1995........ 200,000 1,000 9,000
Jan. -- Mar., 1996........ 800,000 4,000 185,650
Apr. -- Jun., 1996........ 80,000 400 34,600
July -- Sept., 1996....... 960,000 4,800 144,400
----------- ----------- ---------- ------- --------- ---------
2,040,000 10,200 373,650
Executive Compensation........ 9,230
Common stockholder loss for
the year ended September 30,
1996........................ $(273,737)
----------- ----------- ---------- ------- --------- ---------
Balance, September 30, 1996... 7,396,148 36,980 1,056,186 (237,737) (695,452)
Common stock cancelled........ (889,000) (4,445) 4,445
Common stock issued for cash
June -- September, 1997..... 1,100,000 5,500 332,425
Executive Compensation........ 9,230
Stock options granted......... $54,450
Cost to raise capital......... (32,223)
Common stockholder loss for
the year ended September 30,
1997........................ (403,735)
----------- ----------- ---------- ------- --------- ---------
7,607,148 $ 38,035 $1,402,286 $54,450 $(709,695) $(695,452)
=========== =========== ========== ======= ========= =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance -- September 30,
1995........................ $ 4,634
Common stock issued for cash
Oct. -- Dec., 1995........
Jan. -- Mar., 1996........
Apr. -- Jun., 1996........
July -- Sept., 1996.......
---------
383,850
Executive Compensation........ 9,230
Common stockholder loss for
the year ended September 30,
1996........................ (273,737)
---------
Balance, September 30, 1996... 123,977
Common stock cancelled........
Common stock issued for cash
June -- September, 1997..... 337,925
Executive Compensation........ 9,230
Stock options granted......... 54,450
Cost to raise capital......... (32,223)
Common stockholder loss for
the year ended September 30,
1997........................ (403,735)
---------
$ 89,624
=========
</TABLE>
(See Notes to Financial Statements)
F-4
<PAGE> 45
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996 AND THE PERIOD
OCTOBER 1, 1995 (DATE OF DEVELOPMENT STAGE) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OCTOBER 1, 1995
TO
1997 1996 SEPTEMBER 30, 1997
--------- --------- ------------------
<S> <C> <C> <C>
SALES.............................................. $ -- $ -- $ --
--------- --------- ---------
EXPENSES
Consulting....................................... 104,171 159,605 263,776
Legal and professional........................... 33,346 7,486 40,832
Liability insurance.............................. 11,007 -- 11,007
Miscellaneous.................................... 24,354 14,200 38,554
Office supplies and expenses..................... 8,138 2,492 10,630
Other expenses................................... 216 43,642 43,858
Rent............................................. 52,155 19,775 71,930
Repairs and maintenance.......................... -- 1,500 1,500
Research and development......................... 69,238 -- 69,238
Salaries......................................... 77,230 9,230 86,460
Telephone........................................ 3,068 1,356 4,424
Travel........................................... 5,459 15,823 21,282
--------- --------- ---------
Total General & Administrative........... 388,382 275,109 663,491
--------- --------- ---------
LOSS FROM OPERATIONS............................... (388,382) (275,109) (663,491)
--------- --------- ---------
OTHER INCOME (EXPENSE)
Interest income.................................. 2,957 1,372 4,329
Interest expense................................. (18,310) -- (18,310)
--------- --------- ---------
(15,353) 1,372 (13,981)
--------- --------- ---------
NET LOSS........................................... $(403,735) $(273,737) $(677,472)
========= ========= =========
NET LOSS PER SHARE................................. $ (.06) $ (.04) (.10)
========= ========= =========
</TABLE>
(See Notes to Financial Statements)
F-5
<PAGE> 46
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996 AND THE PERIOD
OCTOBER 1, 1995 (DATE OF DEVELOPMENT STAGE) TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
OCTOBER 1, 1995
TO
1997 1996 SEPTEMBER 30, 1997
--------- --------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $(403,735) $(273,737) $(677,472)
--------- --------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities
Non-cash consulting fees.................... 54,450 125,000 179,450
Non-cash executive compensation............... 9,230 9,230 18,460
(Increase) decrease in operating assets
Prepaid expenses......................... 9,500 (9,500) --
Interest receivable...................... (2,957) (1,372) (4,329)
Deposits................................. 9,500 (10,200) (700)
Increase (decrease) in operating liabilities
Accounts payable......................... (18,633) 30,758 12,125
Accrued salaries......................... 68,000 -- 68,000
Accrued interest......................... 7,320 -- 7,320
Settlement payable....................... 27,005 -- 27,005
--------- --------- ---------
Total Adjustments...................... 163,415 143,916 307,331
--------- --------- ---------
NET CASH USED IN OPERATING
ACTIVITIES....................................... (240,320) (129,821) (370,141)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan to related party......................... (4,000) (30,850) (34,850)
Purchase of equipment......................... (1,093) -- (1,093)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES.............. (5,093) (30,850) (35,943)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock.......................... 547,125 182,350 729,475
Loan payments................................. (10,000) (12,000) (22,000)
Cost to raise capital......................... (32,223) -- (32,223)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES....................................... 504,902 170,350 675,252
--------- --------- ---------
NET INCREASE IN CASH............................... 259,489 9,679 269,168
CASH, October 1.................................... 11,871 2,192 2,192
--------- --------- ---------
CASH, September 30................................. $ 271,360 $ 11,871 $ 271,360
========= ========= =========
</TABLE>
(See Notes to Financial Statements)
F-6
<PAGE> 47
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 1 -- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company was incorporated in 1983 as CCRS III, Inc. In 1989 its name was
changed to Central Corporate Reports Service, Inc., merged with Information
Bureau Inc. and operated in the financial public relation business until March,
1990 when the Company became inactive. In 1990 the Company changed its name to
Combined Assets, Inc. and in 1991 changed its name to ACP International, Inc.
and then again in 1994 changed its name back to Combined Assets, Inc. In
January, 1995 the Company's name was changed to Environmental Products &
Technologies Corporation. At the end of 1995 the Company began to develop
systems to control odors and solid stream waste in the farming industry. In
addition the Company is developing organic based insecticides for agricultural,
commercial and residential use.
The Company is currently in the development stage of operations devoting
its time to raising capital, product and supplier development, and marketing
future products. No products have been manufactured or marketed at this time.
These financial statements have been prepared on the basis that adequate capital
will be obtained.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all cash
accounts not subject to withdrawal restrictions and certificates of deposits
with original maturities of ninety days or less to be cash or cash equivalents.
INCOME TAXES
The Company accounts for income taxes in accordance with Financial
Accounting Standards Statement No. 109, "Accounting for Income Taxes", which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax basis of assets and liabilities using enacted tax rates in effect for
the year which the differences are expected to be settled or realized.
LOSS PER SHARE
The computations of loss per share of common stock are based on the
weighted average number of shares outstanding of 7,182,690 shares (1997) and
6,156,132 shares (1996) and 6,669,412 shares (cumulative period).
RECLASSIFICATION
Health insurance of $10,905 for the year ended September 30, 1996 has been
reclassified as consulting expense for comparative purposes.
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 amount of assets and liabilities and
disclosures of contingent assets and liabilities as the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-7
<PAGE> 48
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 2 -- NOTE RECEIVABLE -- RELATED PARTY
The receivable is due from a corporation owned by an officer and major
stockholder of the Company. The note calls for interest at nine percent per
annum and is due November 1, 1998. Interest accrued on this note amounted to
$4,329 (1997) and $1,372 (1996).
NOTE 3 -- FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The fair market value of the note receivable and the note payable
approximates cost based on current borrowing rates.
NOTE 4 -- DUE FROM STOCKHOLDERS
Common stock was issued in 1996 prior to receipt of full payment. Payments
for the stock were received in 1997.
NOTE 5 -- NOTE PAYABLE -- RELATED PARTY
The note payable to an officer-stockholder calls for monthly interest only
payments at the rate of 12% per annum. The principal is due August 1, 1998. The
note has an acceleration clause that requires full principal and interest
payments within ten business days of the completion of a secondary offering to
the public of at least $3,000,000. Interest charged against income for 1997 was
$14,820, of which $7,320 is accrued.
NOTE 6 -- COMMITMENTS
The Company has an employment agreement with an officer. The contract
commenced October 1, 1996 and continues for five years. The compensation calls
for an annual salary of $68,000 plus bonuses determined by the Board of
Directors.
The Company entered into a lease for facilities beginning January 1, 1998.
The lease calls for a term of two years, plus an option for an additional two
years. The minimum annual commitment is as follows:
<TABLE>
<S> <C>
1998....................................................... $22,680
1999....................................................... 30,924
2000....................................................... 7,788
-------
$61,392
=======
</TABLE>
NOTE 7 -- STOCK OPTIONS
In December 1995, the Board of Directors and the shareholders approved the
1996 Stock Option Plan. The Plan provides for non-qualified and incentive stock
options. The Board has designated 800,000 shares for the Plan. No options may be
granted under this plan after December 2005, and the Plan terminates September
30, 2006. The exercise price of the non-qualified stock option shall not be less
than 85 percent of the fair market value at the date of grant. The Board of
Directors granted 330,000 options on July 29, 1997 to outside consultants for
services rendered to the Company. The option price, which was equal to the
trading price on the grant date is $.1875 per share. The options are immediately
exercisable under the plan; however, option holders representing 280,000 shares
have signed agreements to not exercise the option prior to July 15, 1999.
Options of 50,000 remain immediately exercisable. As of September 30, 1997 none
of the options had been exercised. Under Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", options granted to non-employees are
recognized at the fair value of the goods or services received or the fair value
of the equity instrument issued. The Company has recorded the service at the
fair value of the option
F-8
<PAGE> 49
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE 7 -- STOCK OPTIONS (CONTINUED)
on the grant date using an option pricing model which used the one-year U.S.
Treasury rate of 5.54%, volatility of 300, a one year expected life, and no
expected dividends.
NOTE 8 -- WARRANTS
The Board of Directors at their June 1995 meeting authorized the issuance
of 1,200,000 warrants. These warrants entitled the holder to purchase an equal
number of capital stocks at $.05 per share. The right to purchase the shares
expires June 21, 1998. The 1,200,000 warrants authorized were purchased for the
Board stated price of $200. In 1997, 600,000 warrants were cancelled. The
600,000 remaining warrants are outstanding.
NOTE 9 -- INCOME TAXES
The Company has available at September 30, 1997, unused operating loss
carryforwards that may be applied against future taxable income and that expire
as follows:
<TABLE>
<S> <C>
September 30, 2012.......................................... $ 340,055
September 30, 2011.......................................... 264,507
September 30, 2010.......................................... 23,133
September 30, 2003.......................................... 530,859
September 30, 2004.......................................... 15,507
September 30, 2005.......................................... 1,061
----------
Total............................................. $1,175,122
==========
</TABLE>
No deferred tax asset has been recorded, as there is a more than 50% chance
that the loss carryovers will expire unused.
NOTE 10 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
OCTOBER 1, 1995
TO
1997 1996 SEPTEMBER 30, 1997
------- ------ ------------------
<S> <C> <C> <C>
Cash paid during the year for
Interest.................................. $10,990 $2,400 $13,390
------- ------ -------
Income taxes.............................. $ -- $ -- $ --
------- ------ -------
</TABLE>
NOTE 11 -- EXECUTIVE COMPENSATION
An officer/stockholder of the Company devoted part of his time to the
business for which he received no compensation. The fair value of that time has
been estimated to be $9,230 for each of the two years. These amounts have been
charged to income and recorded as additional paid-in capital.
NOTE 12 -- SUBSEQUENT EVENTS
Subsequent to the year end, the Company reached a settlement with a former
associate. The agreement called for payment of $15,990 cash plus 10,000 shares
of stock. This settlement was accrued at September 30, 1997.
F-9
<PAGE> 50
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Pursuant to a restated letter of understanding dated May 18, 1998, a Utah
Limited Liability Company agreed to transfer to the Company all rights, title
and interest in and to an anaerobic digester, a bio-reactor and the biologicals
used therewith. In consideration for this transfer, the Company issued 100,000
shares of common stock to the Utah company and has agreed to issue an additional
50,000 shares of common stock upon assignment to the Company of all patents to
the bio-reactor. In addition, the Company has agreed to issue to the Utah
company an aggregate of 320,000 shares of common stock, payable 80,000 shares on
each of October 15, 1999, 2000, 2001 and 2002. The value of the initial 100,000
shares at the market price on the date of the issuance of the shares was
recorded as research and development and expensed as incurred.
In January 1998, the Company issued 300,000 warrants to outside consultants
for services rendered to the Company. The warrants entitle them to purchase an
equal number of common shares at the exercise price of $2.00 per share. The
exercise period terminates on January 21, 2001. The Company has recorded their
services at the fair value of the warrant on the grant date using an option
pricing model which used the one year U.S. Treasury rate of 5.45 percent,
volatility of 225, a one year expected life and no expected dividends. 300,000
warrants remain outstanding at June 30, 1998.
In March 1998, the Board of Directors authorized the issuance of Series A
convertible preferred stock and warrants and the reserving of shares of common
stock for issuance upon the conversion of the preferred stock and exercise of
the warrants. The holders of the Series A convertible preferred stock are not
entitled to receive dividends. The preferred stock can be converted to common
stock at the fixed or variable conversion price, whichever is more beneficial to
the stockholder. The fixed conversion price is $3.875 per share. The variable
conversion price is 80% of the average of the five lowest closing market prices
of the stock in the fifteen trading days immediately before the conversion date.
The number of common shares is determined by dividing $1,000 by the conversion
price and multiplying the resulting amount by the number of preferred shares
being converted. There is also a premium that can be redeemed by the Company in
cash. If it is not redeemed in cash, it will add to the stated value of the
preferred shares in arriving at the number of common shares to be issued. The
premium is six percent (on an annualized basis) of the stated value of the
preferred shares. The securities issued have a below-market conversion feature
which the Company recorded as a preferred stock dividend in April 1998 in the
amount of $3,295,610.
The Company loaned $12,116 to an officer-stockholder. The note is dated
November 18, 1997 and principal plus interest at the rate of nine percent (9%)
per annum are due on or before November 18, 1999.
NOTE 13 -- STOCK SPLIT
In April 1998, the Board of Directors approved a two for one forward stock
split for holders of record on May 4, 1998. The effect of this stock split has
been retroactively applied to the 1997 and 1996 Financial Statements.
