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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-SB/A
2nd Amendment
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
ZEROS USA, Inc.
(Name of Small Business Issuer in its charter)
Texas 76-0520236
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
507 North Belt East, Suite 550, Houston, Texas 77060
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: 281,448-6083
Securities to be registered pursuant to Section 12(b) of the Act:
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Title of each class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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none
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Securities to be registered pursuant to Section 12(g) of the Act:
Common
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(Title of Class)
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GENERAL
ZEROS USA, Inc., a Texas corporation (the "Company" or "ZEROS"), seeks to
become a reporting company and is filing this Form 10-SB on a voluntary basis.
The Company intends to voluntarily file periodic reports even if its obligation
to file such reports is suspended under the Exchange Act of 1934, as amended
(the "Exchange Act").
ITEM 1. BUSINESS
GENERAL
ZEROS was organized in November 1996, for the purpose of selling licenses
and equipment, and providing licensee support services, in connection with the
Zero-emission Energy Recycling Oxidation System (the "ZEROS System"). The ZEROS
System is a closed, waste disposal and energy production system which processes
toxic and non-toxic waste and recycles the processed waste into marketable
energy, carbon dioxide products, brine and other products. The waste processing
is performed with zero emissions and is an alternative to the traditional
"smokestack" incineration. The Company holds an exclusive license to sell
licenses and equipment in connection with the ZEROS System technology to
customers pursuant to a Master License Agreement (the "Master License
Agreement"), entered into by and between the Company and M, Ltd., a Bahamian
business entity and the owner of the rights to the ZEROS System technology.
ORGANIZATION AND HISTORY
The Company was organized in Texas on November 12, 1996. On June 30, 1997
the Company merged with ZEROS USA, Inc., a Utah corporation incorporated on
February 14, 1996, formerly known as Gunner Holdings, Inc. ("Gunner"). Pursuant
to the terms of such merger, each shareholder of Gunner received one share of
common stock of the Company, $.001 par value per share ("Common Stock"), for
each share of Gunner common stock held by such shareholder.
Prior to the merger, Gunner was a private corporation with 1,490,000
million issued and outstanding shares of common stock held by shareholders other
than the Company. Such shares of common stock were held by the Agri Capital
Trust, the Star Trust and the Gunner Trust. On March 15, 1997, immediately prior
to the merger, Gunner effected a one for ten shares reverse split of its common
stock, reducing to 1.49 million of its shares of outstanding common stock.
Following the Merger, the three trusts distributed shares to an aggregate of 163
beneficiaries. At that time, Steve Clark, a director and chief executive officer
of the Company, remained the controlling shareholder of the Company with an
80.3% voting interest.
PRIOR TO THE MERGER BETWEEN ZEROS USA, INC., AND GUNNER HOLDINGS, INC.,
ANOTHER COMPANY NAMED GUNNER ENERGY CORPORATION WAS REPORTED TO ZEROS USA, INC.,
AS BEING A PUBLIC REPORTING COMPANY. UPON INFORMATION AND BELIEF IT WAS NEITHER
A "BLANK CHECK" OR SHELL COMPANY, BUT INSTEAD HAD MADE ITS OWN OFFERING AND
REPORTEDLY FAILED IN ITS VENTURES.
THE BUSINESS NATURE OF GUNNER HOLDINGS, INC., WAS TO BE THE CONTROLLING
SHAREHOLDERS OF GUNNER ENERGY CORPORATION TO PROVIDE A PLAN DISPOSITION FOR THE
SHAREHOLDERS. GUNNER ENERGY CORPORATION HAD BEEN AN INACTIVE NON-REPORTING
COMPANY FOR SEVERAL YEARS PRIOR TO THE FORMATION OF GUNNER HOLDINGS, INC.
THE MAJORITY SHAREHOLDERS OF GUNNER ENERGY CORPORATION INCORPORATED
GUNNER HOLDINGS, INC., UTAH, TO MERGE WITH ZEROS USA, INC., A TEXAS CORPORATION.