F-10
<PAGE> 51
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 2,371,705
Prepaid expenses.......................................... 2,520
Interest receivable....................................... 6,681
Deposits.................................................. 44,578
Note receivable, related party............................ 34,850
-----------
Total current assets................................... 2,460,334
-----------
Equipment, net.............................................. 54,115
-----------
Other assets:
Note receivable, related party............................ 12,116
Deposits.................................................. 700
Mining rights............................................. 40,000
-----------
52,816
-----------
TOTAL ASSETS........................................... $ 2,567,265
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued salaries.......................................... $ 139,000
Accrued interest.......................................... 11,589
Note payable, related party............................... 103,000
-----------
Total current liabilities.............................. 253,589
-----------
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares; issued and outstanding 8,567,148 shares........ 42,735
Preferred stock, $.01 par value, authorized 20,000,000
shares; 3,000 shares issued
and outstanding........................................ 30
Additional paid-in capital................................ 1,812,889
Additional paid-in capital, preferred..................... 6,295,580
Additional paid-in capital, stock options................. 54,450
Retained deficit.......................................... (695,452)
Accumulated deficit during development stage.............. (5,196,556)
-----------
2,313,676
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 2,567,265
===========
</TABLE>
See notes to financial statements.
F-11
<PAGE> 52
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED
--------------- ADDITIONAL ------------------- PAID-IN DEFICIT
NUMBER PAID-IN NUMBER ADDITIONAL CAPITAL- DURING THE
OF CAPITAL- OF PAID-IN STOCK DEVELOPMENT
SHARES AMOUNT PREFERRED SHARES AMOUNT CAPITAL OPTIONS STAGE
------ ------ ---------- --------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1997.................... -- -- -- 7,607,148 $38,035 $1,402,286 $54,450 $ (709,695)
Common stock issued for
cash.................... -- -- -- 300,000 1,500 89,125 -- --
Common stock issued for
research and
development............. -- -- -- 100,000 500 130,750 -- --
Common stock issued in
settlement of note
obligation.............. -- -- -- 10,000 50 9,950 -- --
Preferred stock issued for
cash.................... 3,000 30 2,999,970 -- -- -- -- --
Cost to raise capital..... -- -- -- -- -- -- -- (349,800)
Warrant transactions...... -- -- -- 570,000 2,850 (2,850) -- --
Common stock canceled..... -- -- -- (20,000) (200) 200 -- --
Executive compensation.... -- -- -- -- -- 5,000 -- --
Warrants granted.......... -- -- -- -- -- 178,428 -- --
Preferred stock
dividend................ -- -- 3,295,610 -- -- -- -- (3,295,610)
Net loss for the nine
months ended June 30,
1998.................... -- -- -- -- -- -- -- (841,451)
----- --- ---------- --------- ------- ---------- ------- -----------
Balance at June 30,
1998.................... 3,000 $30 $6,295,580 8,567,148 $42,735 $1,812,889 $54,450 $(5,196,556)
<CAPTION>
RETAINED
DEFICIT
PRIOR TO THE TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
------------ -------------
<S> <C> <C>
Balance at September 30,
1997.................... $(695,452) $ 89,624
Common stock issued for
cash.................... -- 90,625
Common stock issued for
research and
development............. -- 131,250
Common stock issued in
settlement of note
obligation.............. -- 10,000
Preferred stock issued for
cash.................... -- 3,000,000
Cost to raise capital..... (349,800)
Warrant transactions...... -- --
Common stock canceled..... -- --
Executive compensation.... -- 5,000
Warrants granted.......... -- 178,428
Preferred stock
dividend................ -- --
Net loss for the nine
months ended June 30,
1998.................... -- (841,451)
--------- ----------
Balance at June 30,
1998.................... $(695,452) $2,313,676
</TABLE>
See notes to financial statements.
F-12
<PAGE> 53
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 AND THE PERIOD FROM
OCTOBER 1, 1995 (DATE OF DEVELOPMENT STAGE) TO JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS OCTOBER 1,
ENDED 1995 TO
JUNE 30, 1998 JUNE 30, 1998
-------------- -------------
<S> <C> <C>
Sales....................................................... $ -- $ --
Expenses:
Consulting................................................ 275,602 539,378
Legal and professional.................................... 74,707 115,539
Liability insurance....................................... 2,492 13,499
Miscellaneous............................................. 3,470 42,024
Office supplies and expenses.............................. 21,300 31,930
Other expenses............................................ -- 43,858
Rent...................................................... 15,747 87,677
Repairs and maintenance................................... 2,250 3,750
Research and development.................................. 321,490 390,728
Salaries.................................................. 118,667 205,127
Telephone................................................. 2,539 6,963
Travel.................................................... 20,773 42,055
Depreciation and amortization 5,478 5,478
--------- -----------
Total general and administrative............................ 864,515 1,528,006
--------- -----------
Loss from operations........................................ (864,515) (1,528,006)
--------- -----------
Other income (expense)
Interest income........................................... 32,334 36,663
Interest expense.......................................... (9,270) (27,580)
--------- -----------
23,064 9,083
--------- -----------
Net loss.................................................... $(841,451) $(1,518,923)
Preferred stock dividend.................................... 3,295,610 3,295,610
Net loss -- common stockholders............................. (4,137,061) (4,814,533)
========= ===========
Net loss per common share................................... (.51) (.68)
========= ===========
</TABLE>
See notes to financial statements.
F-13
<PAGE> 54
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1998 AND THE PERIOD FROM
OCTOBER 1, 1995 (DATE OF DEVELOPMENT STAGE) TO JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS OCTOBER 1,
ENDED 1995 TO
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (841,451) $(1,518,923)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 5,478 5,478
Loss on disposition of equipment....................... 1,093 1,093
Noncash research and development....................... 131,250 131,250
Noncash consulting fees................................ 178,428 357,878
Other noncash expenses................................. 10,000 10,000
Noncash executive compensation......................... 5,000 23,460
(Increase) decrease in:
Prepaid expenses..................................... (2,520) (2,520)
Interest receivable.................................. (2,352) (6,681)
Deposits............................................. (44,578) (45,278)
Increase (decrease) in:
Accounts payable..................................... (17,383) (5,258)
Accrued salaries..................................... 71,000 139,000
Accrued interest..................................... 4,269 11,589
Settlement payable................................... (27,005) --
---------- -----------
Total adjustments................................. 312,680 620,011
---------- -----------
Net cash used in operating activities....................... (528,771) (898,912)
---------- -----------
Cash flows from investing activities:
Loan to related party..................................... (12,116) (46,966)
Purchase of mining rights................................. (40,000) (40,000)
Purchase of equipment..................................... (59,593) (60,686)
---------- -----------
Cash used in investing activities........................... (111,709) (147,652)
---------- -----------
Cash flows from financing activities:
Loan payments............................................. -- (22,000)
Sale of common stock...................................... 90,625 820,100
Sale of preferred stock................................... 3,000,000 3,000,000
Cost to raise capital..................................... (349,800) (382,023)
---------- -----------
Net cash provided by financing activities................... 2,740,825 3,416,077
---------- -----------
Net increase in cash........................................ 2,100,345 2,369,513
Cash, October 1............................................. 271,360 2,192
---------- -----------
Cash, June 30, 1998......................................... $2,371,705 $ 2,371,705
========== ===========
</TABLE>
See notes to financial statements.
F-14
<PAGE> 55
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENTS
The balance sheet as of June 30, 1998, and the related statements of
stockholders' equity, operations and cash flows for the nine months ended June
30, 1998, are unaudited. Such unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form SB-2. Accordingly, they do
not include all of the information and disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring accruals
considered necessary for a fair presentation, have been included. Results for
the nine months ended June 30, 1998 are not necessarily indicative of the
results that may be achieved for any other interim period or for the fiscal year
ending September 30, 1998. These statements should be read in conjunction with
the financial statements and related notes included in the audited report for
the year ended September 30, 1997.
STOCK-BASED COMPENSATION
The Company applies Financial Accounting Standards Boards (FASB) Statement
No. 123 "Accounting for Stock-Based Compensation" in accounting for transactions
in which goods or services are received from non-employees in exchange for
equity instruments, including stock options and warrants. Under FASB No. 123,
all transactions in which goods or services are received in exchange for equity
instruments are recorded at the fair value of the goods or services received or
the fair value of the equity instrument issued.
LOSS PER SHARE
The computations of loss per share of common stock are based on the
weighted average number of shares outstanding of 8,129,370 (1998) and 7,067,582
(cumulative period).
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk include cash and cash equivalents. The Company
primarily transacts its business with one financial institution and may maintain
deposits in excess of federally insured limits. At June 30, 1998, the Company's
uninsured cash balances totaled $2,269,779.
2. EQUIPMENT
At June 30, 1998, equipment consisted of the following:
<TABLE>
<S> <C>
Office equipment............................................ $30,335
Computer equipment.......................................... 27,526
Leasehold improvements...................................... 1,732
-------
59,593
Accumulated depreciation and amortization................... (5,478)
-------
$54,115
=======
</TABLE>
F-15
<PAGE> 56
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
3. RELATED-PARTY TRANSACTIONS
The short-term note receivable is due from a corporation owned by an
officer and major stockholder of the Company. The note calls for interest at
nine percent per year and is due on November 1, 1998. Interest income for the
nine months ended June 30, 1998, was $2,352.
The long-term note receivable is due from an officer-shareholder. The note
calls for interest at nine percent per year and is due on or before November 12,
1999.
The note payable to an officer-stockholder calls for monthly interest-only
payments at the rate of twelve percent per year. The principal is due on August
1, 1998. The note has an acceleration clause that requires full principal and
interest payments within ten business days of the completion of a secondary
offering to the public of at least $3,000,000. Interest expense for the nine
months ended June 30, 1998, was $9,270.
Management believes that these transactions were under terms no less
favorable to the Company than those arranged with other parties.
4. COMMITMENTS
Pursuant to a letter of understanding dated May 18, 1998, a Utah Limited
Liability Company agreed to transfer to the Company all rights, title and
interest in and to an anaerobic digester, a bio-reactor and the biologicals used
therewith. In consideration for this transfer, the Company issued 100,000 shares
of common stock to the Utah company and has agreed to issue an additional 50,000
shares of common stock upon assignment to the Company of all patents to the
bio-reactor. In addition, the Company has agreed to issue to the Utah company an
aggregate of 320,000 shares of common stock, payable 80,000 shares on each of
October 15, 1999, 2000, 2001 and 2002. The value of the initial 100,000 shares
at the market price on the date of the issuance of the shares was recorded as
research and development and expensed as incurred.
The Company has employment contracts with executive officers, the terms of
which expire through April 2002. Such agreements provide for minimum salary
levels plus annual bonuses at the sole discretion of the Board of Directors. The
aggregate commitment for future salaries at June 30, 1998, was $729,000.
The Company entered into a lease for facilities beginning January 1, 1998.
The lease calls for a term of two years, plus an option for an additional two
years. The minimum annual commitment is as follows:
<TABLE>
<S> <C>
June 30, 1999............................................... $30,240
June 30, 2000............................................... 15,120
-------
$45,360
=======
</TABLE>
Rent expense was $15,747 for the nine month period ended June 30, 1998.
5. WARRANTS
The Board of Directors at their June 1995 meeting authorized the issuance
of 1,200,000 warrants. These warrants entitled the holder to purchase an equal
number of shares of capital stock at $.05 per share. The warrants authorized
were purchased for the Board stated price of $200. In 1997, 600,000 warrants
were canceled. In April 1998, the 600,0000 warrants were exercised. In lieu of
the $30,000 cash payment required, the Company took back and canceled 30,000
shares.
In January 1998, the Company issued 300,000 warrants to outside consultants
for services rendered to the Company. The warrants entitle them to purchase an
equal number of common shares at the exercise price of
F-16
<PAGE> 57
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
5. WARRANTS (CONTINUED)
$2.00 per share. The exercise period terminates on January 21, 2001. The Company
has recorded their services at the fair value of the warrant on the grant date
using an option pricing model which used the one year U.S. Treasury rate of 5.45
percent, volatility of 225, a one year expected life and no expected dividends.
300,000 warrants remain outstanding at June 30, 1998.
6. CONVERTIBLE PREFERRED STOCK
In March 1998, the Board of Directors authorized the issuance of Series A
convertible preferred stock and warrants and the reserving of shares of common
stock for issuance upon the conversion of the preferred stock and exercise of
the warrants. The holders of the Series A convertible preferred stock are not
entitled to receive dividends. The preferred stock can be converted to common
stock at the fixed or variable conversion price, whichever is more beneficial to
the stockholder. The fixed conversion price is $3.875 per share. The variable
conversion price is 80% of the average of the five lowest closing market prices
of the stock in the fifteen trading days immediately before the conversion date.
The number of common shares is determined by dividing $1,000 by the conversion
price and multiplying the resulting amount by the number of preferred shares
being converted. There is also a premium that can be redeemed by the Company in
cash. If it is not redeemed in cash, it will add to the stated value of the
preferred shares in arriving at the number of common shares to be issued. The
premium is six percent (on an annualized basis) of the stated value of the
preferred shares. The securities issued have a below-market conversion feature
which the Company recorded as a preferred stock dividend in April 1998. At June
30, 1998, none of the holders of the preferred stock had converted their shares
into shares of common stock.
7. STOCK OPTIONS AND WARRANTS OUTSTANDING
<TABLE>
<CAPTION>
OPTIONAL EXERCISE
WARRANTS PRICE EXERCISE DATE
-------- -------- -------------
<S> <C> <C> <C>
July 16, 1999 to
Options granted....................... 280,000 $ .1875 September 30, 2006,
Options granted....................... 50,000 .1875 Up to September 30, 2006
Warrants issued....................... 300,000 2.0000 Up to January 21, 2001
Warrants issued....................... 300,000 3.8750 Up to April, 2003
-------
Options/warrants outstanding at June
30, 1998............................ 930,000
=======
Options/warrants exercisable at June
30, 1998............................ 650,000
=======
</TABLE>
8. COMMON STOCK SPLIT
On April 20, 1998, the Board of Directors declared a two-for-one forward
stock split to holders of record on May 4, 1998. The effect of the stock split
has been retroactively applied.
9. EXECUTIVE COMPENSATION
An officer-stockholder of the Company devoted part of his time to the
business for which he received no compensation. The fair value of that time has
been estimated to be $5,000 for the nine months ended June 30, 1998. This amount
has been charged to expense and recorded as additional paid-in capital.
F-17
<PAGE> 58
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS OCTOBER 1,
ENDED 1995 TO
JUNE 30, JUNE 30,
1998 1998
------------- ----------
<S> <C> <C>
Cash paid for
Interest........................................... $5,000 $18,390
Income taxes....................................... -- --
</TABLE>
F-18
<PAGE> 59
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash...................................................... $ 8,549
Interest receivable....................................... 3,545
----------
Total current assets.............................. 12,094
----------
Equipment................................................... 1,093
----------
Other assets:
Note receivable, related party............................ 34,850
Deposits.................................................. 10,700
----------
45,550
----------
TOTAL ASSETS...................................... $ 58,737
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued salaries.......................................... $ 51,000
Accrued interest.......................................... 4,230
Settlement payable........................................ 27,005
----------
Total current liabilities......................... 82,235
----------
Note payable, related party................................. 103,000
----------
Commitments
Stockholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares; issued and outstanding 6,707,148 shares........ 33,535
Preferred stock, $.01 par value, authorized 20,000,000
shares; no shares issued or outstanding................ --
Additional paid-in capital................................ 1,071,553
Retained deficit (695,452)
Accumulated deficit during development stage.............. (536,134)
----------
(126,498)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT....... $ 58,737
==========
</TABLE>
See notes to financial statements.
F-19
<PAGE> 60
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK DEFICIT RETAINED
------------------- ACCUMULATED DEFICIT
NUMBER ADDITIONAL DURING THE PRIOR TO THE TOTAL
OF PAID-IN DEVELOPMENT DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE STAGE DEFICIT
--------- ------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1996........................ 7,396,148 $36,980 $1,056,186 $(273,737) $(695,452) $ 123,977
Common stock issued for
cash........................ 200,000 1,000 4,000 -- -- 5,000
Cost to raise capital......... -- -- -- (37) -- (37)
Common stock canceled......... (889,000) (4,445) 4,445 -- -- --
Executive compensation........ -- 6,922 -- -- 6,922
Common stockholder loss for
the nine months ended June
30, 1997.................... -- -- -- (262,360) -- (262,360)
--------- ------- ---------- --------- --------- ---------
Balance at June 30, 1997...... 6,707,148 $33,535 $1,071,553 $(536,134) $(695,452) $(126,498)
========= ======= ========== ========= ========= =========
</TABLE>
See notes to financial statements.
F-20
<PAGE> 61
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997 AND THE PERIOD FROM
OCTOBER 1, 1995 (DATE OF DEVELOPMENT STAGE) TO JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 1,
NINE MONTHS 1995 TO
ENDED JUNE 30, JUNE 30,
1997 1997
-------------- ----------
<S> <C> <C>
Sales....................................................... $ -- $ --
--------- ---------
Expenses:
Consulting................................................ 50,379 209,984
Legal and professional.................................... 7,339 14,825
Liability insurance....................................... 9,632 9,632
Miscellaneous............................................. 25,716 39,916
Office supplies and expenses.............................. 5,162 7,654
Other expenses............................................ -- 43,642
Rent...................................................... 50,755 70,530
Repairs and maintenance................................... -- 1,500
Research and development.................................. 33,830 33,830
Salaries.................................................. 57,922 67,152
Telephone................................................. 2,218 3,574
Travel.................................................... 6,359 22,182
--------- ---------
Total general and administrative.................. 249,312 524,421
--------- ---------
Loss from operations........................................ (249,312) (524,421)
--------- ---------
Other income (expense)
Interest income........................................... 2,172 3,544
Interest expense.......................................... (15,220) (15,220)
--------- ---------
(13,048) (11,676)
--------- ---------
Net loss.................................................... $(262,360) $(536,097)
========= =========
Net loss per share.......................................... (.04) (.08)
========= =========
</TABLE>
See notes to financial statements.
F-21
<PAGE> 62
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1997 AND THE PERIOD FROM
OCTOBER 1, 1995 (DATE OF DEVELOPMENT STAGE) TO JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS OCTOBER 1,
ENDED 1995 TO
JUNE 30, JUNE 30,
1997 1997
-------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(262,360) $(536,097)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash consulting fees................................ -- 125,000
Noncash executive compensation......................... 6,922 16,152
(Increase) decrease in:
Prepaid expenses..................................... 9,500 --
Interest receivable.................................. (2,173) (3,545)
Deposits............................................. (500) (10,700)
Increase (decrease) in:
Accounts payable..................................... (36,016) (5,258)
Accrued salaries..................................... 51,000 51,000
Accrued interest..................................... 4,230 4,230
Settlement payable................................... 27,005 27,005
--------- ---------
Total adjustments................................. 59,968 203,884
--------- ---------
Net cash used in operating activities....................... (202,392) (332,213)
--------- ---------
Cash flows from investing activities:
Loan to related party..................................... (4,000) (34,850)
Purchase of equipment..................................... (1,093) (1,093)
--------- ---------
Cash used in investing activities........................... (5,093) (35,943)
--------- ---------
Cash flows from financing activities:
Loan payments............................................. (10,000) (22,000)
Sale of common stock...................................... 214,200 396,550
Cost to raise capital..................................... (37) (37)
--------- ---------
Net cash provided by financing activities................... 204,163 374,513
--------- ---------
Net increase (decrease) in cash............................. (3,322) 6,357
Cash, October 1............................................. 11,871 2,192
--------- ---------
Cash, June 30, 1997......................................... $ 8,549 $ 8,549
========= =========
</TABLE>
See notes to financial statements.
F-22
<PAGE> 63
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENTS
The balance sheet as of June 30, 1997, and the related statements of
stockholders' deficit, operations and cash flows for the nine months ended June
30, 1997, are unaudited. Such unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial reporting and with the instructions to Form SB-2. Accordingly, they do
not include all of the information and disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring accruals
considered necessary for a fair presentation, have been included. Results for
the nine months ended June 30, 1997 are not necessarily indicative of the
results that may be achieved for any other interim period or for the fiscal year
ending September 30, 1997. These statements should be read in conjunction with
the financial statements and related notes included in the audited report for
the year ended September 30, 1996.
STOCK-BASED COMPENSATION
The Company applies Financial Accounting Standards Boards (FASB) Statement
No. 123 "Accounting for Stock-Based Compensation" in accounting for transactions
in which goods or services are received from non-employees in exchange for
equity instruments, including stock options and warrants. Under FASB No. 123,
all transactions in which goods or services are received in exchange for equity
instruments are recorded at the fair value of the goods or services received or
the fair value of the equity instrument issued.
LOSS PER SHARE
The computations of loss per share of common stock are based on the
weighted average number of shares outstanding of 7,213,426 (1997) and 6,609,258
(cumulative period).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of notes receivable and payable approximates cost based on
current borrowing rates.
2. RELATED-PARTY TRANSACTIONS
The note receivable is due from a corporation owned by an officer and major
stockholder of the Company. The note calls for interest at nine percent per year
and is due on November 1, 1998. Interest income for the nine months ended June
30, 1997, was $2,172.
The note payable to an officer-stockholder calls for monthly interest-only
payments at the rate of twelve percent per year. The principal is due on August
1, 1998. The note has an acceleration clause that requires full principal and
interest payments within ten business days of the completion of a secondary
offering to the public of at least $3,000,000. Interest expense for the nine
months ended June 30, 1997, was $11,730.
Management believes that these transactions were under terms no less
favorable to the Company than those arranged with other parties.
F-23
<PAGE> 64
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
3. COMMITMENTS
The Company has an employment contract with an officer, the terms of which
expire in September 2001. Such agreement provides for an annual salary of
$68,000 plus annual bonuses at the sole discretion of the Board of Directors.
4. COMMON STOCK SPLIT
On April 20, 1998, the Board of Directors declared a two-for-one forward
stock split to holders of record on May 4, 1998. The effect of the stock split
has been retroactively applied.
5. STOCK OPTIONS AND WARRANTS OUTSTANDING
<TABLE>
<CAPTION>
OPTIONAL EXERCISE
WARRANTS PRICE EXERCISE DATE
-------- -------- -------------------
<S> <C> <C> <C>
Warrants outstanding at June 30, 1997....... 600,000 $.05 Up to June 21, 1998
=======
</TABLE>
6. EXECUTIVE COMPENSATION
An officer-stockholder of the Company devoted part of his time to the
business for which he received no compensation. The fair value of that time has
been estimated to be $6,922 for the nine months ended June 30, 1997. This amount
has been charged to expense and recorded as additional paid-in capital.
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS OCTOBER 1, 1995
ENDED TO
JUNE 30, 1997 JUNE 30, 1997
------------- ---------------
<S> <C> <C>
Cash paid for
Interest............................................... $7,500 $9,900
Income taxes........................................... -- --
</TABLE>
F-24
<PAGE> 65
APPENDIX A
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
ENVIRONMENTAL PRODUCTS & TECHNOLOGIES CORPORATION
(PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW)
Environmental Products & Technologies, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "CORPORATION"), hereby
certifies that the following resolutions were adopted by the Board of Directors
of the Corporation pursuant to authority of the Board of Directors as required
by Section 151 of the Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD") in
accordance with the provisions of its Certificate of Incorporation and Bylaws,
each as amended and restated through the date hereof, the Board of Directors
hereby authorizes a series of the Corporation's previously authorized Preferred
Stock, par value $.01 per share (the "PREFERRED STOCK"), and hereby states the
designation and number of shares, and fixes the relative rights, preferences,
privileges, powers and restrictions thereof as follows:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 3,000 shares of Preferred
Stock, is the Series A Convertible Preferred Stock (the "SERIES A PREFERRED
STOCK") and the face amount shall be One Thousand U.S. Dollars ($1000.00) per
share (the "FACE AMOUNT").
II. DIVIDENDS
The Series A Preferred Stock shall bear no dividends, and the holders of
the Series A Preferred Stock shall not be entitled to receive dividends on the
Series A Preferred Stock.
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms shall
have the following meanings:
A. "Closing Bid Price" means, for any security as of any date, the closing
bid price of such security on the principal United States securities exchange or
trading market where such security is listed or traded as reported by Bloomberg
Financial Markets or a comparable reporting service of national reputation
selected by the Corporation and reasonably acceptable to holders of a majority
of the then outstanding shares of Series A Preferred Stock if Bloomberg
Financial Markets is not then reporting closing bid prices of such security
(collectively, "BLOOMBERG"), or if the foregoing does not apply, the last
reported sale price of such security on the principal United States securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing does not apply, the last reported sale price
of such security in the over-the-counter market on the electronic bulletin board
(the "Bulletin Board") for such security as reported by Bloomberg, or, if no
sale price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc., in each case for such date or, if such
date was not a trading date for such security, on the next preceding date which
was a trading date. If the Closing Bid Price cannot be calculated for such
security as of either of such dates on any of the foregoing bases, the Closing
Bid Price of such security on such date shall be the fair market value as
reasonably determined by an investment banking firm selected by the Corporation
and
A-1
<PAGE> 66
reasonably acceptable to the holders of a majority of the then outstanding
shares of Series A Preferred Stock, with the costs of such appraisal to be borne
by the Corporation.
B. "Conversion Date" means, for any Conversion, the date specified in the
notice of conversion in the form attached hereto (the "NOTICE OF CONVERSION"),
so long as the copy of the Notice of Conversion is faxed (or delivered by other
means resulting in notice) to the Corporation at or before 11:59 p.m., New York
City time, on the Conversion Date indicated in the Notice of Conversion;
provided, however, that if the Notice of Conversion is not so faxed or otherwise
delivered before such time, then the Conversion Date shall be the date the
holder faxes or otherwise delivers the Notice of Conversion to the Corporation.
C. "Conversion Percentage" shall initially mean eighty percent (80%). In
the event the Corporation's Common Stock, par value $.01 per share ("COMMON
STOCK"), is no longer designated for quotation on the Bulletin Board or any
other United States stock exchange or trading market with equivalent or higher
listing standards than the Bulletin Board, the Conversion Percentage shall be
permanently reduced by ten percent (10%) to seventy percent (70%). The
Conversion Percentage also shall be subject to adjustment as provided herein.
D. "Conversion Price" means, with respect to any Conversion Date, the lower
of the Variable Conversion Price and the Fixed Conversion Price, each in effect
as of such date and subject to adjustment as provided herein; provided, however,
that in no event shall the Conversion Price in effect on any Conversion Date be
less than the Floor Price in effect on such Conversion Date unless a Reserved
Amount Trigger Event (as defined in Article V hereof) a Conversion Default (as
defined in Article VI hereof) or a Mandatory Redemption Event (as defined in
Article VIII.A hereof) shall have occurred and be then continuing; provided,
further, however, that the restriction contained in the immediately preceding
proviso shall not apply on any Conversion Date occurring after an Announcement
Date (as defined in Article XI.C hereof) and prior to the sixth (6th) trading
day following (i) the consummation of the proposed transaction or tender offer,
exchange offer or other transaction to which the Announcement Date relates or
(ii) the Abandonment Date (as defined in Article XI.C hereof).
E. "Fixed Conversion Price" means $7.75, and shall be subject to adjustment
as provided herein (including, without limitation, Articles V.D, VI.B and XI).
F. "Floor Price" means, with respect to any Conversion Date, the lower of
(i) $2.00 and (ii) the Fixed Conversion Price then in effect.
G. "Issuance Date" means the date of the closing under that certain
Securities Purchase Agreement by and between the Corporation and the purchaser
named therein with respect to the issuance of the Series A Preferred Stock (the
"SECURITIES PURCHASE AGREEMENT").
H. "N" means the number of days from, but excluding, the Issuance Date.
I. "Premium" means an amount equal to (.06)x(N/365)x(1,000).
J. "Variable Conversion Price" means, as of any date of determination, the
amount obtained by multiplying the Conversion Percentage then in effect by the
average of the five (5) lowest Closing Bid Prices for the Common Stock during
the fifteen (15) consecutive trading days ending on the trading day immediately
preceding such date of determination (subject to equitable adjustment for any
stock splits, stock dividends, reclassifications or similar events during such
fifteen (15) trading day period), and shall be subject to adjustment as provided
herein. For the avoidance of doubt, the trading day immediately preceding any
Conversion Date is the last calendar day that is a trading day and which is
immediately preceding the Conversion Date.
K. "Business Day" and "Trading Day" means any day on which the New York
Stock Exchange is open for trading.