AS A CONDITION OF MERGER, THE GUNNER ENERGY SHAREHOLDERS WERE GIVEN ONE SHARE OF
STOCK FOR EACH SHARE OF GUNNER ENERGY CORPORATION OWNED. THE GUNNER ENERGY
CORPORATION SHAREHOLDERS WERE NOT REQUIRED TO SELL, DISPOSE OR EXCHANGE THEIR
GUNNER ENERGY CORPORATION STOCK. THE MERGER OF ZEROS USA, INC., (TEXAS) WITH
ZEROS USA, INC., UTAH (NAME CHANGED FROM GUNNER HOLDINGS INC., TO ZEROS USA,
INC., UTAH) RESULTED IN EACH GUNNER HOLDINGS (ZEROS USA, INC., UTAH) RECEIVING
ONE SHARE OF ZEROS USA, INC, (TEXAS) PER SHARE OF GUNNER HOLDINGS, INC. (ZEROS
USA, INC. UTAH) OWNED.
THE NUMBER OF GUNNER HOLDING SHAREHOLDERS WAS 163. THEY WERE OBTAINED
FROM THE STOCK TRANSFER AGENT'S CERTIFIED LIST OF GUNNER ENERGY CORPORATION
SHAREHOLDERS.
The shareholders ratified a share structure of the merged companies of
20,000,000 share of common and 10,000,000 shares of preferred. A distribution
of shares was made as follows:
Steve Clark 9,000,000
Capital American 1,000,000
Star Trust 400,000
Agri Capital Trust 400,000
Gunner Trust 690,000
THE BUSINESS NATURE OF AGRI CAPITAL TRUST, STAR TRUST AND GUNNER TRUST
IS BELIEVED TO BE BUSINESS INVESTMENT TRUSTS ESTABLISHED SEVERAL YEARS BEFORE
THE FORMATION OF GUNNER HOLDING, INC., AND ZEROS USA, INC., TO INVEST, MANAGE
ASSETS AND PROVIDE FINANCIAL SERVICE ON BEHALF OF THEIR BENEFICIARIES.
THE AGRI CAPITAL TRUST, STAR TRUST AND GUNNER TRUST HAVE NO AFFILIATION
TO THE OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS. THE AGRI CAPITAL TRUST,
STAR TRUST AND GUNNER TRUST ARE SHAREHOLDERS OF ZEROS USA, INC.
Steve Clark formed M, Ltd., in 1993 primarily to manage revenues derived
from international projects using his patents, technologies and systems and to
own, develop and market his various inventions to be used in the oil and gas
industry. Mr. Clark initially developed the predecessor to the ZEROS System
based on mature technologies. This technology has evolved from operational
facilities since 1983 performing environmental restoration for oil industry
clients. Mr. Clark conveyed all rights to the predecessor to the ZEROS System to
M, Ltd., in 1993. M., Ltd., continued further development of the technology
into the ZEROS System. UCBM Management, a Bahamian company ("UCBM"), provides
the officers and directors. Mr. Clark is neither an officer nor a director of
M. Ltd. Mr. Clark has no ownership interest in UCBM, nor any rights to
management of UCBM.
In November 1996, M, Ltd., entered into the Master License Agreement with
the Company, providing the Company with the exclusive right and license to sell
operating licenses, to sell or lease through related parties ZEROS System
equipment to customers and to use M, Ltd.'s proprietary marks, indicia and
information regarding patents in connection therewith. The license covers an
unlimited geographical area and includes any and all territories, foreign and
domestic. The Company agreed to pay M, Ltd., a master license fee in the
aggregate amount of $16,000,000, due and payable on or before eight years from
the date of the agreement. The master license fee consists of a $4.0 million fee
for the right and license granted pursuant to the Master Transaction Agreement,
and a $12,000,000 royalty payment. Such royalty payment is to be paid at the
rate of $3,000,000 per system for each of the first four systems sold by the
Company to other licensees. In addition, M, Ltd., shall receive a five percent
commission on the Company's collections arising in connection with the sale of
licenses and equipment, five percent of the waste disposal fees ("tipping fees")
and five percent of the value of all by-products produced from the operation of
each ZEROS System.