A-2
<PAGE> 67
IV. CONVERSION
A. Conversion at the Option of the Holder. (i) Subject to the limitations
on conversions contained in Paragraph C of this Article IV, each holder of
shares of Series A Preferred Stock may, at any time and from time to time,
convert (an "OPTIONAL CONVERSION") each of its shares of Series A Preferred
Stock into a number of fully paid and nonassessable shares of Common Stock
determined in accordance with the following formula if the Corporation timely
redeems the Premium thereon in cash or shares of Common Stock in accordance with
subparagraph (ii) below:
1,000
CONVERSION PRICE
or in accordance with the following formula if the Corporation does not timely
redeem the Premium thereon in accordance with subparagraph (ii) below:
1,000 + THE PREMIUM
CONVERSION PRICE
(ii)(a) The Corporation shall have the right, in its sole discretion,
upon receipt of a Notice of Conversion, or in the event of a Required
Conversion at Maturity, to redeem the Premium subject to such conversion
for a sum of cash equal to the amount of the Premium being so redeemed. All
cash redemption payments hereunder shall be paid in lawful money of the
United States of America at such address for the holder as appears on the
record books of the Corporation (or at such other address as such holder
shall hereafter give to the Corporation by written notice). In the event
the Corporation so elects to redeem the Premium in cash and fails to pay
such holder the applicable redemption amount to which such holder is
entitled by depositing a check in the U.S. Mail to such holder within three
(3) business days of receipt by the Corporation of a Notice of Conversion
(in the case of a redemption in connection with an Optional Conversion) or
the Maturity Date (in the case of a redemption in connection with a
Required Conversion at Maturity), the Corporation shall thereafter forfeit
its right to redeem such Premium in cash and such Premium shall thereafter
be converted into shares of Common Stock in accordance with Article
IV.A(i).
(b) Each holder of Series A Preferred Stock shall have the right to
require the Corporation to provide advance notice to such holder stating
whether the Corporation will elect to redeem the Premium in cash pursuant
to the Corporation's redemption rights discussed in subparagraph (a) of
this Article IV.A(ii). A holder may exercise such right from time to time
by sending notice (an "ELECTION NOTICE") to the Corporation, by facsimile,
requesting that the Corporation disclose to such holder whether the
Corporation would elect to redeem the Premium for cash in lieu of issuing
shares of Common Stock therefor if such holder were to exercise its right
of conversion pursuant to this Article IV.A. The Corporation shall, no
later than the close of business on the next business day following receipt
of an Election Notice, disclose to such holder whether the Corporation
would elect to redeem the Premium in connection with a conversion pursuant
to a Notice of Conversion delivered over the subsequent five (5) business
day period. If the Corporation does not respond to such holder within such
one business day period via facsimile, the Corporation shall, with respect
to any conversion pursuant to a Conversion Notice delivered within the
subsequent five (5) business day period, forfeit its right to redeem such
Premium in accordance with subparagraph (a) of this Article IV.A(ii) and
shall be required to convert such Premium into shares of Common Stock.
B. Mechanics of Conversion. In order to effect an Optional Conversion, a
holder shall: (x) fax (or otherwise deliver) a copy of the fully executed Notice
of Conversion to the Corporation or the transfer agent for the Common Stock and
(y) surrender or cause to be surrendered the original certificates representing
the Series A Preferred Stock being converted (the "PREFERRED STOCK
CERTIFICATES"), duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Corporation or the transfer agent. Upon
receipt by the Corporation of a facsimile copy of a Notice of Conversion from a
holder,
A-3
<PAGE> 68
the Corporation shall immediately send, via facsimile, a confirmation to such
holder stating that the Notice of Conversion has been received, the date upon
which the Corporation expects to deliver the Common Stock issuable upon such
conversion and the name and telephone number of a contact person at the
Corporation regarding the conversion. The Corporation shall not be obligated to
issue shares of Common Stock upon a conversion unless either the Preferred Stock
Certificates are delivered to the Corporation or the transfer agent as provided
above, or the holder notifies the Corporation or the transfer agent that such
certificates have been lost, stolen or destroyed and delivers the documentation
to the Company required by Article XIV.B hereof.
(i) Delivery of Common Stock Upon Conversion. Upon the surrender of
Preferred Stock Certificates from a holder of Series A Preferred Stock
accompanied by a Notice of Conversion, the Corporation shall, no later than
the later of (a) the second business day following the Conversion Date and
(b) the business day following the date of such surrender (or, in the case
of lost, stolen or destroyed certificates, after provision of indemnity
pursuant to Article XIV.B) (the "DELIVERY PERIOD"), issue and deliver to
the holder or its nominee (x) that number of shares of Common Stock
issuable upon conversion of such shares of Series A Preferred Stock being
converted and (y) a certificate representing the number of shares of Series
A Preferred Stock not being converted, if any. If the Corporation's
transfer agent is participating in the Depository Trust Company ("DTC")
Fast Automated Securities Transfer program, and so long as the certificates
therefor do not bear a legend and the holder thereof is not obligated to
return such certificate for the placement of a legend thereon, the
Corporation shall cause its transfer agent to electronically transmit the
Common Stock issuable upon conversion to the holder by crediting the
account of the holder or its nominee with DTC through its Deposit
Withdrawal Agent Commission system ("DTC TRANSFER"). If the aforementioned
conditions to a DTC Transfer are not satisfied, the Corporation shall
deliver to the holder physical certificates representing the Common Stock
issuable upon conversion. Further, a holder may instruct the Corporation to
deliver to the holder physical certificates representing the Common Stock
issuable upon conversion in lieu of delivering such shares by way of DTC
Transfer.
(ii) Taxes. The Corporation shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of the shares of
Common Stock upon the conversion of the Series A Preferred Stock.
(iii) No Fractional Shares. If any conversion of Series A Preferred
Stock would result in the issuance of a fractional share of Common Stock,
such fractional share shall be disregarded and the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock shall
be the next higher whole number of shares.
(iv) Conversion Disputes. In the case of any dispute with respect to a
conversion, the Corporation shall promptly issue such number of shares of
Common Stock as are not disputed in accordance with subparagraph (i) above.
If such dispute involves the calculation of the Conversion Price, the
Corporation shall submit the disputed calculations to an independent
outside accountant via facsimile within two (2) business days of receipt of
the Notice of Conversion. The accountant, at the Corporation's sole
expense, shall audit the calculations and notify the Corporation and the
holder of the results no later than two (2) business days from the date it
receives the disputed calculations. The accountant's calculation shall be
deemed conclusive, absent manifest error. The Corporation shall then issue
the appropriate number of shares of Common Stock in accordance with
subparagraph (i) above.
C. Limitations on Conversions. The conversion of shares of Series A
Preferred Stock shall be subject to the following limitations (each of which
limitations shall be applied independently):
(i) No Five Percent Holders. Unless a holder of shares of Series A
Preferred Stock delivers a waiver in accordance with the last sentence of
this subparagraph (i), except in connection with a Required Conversion at
Maturity, in no event shall a holder of shares of Series A Preferred Stock
be entitled to receive shares of Common Stock upon a conversion to the
extent that the sum of (x) the number of shares of Common Stock
beneficially owned by the holder and its affiliates (exclusive of shares
issuable upon conversion of the unconverted portion of the shares of Series
A Preferred Stock or the unexercised or unconverted portion of any other
securities of the Corporation (including, without
A-4
<PAGE> 69
limitation, the warrants (the "WARRANTS") issued by the Corporation
pursuant to the Securities Purchase Agreement) subject to a limitation on
conversion or exercise analogous to the limitations contained herein) and
(y) the number of shares of Common Stock issuable upon the conversion of
the shares of Series A Preferred Stock with respect to which the
determination of this subparagraph is being made, would result in
beneficial ownership by the holder and its affiliates of more than 4.99% of
the outstanding shares of Common Stock. For purposes of this subparagraph,
beneficial ownership shall be determined in accordance with Section 13(d)
of the Securities Exchange Act of 1934, as amended, and Regulation 13 D-G
thereunder, except as otherwise provided in clause (x) above. Except as
provided in the immediately succeeding sentence, the restriction contained
in this subparagraph (i) shall not be altered, amended, deleted or changed
in any manner whatsoever unless the holders of a majority of the
outstanding shares of Common Stock and each holder of outstanding shares of
Series A Preferred Stock shall approve such alteration, amendment, deletion
or change. Notwithstanding the foregoing, a holder of shares of Series A
Preferred Stock may waive the restriction set forth in this subparagraph
(i) upon not less than 61 days prior written notice to the Corporation
(with such waiver taking effect only upon the expiration of such 61-day
period).
D. Required Conversion at Maturity. Subject to the limitations set forth in
Paragraphs C(i) and C(ii) of this Article IV and provided all shares of Common
Stock issuable upon conversion of all outstanding shares of Series A Preferred
Stock are then (i) authorized and reserved for issuance, (ii) registered under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), for resale by the
holders of such shares of Series A Preferred Stock and (iii) eligible to be
traded on either the New York Stock Exchange ("NYSE"), the American Stock
Exchange ("AMEX"), the Nasdaq National Market ("NNM"), the Nasdaq Small Cap
Market ("SMALL CAP"), or the Bulletin Board, each share of Series A Preferred
Stock issued and outstanding on the second (2nd) anniversary of the Issuance
Date (the "MATURITY DATE") automatically shall be converted into shares of
Common Stock on such date in accordance with the conversion formulas set forth
in Paragraph A of this Article IV (the "REQUIRED CONVERSION AT MATURITY"). If
the Required Conversion at Maturity occurs, the Corporation and the holders of
Series A Preferred Stock shall follow the applicable conversion procedures set
forth in Paragraph B of this Article IV; provided, however, that the holders of
Series A Preferred Stock are not required to deliver a Notice of Conversion to
the Corporation or its transfer agent. If the Required Conversion at Maturity
does not occur (including by reason of the limitations set forth in Paragraph
C(i) of this Article IV), each holder of Series A Preferred Stock shall
thereafter have the option, exercisable in whole or in part at any time and from
time to time by delivery of a Mandatory Redemption Notice (as defined in Article
VIII.C) to the Corporation, to require the Corporation to purchase for cash, at
an amount per share equal to the Mandatory Redemption Amount (as defined in
Article VIII.B), the holder's Series A Preferred Stock. If the Corporation fails
to redeem any of such shares within five (5) business days after the day on
which the Corporation receives such Mandatory Redemption Notice, then such
holder shall be entitled to the remedies provided in Article VIII.C.
V. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. Upon the initial issuance of shares of Series A
Preferred Stock, the Corporation shall reserve 825,000 shares (200% of the
maximum number of shares of Common Stock which would be issuable if all shares
of Series A Preferred Stock are converted in their entirety on the Issuance
Date) of the authorized but unissued shares of Common Stock for issuance upon
conversion of the Series A Preferred Stock and thereafter the number of
authorized but unissued shares of Common Stock so reserved (the "RESERVED
AMOUNT") shall at all times be sufficient to provide for the conversion of the
shares of Series A Preferred Stock then outstanding at the then current
Conversion Price. The Reserved Amount shall be allocated to the holders of
Series A Preferred Stock as provided in Article XIV.C.
B. Increases to Reserved Amount. If the Reserved Amount for any three (3)
consecutive trading days (the last of such three (3) trading days being the
"AUTHORIZATION TRIGGER DATE") shall be less than 135% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of Series A
Preferred Stock, the Corporation shall immediately notify the holders of Series
A Preferred Stock of such occurrence and shall take immediate action (including,
if necessary, seeking stockholder approval to
A-5
<PAGE> 70
authorize the issuance of additional shares of Common Stock) to increase the
Reserved Amount to 200% of the number of shares of Common Stock then issuable
upon conversion of the outstanding Series A Preferred Stock. In the event the
Corporation fails to so increase the Reserved Amount within ninety (90) days
after an Authorization Trigger Date, each holder of Series A Preferred Stock
shall thereafter have the option, exercisable in whole or in part at any time
and from time to time by delivery of a Mandatory Redemption Notice (as defined
in Article VIII.C) to the Corporation, to require the Corporation to purchase
for cash, at an amount per share equal to the Mandatory Redemption Amount (as
defined in Article VIII.B), a portion of the holder's Series A Preferred Stock
such that, after giving effect to such purchase, such holder's allocated portion
of the Reserved Amount exceeds 135% of the total number of shares of Common
Stock issuable to such holder upon conversion of the holder's Series A Preferred
Stock. If the Corporation fails to redeem any of such shares within five (5)
business days after its receipt of a Mandatory Redemption Notice, then such
holder shall be entitled to the remedies provided in Article VIII.C.
C. Limitations on Redemption Right. Notwithstanding the provisions of
Paragraph B of this Article V, the holders of Series A Preferred Stock shall
have no right to require the Corporation to effect a redemption of their
outstanding shares of Series A Preferred Stock as provided in Paragraph B of
this Article V so long as (i) the Corporation has not, at any time, decreased
the Reserved Amount below 825,000 shares of Common Stock; (ii) the Corporation
shall have taken immediate action following the applicable Authorization Trigger
Date (including, if necessary, seeking stockholder approval to authorize the
issuance of additional shares of Common Stock) to increase the Reserved Amount
to 200% of the number of shares of Common Stock then issuable upon conversion of
the outstanding Series A Preferred Stock; and (iii) the Corporation continues to
use its good faith best efforts (including the resolicitation of stockholder
approval to authorize the issuance of additional shares of Common Stock) to
increase the Reserved Amount to 200% of the number of shares of Common Stock
then issuable upon conversion of the outstanding Series A Preferred Stock. The
Corporation will be deemed to be using "its good faith best efforts" to increase
the Reserved Amount so long as it solicits stockholder approval, if required, to
authorize the issuance of additional shares of Common Stock not less than three
(3) times during each twelve month period following the applicable Authorization
Trigger Date during which any shares of Series A Preferred Stock remain
outstanding.
D. Adjustment to Conversion Price. If the Corporation is prohibited, at any
time, from issuing shares of Common Stock upon conversion of Series A Preferred
Stock to any holder because the Corporation does not then have available a
sufficient number of authorized and reserved shares of Common Stock (a "RESERVED
AMOUNT TRIGGER EVENT"), then the Fixed Conversion Price in respect of any shares
of Series A Preferred Stock held by any holder (including shares of Series A
Preferred Stock submitted to the Corporation for conversion, but for which
shares of Common Stock have not been issued to any such holder) shall thereafter
be the lesser of (i) the Fixed Conversion Price on the date of the Reserved
Amount Trigger Event and (ii) the lowest Conversion Price in effect during the
period beginning on, and including the date of, the Reserved Amount Trigger
Event through and including the date on which the Corporation shall have taken
all action necessary to increase the number of authorized shares of Common Stock
and to increase the Reserved Amount to 200% of the number of shares of Common
Stock then issuable upon conversion of the then outstanding Series A Preferred
Stock. Upon the occurrence of each reset of the Fixed Conversion Price pursuant
to this Paragraph D, the Corporation, at its expense, shall promptly compute the
new Fixed Conversion Price and prepare and furnish to each holder of Series A
Preferred Stock a certificate setting forth such new Fixed Conversion Price and
showing in detail each Conversion Price in effect during such reset period.
VI. FAILURE TO SATISFY CONVERSIONS
A. Conversion Default Payments. If, at any time, (x) a holder of shares of
Series A Preferred Stock submits a Notice of Conversion and the Corporation
fails for any reason (other than because such issuance would exceed such
holder's allocated portion of the Reserved Amount for which failure the holders
shall have the remedies set forth in Article V) to deliver, on or prior to the
fourth (4th) business day following the expiration of the Delivery Period for
such conversion, such number of freely tradeable shares of Common Stock to which
such holder is entitled upon such conversion, or (y) the Corporation provides
notice to any
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holder of shares of Series A Preferred Stock at any time of its intention not to
issue freely tradeable shares of Common Stock upon exercise by any holder of its
conversion rights in accordance with the terms of this Certificate of
Designation (other than because such issuance would exceed such holder's
allocated portion of the Reserved Amount) (each of (x) and (y) being a
"CONVERSION DEFAULT"), then the Corporation shall pay to the affected holder, in
the case of a Conversion Default described in clause (x) above, and to all
holders, in the case of a Conversion Default described in clause (y) above, an
amount equal to:
(.24) X (D/365) X (Default Amount)
where:
"D" means the number of days after the expiration of the Delivery Period
through and including the Default Cure Date;
"Default Amount" means (i) the total Face Amount of all shares of Series A
Preferred Stock held by such holder, plus (ii) the total accrued Premium as of
the first day of the Conversion Default on all shares of Series A Preferred
Stock included in clause (i) of this definition; and
"Default Cure Date" means (i) with respect to a Conversion Default
described in clause (x) of its definition, the date the Corporation effects the
conversion of the full number of shares of Series A Preferred Stock and (ii)
with respect to a Conversion Default described in clause (y) of its definition,
the date the Corporation issues freely tradeable shares of Common Stock in
satisfaction of all conversions of Series A Preferred Stock in accordance with
Article IV.A, and (iii) with respect to either type of a Conversion Default, the
date on which the Corporation redeems shares of Series A Preferred Stock held by
such holder pursuant to Paragraph D of this Article VI.
The payments to which a holder shall be entitled pursuant to this Paragraph
A are referred to herein as "CONVERSION DEFAULT PAYMENTS." A holder may elect to
receive accrued Conversion Default Payments in cash or to convert all or any
portion of such accrued Conversion Default Payments, at any time, into Common
Stock at the lowest Conversion Price in effect during the period beginning on
the date of the Conversion Default through the Conversion Date with respect to
such Conversion Default Payments. In the event a holder elects to receive any
Conversion Default Payments in cash, it shall so notify the Corporation in
writing. Such payment shall be made in accordance with and be subject to the
provisions of Article XIV.E. In the event a holder elects to convert all or any
portion of the Conversion Default Payments into Common Stock, the holder shall
indicate on a Notice of Conversion such portion of the Conversion Default
Payments which such holder elects to so convert and such conversion shall
otherwise be effected in accordance with the provisions of Article IV.
B. Adjustment to Conversion Price. If a holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) business
day after the expiration of the Delivery Period with respect to a conversion of
Series A Preferred Stock for any reason (other than because such issuance would
exceed such holder's allocated portion of the Reserved Amount, for which failure
the holders shall have the remedies set forth in Article V), then the Fixed
Conversion Price in respect of any shares of Series A Preferred Stock held by
such holder (including shares of Series A Preferred Stock submitted to the
Corporation for conversion, but for which shares of Common Stock have not been
issued to such holder) shall thereafter be the lesser of (i) the Fixed
Conversion Price on the Conversion Date specified in the Notice of Conversion
which resulted in the Conversion Default and (ii) the lowest Conversion Price in
effect during the period beginning on, and including, such Conversion Date
through and including the earlier of (x) the day such shares of Common Stock are
delivered to the holder and (y) the day on which the holder regains its rights
as a holder of Series A Preferred Stock with respect to such unconverted shares
of Series A Preferred Stock pursuant to the provisions of Article XIV.F hereof.
If there shall occur a Conversion Default of the type described in clause (y) of
Article VI.A, then the Fixed Conversion Price with respect to any conversion
thereafter shall be the lowest Conversion Price in effect at any time during the
period beginning on, and including, the date of the occurrence of such
Conversion Default through and including the Default Cure Date. The Fixed
Conversion Price shall thereafter be subject to further adjustment for any
events described in Article XI.
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C. Buy-In Cure. Unless the Corporation has notified the applicable holder
in writing prior to the delivery by such holder of a Notice of Conversion that
the Corporation is unable to honor conversions, if (i)(a) the Corporation fails
for any reason to deliver during the Delivery Period shares of Common Stock to a
holder upon a conversion of shares of Series A Preferred Stock or (b) there
shall occur a Legend Removal Failure (as defined in Article VIII.A(iii) below)
and (ii) thereafter, such holder purchases (in an open market transaction or
otherwise) shares of Common Stock to make delivery in satisfaction of a sale by
such holder of the unlegended shares of Common Stock (the "SOLD SHARES") which
such holder anticipated receiving upon such conversion (a "BUY-IN"), the
Corporation shall pay such holder (in addition to any other remedies available
to the holder) the amount by which (x) such holder's total purchase price
(including brokerage commissions, if any) for the unlegended shares of Common
Stock so purchased exceeds (y) the net proceeds received by such holder from the
sale of the Sold Shares. For example, if a holder purchases unlegended shares of
Common Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to shares of Common Stock it sold for $10,000, the Corporation will be
required to pay the holder $1,000. A holder shall provide the Corporation
written notification and supporting documentation indicating any amounts payable
to such holder pursuant to this Paragraph C. The Corporation shall make any
payments required pursuant to this Paragraph C in accordance with and subject to
the provisions of Article XIV.E.
D. Redemption Right. If the Corporation fails, and such failure continues
uncured for five (5) business days after the Corporation has been notified
thereof in writing by the holder, for any reason (other than because such
issuance would exceed such holder's allocated portion of the Reserved Amount,
for which failure the holders shall have the remedies set forth in Articles V)
to issue shares of Common Stock within ten (10) business days after the
expiration of the Delivery Period with respect to any conversion of Series A
Preferred Stock, then the holder may elect at any time and from time to time
prior to the Default Cure Date for such Conversion Default, by delivery of a
Mandatory Redemption Notice to the Corporation, to have all or any portion of
such holder's outstanding shares of Series A Preferred Stock purchased by the
Corporation for cash, at an amount per share equal to the Mandatory Redemption
Amount (as defined in Article VIII.B). If the Corporation fails to redeem any of
such shares within five (5) business days after its receipt of such Mandatory
Redemption Notice, then such holder shall be entitled to the remedies provided
in Article VIII.C.
VII. [INTENTIONALLY OMITTED]
VIII. EVENTS OF DEFAULT
A. Events of Default. In the event (each of the events described in clauses
(i) -- (vi) below after expiration of the applicable cure period (if any) being
a "MANDATORY REDEMPTION EVENT"):
(i) the Common Stock (including any of the shares of Common Stock
issuable upon conversion of the Series A Preferred Stock) is suspended from
trading on any of, or is not listed (and authorized) for trading on at
least one of, the NYSE, the AMEX, the NNM, the SmallCap or the Bulletin
Board, for an aggregate of fifteen (15) trading days in any nine (9) month
period;
(ii) the Registration Statement required to be filed by the
Corporation pursuant to Section 2(a) of that certain Registration Rights
Agreement, dated as of March 31, 1998, by and among the Corporation and the
other signatories thereto (the "REGISTRATION RIGHTS AGREEMENT") has not
been declared effective by the 183rd day following the Issuance Date or
such Registration Statement, after being declared effective, cannot be
utilized by the holders of Series A Preferred Stock for the resale of all
of their Registrable Securities (as defined in the Registration Rights
Agreement) for an aggregate of more than thirty (30) days;
(iii) the Corporation fails to remove any restrictive legend on any
certificate or any shares of Common Stock issued to the holders of Series A
Preferred Stock upon conversion of the Series A Preferred Stock as and when
required by this Certificate of Designation, the Securities Purchase
Agreement or the Registration Rights Agreement (a "LEGEND REMOVAL
FAILURE"), and any such failure continues uncured for five (5) business
days after the Corporation has been notified thereof in writing by the
holder;
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<PAGE> 73
(iv) the Corporation provides notice to any holder of Series A
Preferred Stock, including by way of public announcement, at any time, of
its intention not to issue shares of Common Stock to any holder of Series A
Preferred Stock or otherwise fails to deliver to any such holder within the
requisite time period shares of Common Stock upon conversion in accordance
with the terms of this Certificate of Designation (other than due to the
circumstances contemplated by Article V for which the holders shall have
the remedies set forth in such Article);
(v) the Corporation shall:
(a) sell, convey or dispose of all or substantially all of its
assets (the presentation of any such transaction for stockholder
approval being conclusive evidence that such transaction involves the
sale of all or substantially all of the assets of the Corporation); or
(b) merge, consolidate or engage in any other business combination
with any other entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of
incorporation of the Corporation and other than pursuant to a merger in
which the Corporation is the surviving or continuing entity; or
(c) have approved, recommended or consented to any transaction or
series of related transactions which result in fifty percent (50%) or
more of the voting power of its capital stock being owned beneficially
by one person, entity or "group" (as such term is used under Section
13(d) of the Securities Exchange Act of 1934, as amended); or
(vi) the Corporation breaches any material covenant or other material
term hereunder (other than as specifically provided in subparagraphs
(i)-(v) of this Paragraph A), or under the Securities Purchase Agreement or
the Registration Rights Agreement and such breach continues uncured for ten
(10) business days after the Corporation has been notified thereof in
writing by the holder;
then, upon the occurrence of any such Mandatory Redemption Event, each
holder of shares of Series A Preferred Stock shall thereafter have the
option, exercisable in whole or in part at any time and from time to time
by delivery of a Mandatory Redemption Notice (as defined in Paragraph C
below) to the Corporation while such Mandatory Redemption Event continues,
to require the Corporation to purchase for cash any or all of the then
outstanding shares of Series A Preferred Stock held by such holder for an
amount per share equal to the Mandatory Redemption Amount (as defined in
Paragraph B below) in effect at the time of the redemption hereunder. For
the avoidance of doubt, the occurrence of any event described in clauses
(i), (ii), (iv) or (v) above shall immediately constitute a Mandatory
Redemption Event and there shall be no cure period; provided, however, that
the holders of Series A Preferred Stock shall have no right to deliver a
Mandatory Redemption Notice following the occurrence of a Mandatory
Redemption Event specified in clause (i) above if the Corporation pays, at
its option exercisable in its sole discretion, to each holder within five
(5) business days after the occurrence of such Mandatory Redemption Event,
as liquidated damages for the decrease in the value of the Series A
Preferred Stock (and the shares of the Corporation's Common Stock issuable
upon conversion thereof) which will result from the occurrence of such
Mandatory Redemption Event, an amount (the "DAMAGES AMOUNT") equal to
twenty-five percent (25%) of the aggregate Face Amount of the shares of
Series A Preferred Stock then held by each such holder. The Damages Amount
shall be payable, at the Corporation's option, in cash or shares of Common
Stock (based upon a price per share of Common Stock equal to fifty percent
(50%) of the Conversion Price in effect as of the date of such Mandatory
Redemption Event). Upon the initial issuance of shares of Series A
Preferred Stock, the Corporation shall reserve 250,000 shares of Common
Stock to satisfy its obligation with respect to the Damages Amount and
thereafter the number of authorized but unissued shares of Common Stock so
reserved shall not be decreased. In the event that the number of shares
required to be issued by the Corporation with respect to the Damages Amount
exceeds 250,000 shares of Common Stock and the Corporation does not have a
sufficient number of shares of Common Stock authorized and available for
issuance to satisfy its obligation with respect to the Damages Amount, the
Corporation shall issue and deliver to the holders, on a pro-rata basis
based on the number of shares of Series A Preferred Stock then held by each
such holder, a number of shares of Common Stock equal to the greater of (i)
the number of shares authorized and available for
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<PAGE> 74
issuance by the Corporation to satisfy such obligation and (ii) all 193,548
shares of Common Stock so reserved for such purpose and, upon such
issuance, the holders shall have no right of redemption with respect to
such Mandatory Redemption Event, but shall retain all other remedies to
which they may be entitled at law or in equity (which remedies shall not
include the right of redemption).
Upon the Corporation's receipt of any Mandatory Redemption Notice hereunder
(other than during the three (3) trading day period following the Corporation's
delivery of a Mandatory Redemption Announcement (as defined below) to all of the
holders in response to the Corporation's initial receipt of a Mandatory
Redemption Notice from a holder of Series A Preferred Stock), the Corporation
shall immediately (and in any event within one (1) business day following such
receipt) deliver a written notice (a "MANDATORY REDEMPTION ANNOUNCEMENT") to all
holders of Series A Preferred Stock stating the date upon which the Corporation
received such Mandatory Redemption Notice and the amount of Series A Preferred
Stock covered thereby. The Corporation shall not redeem any shares of Series A
Preferred Stock during the three (3) trading day period following the delivery
of a required Mandatory Redemption Announcement hereunder. At any time and from
time to time during such three (3) trading day period, each holder of Series A
Preferred Stock may request (either orally or in writing) information from the
Corporation with respect to the instant redemption (including, but not limited
to, the aggregate number of shares of Series A Preferred Stock covered by
Mandatory Redemption Notices received by the Corporation) and the Corporation
shall furnish (either orally or in writing) as soon as practicable such
requested information to such requesting holder.
B. Definition of Mandatory Redemption Amount. The "MANDATORY REDEMPTION
AMOUNT" with respect to a share of Series A Preferred Stock means an amount
equal to the greater of:
<TABLE>
<S> <C> <C>
(i) V
--- X M
CP
</TABLE>
and
(ii) The sum of (x) the product of (I) one hundred percent (100%)
divided by the Conversion Percentage in effect on the date on which the
Corporation receives the Mandatory Redemption Notice, times (II) the Face
Amount thereof, plus (y) the accrued Premium thereon and all unpaid
Conversion Default Payments owing (if any) with respect thereto through the
date of payment of the Mandatory Redemption Amount.
"V" means the Face Amount thereof plus the accrued Premium thereon and all
unpaid Conversion Default Payments owing (if any) with respect thereto through
the date of payment of the Mandatory Redemption Amount;
"CP" means the Conversion Price in effect on the date on which the
Corporation receives the Mandatory Redemption Notice; and
"M" means (i) with respect to all redemptions other than redemptions
pursuant to Article VIII.A(v) hereof, the highest Closing Bid Price of the
Corporation's Common Stock during the period beginning on the date on which the
Corporation receives the Mandatory Redemption Notice and ending on the date
immediately preceding the date of payment of the Mandatory Redemption Amount and
(ii) with respect to redemptions pursuant to Article VIII.A(v) hereof, the
greater of (a) the amount determined pursuant to clause (i) of this definition
or (b) the fair market value, as of the date on which the Corporation receives
the Mandatory Redemption Notice, of the consideration payable to the holder of a
share of Common Stock pursuant to the transaction which triggers the redemption.
For purposes of this definition, "fair market value" shall be determined by the
mutual agreement of the Corporation and holders of a majority-in-interest of the
shares of Series A Preferred Stock then outstanding, or if such agreement cannot
be reached within five (5) business days prior to the date of redemption, by an
investment banking firm selected by the Corporation and reasonably acceptable to
holders of a majority-in-interest of the then outstanding shares of Series A
Preferred Stock, with the costs of such appraisal to be borne by the
Corporation.
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<PAGE> 75
C. Redemption Defaults. If the Corporation fails to pay any holder the
Mandatory Redemption Amount with respect to any share of Series A Preferred
Stock within five (5) business days after its receipt of a notice requiring such
redemption (a "MANDATORY REDEMPTION NOTICE"), then the holder of Series A
Preferred Stock delivering such Mandatory Redemption Notice (i) shall be
entitled to interest on the Mandatory Redemption Amount at a per annum rate
equal to the lower of twenty-four percent (24%) and the highest interest rate
permitted by applicable law from the date on which the Corporation receives the
Mandatory Redemption Notice until the date of payment of the Mandatory
Redemption Amount hereunder, and (ii) shall have the right, at any time and from
time to time prior to payment thereof in cash, to require the Corporation, upon
written notice, to immediately convert (in accordance with the terms of
Paragraph A of Article IV) all or any portion of the Mandatory Redemption
Amount, plus interest as aforesaid, into shares of Common Stock at the lowest
Conversion Price in effect during the period beginning on the date on which the
Corporation receives the Mandatory Redemption Notice and ending on the
Conversion Date with respect to the conversion of such Mandatory Redemption
Amount. In the event the Corporation is not able to redeem all of the shares of
Series A Preferred Stock subject to Mandatory Redemption Notices delivered prior
to the date upon which such redemption is to be effected, the Corporation shall
redeem shares of Series A Preferred Stock from each holder pro rata, based on
the total number of shares of Series A Preferred Stock outstanding at the time
of redemption included by such holder in all Mandatory Redemption Notices
delivered prior to the date upon which such redemption is to be effected
relative to the total number of shares of Series A Preferred Stock outstanding
at the time of redemption included in all of the Mandatory Redemption Notices
delivered prior to the date upon which such redemption is to be effected.
D. Redemption at the Corporation's Option.
(i) The Corporation shall have the right, at any time and from time to
time, commencing on the 90th day following the effective date of the
Registration Statement referred to in Article VIII.A.(ii) hereof, so long
as no Conversion Default or Mandatory Redemption Event shall have occurred
and be continuing, to redeem (an "OPTIONAL REDEMPTION") all or any portion
of the then outstanding shares of Series A Preferred Stock (excluding
shares of Series A Preferred Stock subject to a Notice of Conversion
delivered to the Corporation prior to the date of the Optional Redemption
Notice (as defined in subparagraph (iii) below)) for cash, at an amount per
share equal to the Optional Redemption Amount (as defined below), by
delivering an Optional Redemption Notice to the holders of Series A
Preferred Stock. Subject to the provisions of Article IV.C hereof, holders
of Series A Preferred Stock may convert all or any part of their shares of
Series A Preferred Stock selected for redemption hereunder into Common
Stock by delivering a Notice of Conversion to the Corporation at any time
prior to the Effective Date of Redemption. For purposes hereof, the
"OPTIONAL REDEMPTION AMOUNT" with respect to a share of Series A Preferred
Stock means an amount equal to the greater of:
<TABLE>
<S> <C> <C>
(a) V
--- X M
CP
</TABLE>
and
(b) The sum of (x) the product of (I) one hundred percent (100%)
divided by the Conversion Percentage in effect on the date of the
Optional Redemption Notice, times (II) the Face Amount thereof, plus (y)
the accrued Premium thereon and all unpaid Conversion Default Payments
owing (if any) with respect thereto through the Effective Date of
Redemption (as defined in subparagraph (iii) below).
where:
"V" means the Face Amount thereof plus the accrued Premium thereon and all
unpaid Conversion Default Payments owing (if any) with respect thereto through
the Effective Date of Redemption;
"CP" means the Conversion Price in effect on the date of the Optional
Redemption Notice; and
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"M" means the Closing Bid Price of the Corporation's Common Stock on the
date of the Optional Redemption Notice.
(ii) The Corporation may not deliver an Optional Redemption Notice to
the holders of Series A Preferred Stock unless on or prior to the date of
delivery of such Optional Redemption Notice, the Corporation shall have
deposited with an escrow agent reasonably acceptable to holders of a
majority of the then outstanding shares of Series A Preferred Stock, as a
trust fund, cash sufficient in amount to pay all amounts to which the
holders of Series A Preferred Stock are entitled upon such redemption
pursuant to subparagraph (i) of this Paragraph D, with irrevocable
instructions and authority to such escrow agent to complete the redemption
thereof in accordance with this Paragraph D. Any Optional Redemption Notice
delivered in accordance with the immediately preceding sentence shall be
accompanied by a statement executed by a duly authorized officer of its
escrow agent, certifying the amount of funds which have been deposited with
such escrow agent and that the escrow agent has been instructed and agrees
to act as redemption agent hereunder.
(iii) The Corporation shall effect an Optional Redemption under this
Section VIII.D by giving at least thirty (30) business days prior written
notice (the "OPTIONAL REDEMPTION NOTICE") of the date on which such
redemption is to become effective (the "EFFECTIVE DATE OF REDEMPTION") and
the Optional Redemption Amount to (i) the holders of Series A Preferred
Stock at the address and facsimile number of each holder appearing in the
Corporation's register for the Series A Preferred Stock and (ii) the
transfer agent for the Common Stock, which Optional Redemption Notice shall
be deemed to have been delivered on the business day after the
Corporation's fax (with a copy sent by overnight courier to the holders of
Series A Preferred Stock) of such notice to the holders of Series A
Preferred Stock.
(iv) The Optional Redemption Amount shall be paid to the holder of the
Series A Preferred Stock being redeemed within three (3) business days of
the Effective Date of Redemption; provided, however, that the Corporation
shall not be obligated to deliver any portion of the Optional Redemption
Amount until either the certificates evidencing the Series A Preferred
Stock being redeemed are delivered to the office of the Corporation or the
escrow agent or the holder notifies the Corporation or the escrow agent
that such certificates have been lost, stolen or destroyed and delivers the
documentation in accordance with Article XIV.B hereof. Notwithstanding
anything herein to the contrary, in the event that the certificates
evidencing the Series A Preferred Stock being redeemed are not delivered to
the Corporation or the escrow agent prior to the third business day
following the Effective Date of Redemption, the redemption of the Series A
Preferred Stock pursuant to this Article VIII.D shall still be deemed
effective as of the Effective Date of Redemption and the Optional
Redemption Amount shall be paid to the holder of Series A Preferred Stock
being redeemed within five (5) business days of the date the certificates
evidencing the Series A Preferred Stock being redeemed are actually
delivered to the Corporation or the escrow agent.
IX. RANK
All shares of the Series A Preferred Stock shall rank (i) prior to the
Corporation's Common Stock; (ii) prior to any class or series of capital stock
of the Corporation hereafter created (unless, with the consent of the holders of
Series A Preferred Stock obtained in accordance with Article XIII hereof, such
class or series of capital stock specifically, by its terms, ranks senior to or
pari passu with the Series A Preferred Stock) (collectively with the Common
Stock, "JUNIOR SECURITIES"); (iii) pari passu with any class or series of
capital stock of the Corporation hereafter created (with the consent of the
holders of Series A Preferred Stock obtained in accordance with Article XIII
hereof) specifically ranking, by its terms, on parity with the Series A
Preferred Stock (the "PARI PASSU SECURITIES"); and (iv) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series A Preferred Stock obtained in accordance with Article
XIII hereof) specifically ranking, by its terms, senior to the Series A
Preferred Stock (collectively, the "SENIOR SECURITIES"), in each case as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary.
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X. LIQUIDATION PREFERENCE
A. If the Corporation shall commence a voluntary case under the U.S.
Federal bankruptcy laws or any other applicable bankruptcy, insolvency or
similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event, the Corporation shall liquidate, dissolve or wind
up, or if the Corporation shall otherwise liquidate, dissolve or wind up,
including, but not limited to, the sale or transfer of all or substantially all
of the Corporation's assets in one transaction or in a series of related
transactions (a "LIQUIDATION EVENT"), no distribution shall be made to the
holders of any shares of capital stock of the Corporation (other than Senior
Securities) upon liquidation, dissolution or winding up unless prior thereto the
holders of shares of Series A Preferred Stock shall have received the
Liquidation Preference with respect to each share. If, upon the occurrence of a
Liquidation Event, the assets and funds available for distribution among the
holders of the Series A Preferred Stock and holders of Pari Passu Securities
shall be insufficient to permit the payment to such holders of the preferential
amounts payable thereon, then the entire assets and funds of the Corporation
legally available for distribution to the Series A Preferred Stock and the Pari
Passu Securities shall be distributed ratably among such shares in proportion to
the ratio that the Liquidation Preference payable on each such share bears to
the aggregate Liquidation Preference payable on all such shares.
B. The purchase or redemption by the Corporation of stock of any class, in
any manner permitted by law, shall not, for the purposes hereof, be regarded as
a liquidation, dissolution or winding up of the Corporation. Neither the
consolidation or merger of the Corporation with or into any other entity nor the
sale or transfer by the Corporation of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Corporation.
C. The "LIQUIDATION PREFERENCE" with respect to a share of Series A
Preferred Stock means an amount equal to the Face Amount thereof plus the
accrued Premium thereon through the date of final distribution. The Liquidation
Preference with respect to any Pari Passu Securities shall be as set forth in
the Certificate of Designation filed in respect thereof.
XI. ADJUSTMENTS TO THE CONVERSION PRICE
The Conversion Price and the Floor Price shall be subject to adjustment
from time to time as follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the
Issuance Date, the number of outstanding shares of Common Stock is increased by
a stock split, stock dividend, combination, reclassification or other similar
event, the Fixed Conversion Price and the Floor Price shall be proportionately
reduced, or if the number of outstanding shares of Common Stock is decreased by
a reverse stock split, combination or reclassification of shares, or other
similar event, the Fixed Conversion Price and the Floor Price shall be
proportionately increased. In such event, the Corporation shall notify the
Corporation's transfer agent of such change on or before the effective date
thereof.
B. Adjustment Due to Merger, Consolidation, Etc. If, at any time after the
Issuance Date, there shall be (i) any reclassification or change of the
outstanding shares of Common Stock (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination), (ii) any consolidation or merger of the
Corporation with any other entity (other than a merger in which the Corporation
is the surviving or continuing entity and its capital stock is unchanged), (iii)
any sale or transfer of all or substantially all of the assets of the
Corporation or (iv) any share exchange pursuant to
A-13
<PAGE> 78
which all of the outstanding shares of Common Stock are converted into other
securities or property (each of (i) - (iv) above being a "CORPORATE CHANGE"),
then the holders of Series A Preferred Stock shall thereafter have the right to
receive upon conversion, in lieu of the shares of Common Stock otherwise
issuable, such shares of stock, securities and/or other property as would have
been issued or payable in such Corporate Change with respect to or in exchange
for the number of shares of Common Stock which would have been issuable upon
conversion (without giving effect to the limitations contained in Article IV.C)
had such Corporate Change not taken place, and in any such case, appropriate
provisions shall be made with respect to the rights and interests of the holders
of the Series A Preferred Stock to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and the Floor Price and of the number of shares of Common Stock issuable
upon conversion of the Series A Preferred Stock) shall thereafter be applicable,
as nearly as may be practicable in relation to any shares of stock or securities
thereafter deliverable upon the conversion thereof. The Corporation shall not
effect any Corporate Change unless (i) each holder of Series A Preferred Stock
has received written notice of such transaction at least sixty (60) days prior
thereto, but in no event later than ten (10) days prior to the record date for
the determination of stockholders entitled to vote with respect thereto, and
(ii) the resulting successor or acquiring entity (if not the Corporation)
assumes by written instrument the obligations of this Certificate of
Designation. The above provisions shall apply regardless of whether or not there
would have been a sufficient number of shares of Common Stock authorized and
available for issuance upon conversion of the shares of Series A Preferred Stock
outstanding as of the date of such transaction, and shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
C. Adjustment Due to Major Announcement. In the event the Corporation at
any time after the Issuance Date (i) makes a public announcement that it intends
to consolidate or merge with any other entity (other than a merger in which the
Corporation is the surviving or continuing entity and its capital stock is
unchanged) or to sell or transfer all or substantially all of the assets of the
Corporation or (ii) any person, group or entity (including the Corporation)
publicly announces a tender offer, exchange offer or another transaction to
purchase 50% or more of the Corporation's Common Stock or otherwise publicly
announces an intention to replace a majority of the Corporation's Board of
Directors by waging a proxy battle or otherwise (the date of the announcement
referred to in clause (i) or (ii) of this Paragraph C is hereinafter referred to
as the "ANNOUNCEMENT DATE"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the sixth (6th) trading day following
the earlier of the consummation of the proposed transaction or tender offer,
exchange offer or another transaction or the Abandonment Date (as defined
below), be equal to the lower of (x) the Conversion Price which would have been
applicable for an Optional Conversion occurring on the Announcement Date and (y)
the Conversion Price determined in accordance with Article III.D on the
Conversion Date set forth in the Notice of Conversion for the Optional
Conversion. From and after the sixth (6th) trading day following the Abandonment
Date, the Conversion Price shall be determined as set forth in Article III.D.
"ABANDONMENT DATE" means with respect to any proposed transaction or tender
offer, exchange offer or another transaction for which a public announcement as
contemplated by this Paragraph C has been made, the date upon which the
Corporation (in the case of clause (i) above) or the person, group or entity (in
the case of clause (ii) above) publicly announces the termination or abandonment
of the proposed transaction or tender offer, exchange offer or another
transaction which caused this Paragraph C to become operative.
D. Adjustment Due to Distribution. If, at any time after the Issuance Date,
the Corporation shall declare or make any distribution of its assets (or rights
to acquire its assets) to holders of Common Stock as a partial liquidating
dividend, by way of return of capital or otherwise (including any dividend or
distribution to the Corporation's stockholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"DISTRIBUTION"), then the holders of Series A Preferred Stock shall be entitled,
upon any conversion of shares of Series A Preferred Stock after the date of
record for determining stockholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the holder with
respect to the shares of Common Stock issuable upon such conversion (without
giving effect to the limitations contained in Article IV.C) had such holder been
the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to such Distribution.
A-14
<PAGE> 79
E. Issuance of Other Securities With Variable Conversion Price. If, at any
time after the Issuance Date, the Corporation shall issue any securities which
are convertible into or exchangeable for Common Stock ("CONVERTIBLE SECURITIES")
at a conversion or exchange rate based on a discount to the market price of the
Common Stock at the time of conversion or exercise, then the Conversion
Percentage in respect of any conversion of Series A Preferred Stock after such
issuance shall be calculated utilizing the higher of the greatest discount
applicable to any such Convertible Securities and the difference between one
hundred percent (100%) and the Conversion Percentage then in effect hereunder.
F. Purchase Rights. If, at any time after the Issuance Date, the
Corporation issues any Convertible Securities or rights to purchase stock,
warrants, securities or other property (the "PURCHASE RIGHTS") pro rata to the
record holders of any class of Common Stock, then the holders of Series A
Preferred Stock will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon complete conversion of the Series A Preferred Stock (without giving effect
to the limitations contained in Article IV.C) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price and/or Floor Price pursuant to this Article
XI, the Corporation, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to each holder of Series A Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
A Preferred Stock, furnish to such holder a like certificate setting forth (i)
such adjustment or readjustment, (ii) the Conversion Price and/or Floor Price at
the time in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be
received upon conversion of a share of Series A Preferred Stock.
XII. VOTING RIGHTS
The holders of the Series A Preferred Stock shall have no voting rights
whatsoever, except as otherwise provided by the Delaware General Corporation Law
(the "BUSINESS CORPORATION LAW"), in this Article XII and in Article XIII below.
Notwithstanding the above, the Corporation shall provide each holder of
Series A Preferred Stock with prior notification of any meeting of the
stockholders (and copies of proxy materials and other information sent to
stockholders). If the Corporation takes a record of its stockholders for the
purpose of determining stockholders entitled to (a) receive payment of any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or (b) to vote in connection with any proposed sale,
lease or conveyance of all or substantially all of the assets of the
Corporation, or any proposed merger, consolidation, liquidation, dissolution or
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least ten (10) days prior to the record date specified therein (or
sixty (60) days prior to the consummation of the transaction or event, whichever
is earlier, but in no event earlier than public announcement of such proposed
transaction), of the date on which any such record is to be taken for the
purpose of such vote, dividend, distribution, right or other event, and a brief
statement regarding the amount and character of such vote, dividend,
distribution, right or other event to the extent known at such time.
To the extent that under the Business Corporation Law the vote of the
holders of the Series A Preferred Stock, voting separately as a class or series,
as applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of the Series A Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Series A Preferred Stock
(except as otherwise may be required under the Business Corporation Law) shall
constitute the approval of such action by the class. To the extent that under
the Business Corporation Law holders of the Series A Preferred
A-15
<PAGE> 80
Stock are entitled to vote on a matter with holders of Common Stock, voting
together as one class, each share of Series A Preferred Stock shall be entitled
to a number of votes equal to the number of shares of Common Stock into which it
is then convertible (subject to the limitations contained in Article IV.C(ii))
using the record date for the taking of such vote of stockholders as the date as
of which the Conversion Price is calculated.
XIII. PROTECTION PROVISIONS
So long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by the Business Corporation Law) of the holders of 67% then
outstanding shares of Series A Preferred Stock:
(a) alter or change the rights, preferences or privileges of the
Series A Preferred Stock;
(b) alter or change the rights, preferences or privileges of any
capital stock of the Corporation so as to affect adversely the Series A
Preferred Stock;
(c) create any new class or series of capital stock having a
preference over the Series A Preferred Stock as to distribution of assets
upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article IX hereof, "SENIOR SECURITIES");
(d) create any new class or series of capital stock ranking pari passu
with the Series A Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously
defined in Article IX hereof, "PARI PASSU SECURITIES");
(e) increase the authorized number of shares of Series A Preferred
Stock;
(f) issue any shares of Senior Securities or Pari Passu Securities;
(g) issue any shares of Series A Preferred Stock other than pursuant
to the Securities Purchase Agreement;
(h) redeem, or declare or pay any cash dividend or distribution on,
any Junior Securities; or
(i) increase the par value of the Common Stock.
Notwithstanding the foregoing, no change pursuant to this Article XIII shall be
effective to the extent that, by its terms, it applies to less than all of the
holders of shares of Series A Preferred Stock then outstanding.
XIV. MISCELLANEOUS
A. Cancellation of Series A Preferred Stock. If any shares of Series A
Preferred Stock are converted pursuant to Article IV, the shares so converted
shall be canceled, shall return to the status of authorized, but unissued
preferred stock of no designated series, and shall not be issuable by the
Corporation as Series A Preferred Stock.
B. Lost or Stolen Certificates. Upon receipt by the Corporation of (i)
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Corporation, or (z) in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Corporation shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. However, the Corporation shall not be
obligated to reissue such lost or stolen Preferred Stock Certificate(s) if the
holder contemporaneously requests the Corporation to convert such Series A
Preferred Stock.
C. Allocation of Reserved Amount. The initial Reserved Amount shall be
allocated pro rata among the holders of Series A Preferred Stock based on the
number of shares of Series A Preferred Stock issued to each holder. Each
increase to the Reserved Amount shall be allocated pro rata among the holders of
Series A Preferred Stock based on the number of shares of Series A Preferred
Stock held by each holder at the time of the increase in the Reserved Amount. In
the event a holder shall sell or otherwise transfer any of such holder's
A-16
<PAGE> 81
shares of Series A Preferred Stock, each transferee shall be allocated a pro
rata portion of such transferor's Reserved Amount. Any portion of the Reserved
Amount which remains allocated to any person or entity which does not hold any
Series A Preferred Stock shall be allocated to the remaining holders of shares
of Series A Preferred Stock, pro rata based on the number of shares of Series A
Preferred Stock then held by such holders.
D. Quarterly Statements of Available Shares. For each calendar quarter
beginning in the quarter in which the registration statement required to be
filed pursuant to Section 2(a) of the Registration Rights Agreement is declared
effective and thereafter so long as any shares of Series A Preferred Stock are
outstanding, the Corporation shall deliver (or cause its transfer agent to
deliver) to each holder a written report notifying the holders of any occurrence
which prohibits the Corporation from issuing Common Stock upon any such
conversion. The report shall also specify (i) the total number of shares of
Series A Preferred Stock outstanding as of the end of such quarter, (ii) the
total number of shares of Common Stock issued upon all conversions of Series A
Preferred Stock prior to the end of such quarter, (iii) the total number of
shares of Common Stock which are reserved for issuance upon conversion of the
Series A Preferred Stock as of the end of such quarter and (iv) the total number
of shares of Common Stock which may thereafter be issued by the Corporation upon
conversion of the Series A Preferred Stock before the Corporation would exceed
the Reserved Amount. The Corporation (or its transfer agent) shall deliver the
report for each quarter to each holder prior to the tenth day of the calendar
month following the quarter to which such report relates. In addition, the
Corporation (or its transfer agent) shall provide, within fifteen (15) days
after delivery to the Corporation of a written request by any holder, any of the
information enumerated in clauses (i) -- (iv) of this Paragraph D as of the date
of such request.
E. Payment of Cash; Defaults. Whenever the Corporation is required to make
any cash payment to a holder under this Certificate of Designation (as a
Conversion Default Payment, upon redemption or otherwise), such cash payment
shall be made to the holder within five (5) business days after delivery by such
holder of a notice specifying that the holder elects to receive such payment in
cash and the method (e.g., by check, wire transfer) in which such payment should
be made. If such payment is not delivered within such five (5) business day
period, such holder shall thereafter be entitled to interest on the unpaid
amount at a per annum rate equal to the lower of twenty-four percent (24%) and
the highest interest rate permitted by applicable law until such amount is paid
in full to the holder.
F. Status as Stockholder. Upon submission of a Notice of Conversion by a
holder of Series A Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their issuance would exceed
such holder's allocated portion of the Reserved Amount) shall be deemed
converted into shares of Common Stock and (ii) the holder's rights as a holder
of such converted shares of Series A Preferred Stock shall cease and terminate,
excepting only the right to receive certificates for such shares of Common Stock
and to any remedies provided herein or otherwise available at law or in equity
to such holder because of a failure by the Corporation to comply with the terms
of this Certificate of Designation. In situations where Article VI.B is
applicable, the number of shares of Common Stock referred to in clauses (i) and
(ii) of the immediately preceding sentence shall be determined on the date on
which such shares of Common Stock are delivered to the holder. Notwithstanding
the foregoing, if a holder has not received certificates for all shares of
Common Stock prior to the tenth (10th) business day after the expiration of the
Delivery Period with respect to a conversion of Series A Preferred Stock for any
reason, then (unless the holder otherwise elects to retain its status as a
holder of Common Stock by so notifying the Corporation within five business days
after the expiration of such ten (10) business day period after expiration of
the Delivery Period) the holder shall regain the rights of a holder of Series A
Preferred Stock with respect to such unconverted shares of Series A Preferred
Stock and the Corporation shall, as soon as practicable, return such unconverted
shares to the holder. In all cases, the holder shall retain all of its rights
and remedies, if any, (including, without limitation, (i) the right to receive
Conversion Default Payments pursuant to Article VI.A to the extent required
thereby for such Conversion Default and any subsequent Conversion Default and
(ii) the right to have the Conversion Price with respect to subsequent
conversions determined in accordance with Article VI.B) for the Corporation's
failure to convert Series A Preferred Stock.
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<PAGE> 82
G. Remedies Cumulative. The remedies provided in this Certificate of
Designation shall be cumulative and in addition to all other remedies available
under this Certificate of Designation, at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit a holder's right to pursue actual damages for any failure by the
Corporation to comply with the terms of this Certificate of Designation. The
Corporation acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the holders of Series A Preferred Stock and that the
remedy at law for any such breach may be inadequate. The Corporation therefore
agrees, in the event of any such breach or threatened breach, that the holders
of Series A Preferred Stock shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 83
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation this 31st day of March, 1998.
ENVIRONMENTAL PRODUCTS &
TECHNOLOGIES CORPORATION
By:
--------------------------------------
Name:
Title:
A-19
<PAGE> 84
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED HOLDER
IN ORDER TO CONVERT THE SERIES A PREFERRED STOCK)
The undersigned hereby irrevocably elects to convert shares
of Series A Preferred Stock (the "CONVERSION"), represented by stock certificate
Nos(s). (the "PREFERRED STOCK CERTIFICATES"), into shares of
Common Stock ("COMMON STOCK") of ENVIRONMENTAL PRODUCTS & TECHNOLOGIES
CORPORATION (the "CORPORATION") according to the conditions of the Certificate
of Designations, Preferences and Rights of Series A Convertible Preferred Stock
(the "CERTIFICATE OF DESIGNATION"), as of the date written below. If securities
are to be issued in the name of a person other than the undersigned, the
undersigned will pay all transfer taxes payable with respect thereto. No fee
will be charged to the holder for any conversion, except for transfer taxes, if
any. A copy of each Preferred Stock Certificate is attached hereto (or evidence
of loss, theft or destruction thereof).
The Corporation shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee (which is ) with DTC through its Deposit Withdrawal Agent
Commission System ("DTC TRANSFER").
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series A Preferred Stock shall be made pursuant to registration of the Common
Stock under the Securities Act of 1933, as amended (the "ACT"), or pursuant to
an exemption from registration under the Act.
[ ] In lieu of receiving the shares of Common Stock issuable pursuant to
this Notice of Conversion by way of DTC Transfer, the undersigned
hereby requests that the Corporation issue and deliver to the
undersigned physical certificates representing such shares of Common
Stock.
Date of Conversion: ___________________________________
Applicable Conversion Price: __________________________
Amount of Conversion Default Payments to be
Converted, if any: ____________________________________
Number of Shares of
Common Stock to be Issued: ____________________________
Signature: ____________________________________________
Name: _________________________________________________
Address: ______________________________________________
______________________________________________
______________________________________________
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<PAGE> 85
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell
or the solicitation of any offer to buy any security other than the shares of
the Common Stock offered by this Prospectus, nor does it constitute an offer to
sell or a solicitation of any offer to buy the shares of Common Stock by anyone
in any jurisdiction in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so, or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Dividend Policy....................... 14
Use of Proceeds....................... 15
Management's Discussion and Analysis
or Plan of Operations............... 16
Selected Financial Data............... 19
Price Range of Common Stock........... 20
Business.............................. 21
Management............................ 28
Certain Transactions.................. 30
Principal Stockholders................ 31
Selling Stockholders.................. 31
Plan of Distribution.................. 33
Description of Capital Stock.......... 34
Legal Matters......................... 39
Experts............................... 39
Additional Information................ 39
Index to Financial Statements......... F-1
Appendix A............................ A-1
</TABLE>
Until , 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,820,000 SHARES
ENVIRONMENTAL PRODUCTS
& TECHNOLOGIES CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
SEPTEMBER , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Neither the Company's Certificate of Incorporation nor bylaws provide for
indemnification of the Company's officers, directors, employees or agents. As
soon as practicable after the effectiveness of this Registration Statement, the
Company intends to seek stockholder approval to amend its Certificate of
Incorporation and bylaws to provide for such indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Units being registered hereby. All of the amounts shown are
estimates except for the Securities and Exchange Commission (the "Commission")
registration fee and the National Association of Securities Dealers ("NASD")
filing fee.
<TABLE>
<S> <C>
Commission Registration Fee................................. $ 6,083.27
Accounting Fees and Expenses................................ $ 10,000.00
Legal Fees and Expenses..................................... $ 50,000.00
Printing and Engraving Expenses............................. $ 20,000.00
Transfer Agent Fees......................................... $ 2,000.00
Miscellaneous Expenses...................................... $ 6,916.73
-----------
TOTAL.................................................. $100,000.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Between June and August 1995, the Registrant sold 75,000 shares of Common
Stock for an aggregate of $7,500, or $.10 per share to one investor.
Between October and December 1995, the Registrant sold 100,000 shares of
Common Stock for an aggregate of $10,000, or $.10 per share to one investor.
Between January and March 1996, the Registrant sold 400,000 shares of
Common Stock for an aggregate of $189,650, or approximately $.47 per share to
two investors.
Between April and June 1996, the Registrant sold 40,000 shares of Common
Stock for an aggregate of $35,000, or $.87 per share to one investor.
Between July and September 1996, the Registrant sold 480,000 shares of
Common Stock for an aggregate of $147,750, or approximately $.31 per share to
five investors.
Between June and October 1997, the Registrant sold 700,000 shares of Common
Stock for an aggregate of $430,000, or approximately $.614 per share to 11
investors.
On October 2, 1995, the Registrant issued warrants to purchase an aggregate
of 600,000 shares of Common Stock at an exercise price of $.10 per share to four
investors. On May 29, 1997, warrants representing the right to purchase 300,000
shares of Common Stock were canceled. On April 13, 1998 the holders of the
remaining warrants to purchase 300,000 shares of Common Stock agreed to exercise
such warrants and in lieu of paying an aggregate of $30,000 agreed to received
285,000 shares of Common Stock instead of 300,000 shares of Common Stock.
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<PAGE> 87
On January 22, 1998, the Registrant sold for an aggregate of $200 warrants
to purchase 300,000 shares of Common Stock at an exercise price of $2.00 per
share to Jonathan Fink and Brad Billik.
Pursuant to a restated letter of understanding dated May 18, 1998, Lifeline
agreed to transfer to the Company all rights, title and interest in and to the
anaerobic digester, the bio-reactor and the biologicals used therewith. Patents
are currently pending on the co-generation technology and the bio-reactor. In
consideration for this transfer, the Company issued 100,000 shares of Common
Stock to Lifeline and has agreed to issue an additional 50,000 shares of Common
Stock upon assignment to the Company of all patents to the bio-reactor. In
addition, the Company has agreed to issue to Lifeline an aggregate of 320,000
shares of Common Stock, payable 80,000 shares on each of October 15, 1999, 2000,
2001 and 2002.
In April 1998, the Registrant sold 3,000 shares of Series A Preferred Stock
together with warrants (the "Private Placement Warrants") to purchase 300,000
shares of Common Stock (the "Private Placement") for gross proceeds of
$3,000,000. The Private Placement Warrants have an initial exercise price of
$3.875 per share. The Private Placement Warrants expire on March 31, 2003. the
Private Placement Warrants contain provisions of the adjustment of the exercise
price and the aggregate number of shares issuable upon exercise under certain
circumstances, including without limitation, stock dividends, stock splits,
reorganizations, reclassifications, consolidations, certain dilutive sales of
securities for which the Private Placement Warrants are exercisable below the
then existing Market Price (as defined) and failure to maintain a sufficient
number of authorized shares of Common Stock for issuance and delivery upon
exercise of the Private Placement Warrants. The shares of Series A Preferred
Stock and the Private Placement Warrants were sold to two accredited investors.
The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under either (i) Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), as transactions not
involving any public offering or (ii) only in the case of options or warrants
granted to employees, directors, officers and consultants, Rule 701 under the
Securities Act. In the case of private placements exempt pursuant to Section
4(2), such offers and sales were made only to accredited investors; the
Registrant did not engage in any form of general solicitation or advertising;
and the Registrant exercised reasonable care to assure that the purchasers of
the Registrant's securities were not underwriters within the meaning of Section
2(11) of the Securities Act.
ITEM 27. EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant(2)
3.2 Bylaws of the Registrant(2)
3.3 Certificate of Designation, Preferences and Rights(1)
4.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 hereof) and Bylaws of the
Registrant (incorporated by reference to Exhibit 3.2 hereof)
4.2 Form of Common Stock Certificate(2)
5.1 Legal opinion of Donahue, Mesereau & Leids LLP re legality
10.1 Securities Purchase Agreement dated as of March 31, 1998 by
and between the Registrant and each of Diversified
Strategies fund, L.P. and JNC Opportunity Fund, Ltd.(1)
10.2 Warrant to purchase 137,500 shares of Common Stock of the
Registrant issued to JNC Opportunity Fund, Ltd.(1)
10.3 Warrant to purchase 12,500 shares of Common Stock of the
Registrant issued to Diversified Strategies Fund, L.P.(1)
</TABLE>
II-2
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
10.4 Registration Rights Agreement dated as of March 31, 1998 by
and between the Registrant and each of Diversified Fund,
L.P. and JNC Opportunity Fund, Ltd.(1)
10.5 Consulting Agreement dated January 22, 1998 by and between
the Registrant and Strategic Planning Consultants, Inc.(2)
10.6 Warrant to purchase 200,000 shares of Common Stock of the
Registrant issued to Jonathan Fink (the "Fink Warrant") at
an exercise price of $.10 per share(2)
10.7 Letter agreement from Jonathan Fink to the Registrant
agreeing to exercise the Fink Warrant(2)
10.8 Warrant to purchase 100,000 shares of Common Stock of the
Registrant issued to Brad Billik (the "Billik Warrant") at
an exercise price of $.10 per share(2)
10.9 Letter agreement from Brad Billik to the Registrant agreeing
to exercise the Billik Warrant(2)
10.10 Warrant to purchase 100,000 shares of Common Stock of the
Registrant issued to Jonathan Fink at an exercise price of
$4.00 per share(2)
10.11 Warrant to purchase 50,000 shares of Common Stock of the
Registrant issued to Brad Billik at an exercise price of
$4.00 per share(2)
10.12 Lease Agreement dated December 3, 1997 by and between the
Registrant and Westlake Industrial Complex(2)
10.13 1996 Stock Option Plan and related agreements(2)
10.14 Employment Agreement dated as of April 15, 1998 by and
between the Registrant and Marvin Mears(2)
10.15 [Intentionally omitted]
10.16 Promissory Note issued to the Registrant by Morris Lerner(2)
10.17 Promissory Note issued to the Registrant by Combined Assets,
Inc.(2)
10.18 Promissory Note issued by the Registrant to Ronald
Knudsen(2)
10.19 Agreement with Lifeline Enterprises L.L.C.(2)
23.1 Consent of Donahue, Mesereau & Leids LLP (incorporated by
reference to Exhibit 5.1 hereof)
23.2 Consent of Clumeck, Stern, Phillips & Schenkelberg
24.1 Power of Attorney (reference is made to page II-5 hereof)
27 Financial Data Schedule
</TABLE>
- ---------------
(1)Incorporated by reference from Registration Statement on Form SB-2 (File No.
333-53397), filed on May 22, 1998.
(2) Incorporated by reference from Amendment No. 1 to Registration Statement on
Form SB-2 (File No. 333-53397), filed on August 18, 1998.
(b) Financial Statement Schedules:
None.
II-3
<PAGE> 89
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which individually, or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) That, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(6) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed as part
of this Registration Statement as of the time it was declared effective.
(7) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 90
SIGNATURES
In accordance with the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned, in the
City of Los Angeles, State of California, on September 17, 1998.
ENVIRONMENTAL PRODUCTS &
TECHNOLOGIES CORPORATION
/s/ MARVIN MEARS
--------------------------------------
By: Marvin Mears
Title: Chief Executive Officer and
President
In accordance with the requirements of the Securities Act, this Amendment
No. 2 to the Registration Statement was signed by the following persons in the
capacities and on the dates stated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ MARVIN MEARS Chief Executive Officer, September 17, 1998
- ----------------------------------------------------- President and Director
Marvin Mears
/s/ JOEL WADMAN Chief Financial Officer September 17, 1998
- ----------------------------------------------------- (principal accounting
Joel Wadman officer) and Secretary
</TABLE>
II-5
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant.(2)
3.2 Bylaws of the Registrant.(2)
3.3 Certificate of Designation, Preferences and Rights.(1)
4.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 hereof) and Bylaws of the
Registrant (incorporated by reference to Exhibit 3.2
hereof).
4.2 Form of Common Stock Certificate.(2)
5.1 Legal opinion of Donahue, Mesereau & Leids LLP re legality.
10.1 Securities Purchase Agreement dated as of March 31, 1998 by
and between the Registrant and each of Diversified
Strategies fund, L.P. and JNC Opportunity Fund, Ltd.(1)
10.2 Warrant to purchase 137,500 shares of Common Stock of the
Registrant issued to JNC Opportunity Fund, Ltd.(1)
10.3 Warrant to purchase 12,500 shares of Common Stock of the
Registrant issued to Diversified Strategies Fund, L.P.(1)
10.4 Registration Rights Agreement dated as of March 31, 1998 by
and between the Registrant and each of Diversified Fund,
L.P. and JNC Opportunity Fund, Ltd.(1)
10.5 Consulting Agreement dated January 22, 1998 by and between
the Registrant and Strategic Planning Consultants, Inc.(2)
10.6 Warrant to purchase 200,000 shares of Common Stock of the
Registrant issued to Jonathan Fink (the "Fink Warrant") at
an exercise price of $.10 per share.(2)
10.7 Letter agreement from Jonathan Fink to the Registrant
agreeing to exercise the Fink Warrant.(2)
10.8 Warrant to purchase 100,000 shares of Common Stock of the
Registrant issued to Brad Billik (the "Billik Warrant") at
an exercise price of $.10 per share.(2)
10.9 Letter agreement from Brad Billik to the Registrant agreeing
to exercise the Billik Warrant.(2)
10.10 Warrant to purchase 100,000 shares of Common Stock of the
Registrant issued to Jonathan Fink at an exercise price of
$4.00 per share.(2)
10.11 Warrant to purchase 50,000 shares of Common Stock of the
Registrant issued to Brad Billik at an exercise price of
$4.00 per share.(2)
10.12 Lease Agreement dated December 3, 1997 by and between the
Registrant and Westlake Industrial Complex.(2)
10.13 1996 Stock Option Plan and related agreements.(2)
10.14 Employment Agreement dated as of April 15, 1998 by and
between the Registrant and Marvin Mears.(2)
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<S> <C>
10.15 [Intentionally omitted].
10.16 Promissory Note issued to the Registrant by Morris
Lerner.(2)
10.17 Promissory Note issued to the Registrant by Combined Assets,
Inc.(2)
10.18 Promissory Note issued by the Registrant to Ronald
Knudsen.(2)
10.19 Agreement with Lifeline Enterprises L.L.C.(2)
23.1 Consent of Donahue, Mesereau & Leids LLP (incorporated by
reference to Exhibit 5.1 hereof).
23.2 Consent of Clumeck, Stern, Phillips & Schenkelberg.
24.1 Power of Attorney (reference is made to page II-5 hereof).
27 Financial Data Schedule
</TABLE>
- ---------------
(1)Incorporated by reference from Registration Statement on Form SB-2 (File No.
333-53397), filed on May 22, 1998.
(2) Incorporated by reference from Amendment No. 1 to Registration Statement on
Form SB-2 (File No. 333-53397), filed on August 18, 1998.
<PAGE> 1
EXHIBIT 5.1
Donahue, Mesereau & Leids, LLP
1900 Avenue of the Stars, Suite 2700
Los Angeles, California 90067
Tel: (310) 277-1441
Fax: (310) 277-2888
e-mail: [email protected]
Environmental Products & Technologies Corporation
5380 Sterling Center Drive
Westlake Village, California 91361
Re: Environmental Products & Technologies Corporation
Registration Statement on Form SB-2
(Registration No. 333-53397)
-------------------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form SB-2 filed by you
with the Securities and Exchange Commission (the "Commission") on May 22, 1998
(Registration No. 333-53397), as amended by Amendment No. 1 to Form SB-2 filed
by you with the Commission on August 18, 1998, as amended by Amendment No. 2 to
Form SB-2 filed by you with the Commission on September 17, 1998 (as amended,
the "Registration Statement"), for the purpose of registering under the
Securities Act of 1933, as amended, 2,820,000 shares of your Common Stock, par
value $.01 per share, and such indeterminate number of shares as set forth in
the Registration Statement (the "Shares") to be sold by the selling stockholders
identified therein (the "Selling Stockholders"). As your counsel in connection
with this transaction, we have examined the proceedings taken and are familiar
with the proceedings proposed to be taken by you in connection with the sale and
issuance of the Shares.
On the basis of such investigation as we have deemed necessary, we are
of the opinion that the Shares will be, when sold by the Selling Stockholders,
fully paid and non-assessable shares of Common Stock of the Company.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement, and further consent to the use of our name wherever
appearing in such Registration Statement, including the prospectus constituting
a part thereof, and any amendment thereto.
Very truly yours,
DONAHUE, MESEREAU & LEIDS, LLP
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Environmental Products
& Technologies Corporation on Form SB-2 of our report dated December 18, 1997
for the financial statements as of September 30, 1997 and September 30, 1996
and the years ended September 30, 1997 and 1996 appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Clumeck, Stern, Phillips & Schenkelberg
September 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS WITH FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE NINE
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1996 SEP-30-1998
<PERIOD-END> SEP-30-1997 SEP-30-1996 JUN-30-1998
<CASH> 271,360 11,871 2,371,705
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 275,689 231,943 2,460,334
<PP&E> 1,093 0 59,593
<DEPRECIATION> 0 0 5,478
<TOTAL-ASSETS> 312,332 272,993 2,567,265
<CURRENT-LIABILITIES> 222,708 36,016 253,589
<BONDS> 0 0 0
0 0 0
0 0 30
<COMMON> 38,035 36,980 42,735
<OTHER-SE> 51,589 86,997 2,270,911
<TOTAL-LIABILITY-AND-EQUITY> 312,332 272,993 2,567,265
<SALES> 0 0 0
<TOTAL-REVENUES> 0 0 0
<CGS> 0 0 0
<TOTAL-COSTS> 388,382 275,109 864,515
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 18,310 0 9,270
<INCOME-PRETAX> (403,735) (273,737) (841,451)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (403,735) (273,737) (841,451)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (403,735) (273,737) (841,451)
<EPS-PRIMARY> (.06) (.04) (.51)
<EPS-DILUTED> (.06) (.04) (.51)
</TABLE>