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During 1997, the Company entered into five non-exclusive territorial
license agreements providing for license fees of $13.5 million in the aggregate,
including installments of $4.5 million to be paid to the Company in 1998
beginning one year from the effective date of the license agreement. The
effective dates of such license agreements are as follows:
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LICENSEE EFFECTIVE DATE
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ZEROS Piney Creek Corporation February 27, 1997
ZEROS California Corporation March 31, 1997
Lawson ZEROS Corporation May 31, 1997
ZHM, Inc. October 29, 1997
ZEROS Western Corporation November 2, 1997
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The license agreements with ZEROS Piney Creek Corporation, ZEROS
California Corporation and ZEROS Lawson Corporation were restructured to provide
for a conforming fee of license purchase price to reflect the purchase price
offered to subsequent license purchasers and to provide a new payment schedule
upon the payment of $100,000.00 towards the purchase price of a plant to pay for
engineering costs.
ZEROS Piney Creek Corporation, ZEROS California Corporation, and Lawson
ZEROS Corporation were actually physically issued their share certificates on
September 30, 1997. Even so the effective dates are as stated in the original
license agreements.
Construction financing for ZEROS Piney Creek has been committed by source
in New York through international bankers. Each of the other current licensees
have entered into an agreement with Capital to arrange construction and
permanent financing in order to build a ZEROS Systems facility, but currently no
licensee other than ZEROS Piney Creek has obtained financing or a commitment for
financing from any lender. In addition, there is no assurance that each of the
licensees will be able to obtain financing sufficient to build and equip a ZEROS
Systems. Please note further that the license agreement does not mandate that a
licensee build a primary plant, but may construct a plant for a third party.
BUSINESS OF THE ISSUER
The Company sells non-exclusive territorial licenses to operate the ZEROS
System and the right to sell additional operating licenses for the use of the
ZEROS System. In addition, the Company sells and leases through related parties,
and arranges for the manufacture and installation of, the equipment required to
operate the ZEROS System. Under terms of its license agreements with customers,
the Company collects royalties on the waste by-products generated as a result of
the operation of a ZEROS System facility by its licensees, as well as royalties
on the tipping fees collected by its licensees. In addition, the Company intends
to provide additional ongoing services to the users to permit the equipment to
operate more efficiently.
The Company is in the business of licensing and selling technology and
equipment to customers that recycle energy from a variety of fuels, including
hazardous and non-hazardous, toxic and non-toxic wastes. The Company sells or
leases through related parties the necessary equipment for the operation of the
ZEROS System, which equipment is manufactured by another entity to the
specifications of the Company and its customers. The Company itself does not
recycle waste, energy or operate any equipment.
The standard license agreement entered into by and between the Company
and its licensees permits the licensee to either purchase and operate the ZEROS
System for its own use or act as an authorized representative of the Company in
the sale or lease of the ZEROS System technology and equipment to third parties.
The license covers a limited geographical area specified in each license
agreement. Although the license is non-exclusive, the license agreement provides
that the licensee shall have the right to be paid a commission by the Company
for any other operating license sold after the date of such agreement to another
entity within such licensee's service area.
Pursuant to the terms of the Company's typical license agreement, the
licensee agrees to pay the Company a license fee in the amount of $2.7 million,
payable in three annual installments of $900,000 each, beginning one year from
the date of the agreement, and subject to such further terms and conditions
agreed to by the Company and licensee. In addition, the Company will receive
fifteen percent of the gross income generated by the use of the ZEROS System by
the licensee. For purposes of the Company's license agreements, "gross income"
is defined as all of the income of the licensee, before deducting operating
expenses and taxes, that is generated from tipping fees and from the sale of all
products produced by each ZEROS System facility operated by licensee.
The Company may revoke its standard license agreement in the event the
Company has given written notice to the licensee of a breach of such license
agreement, and such breach is not cured by the licensee within thirty days of
receipt of such notice. In addition, the license agreement terminates
immediately upon the occurrence of any of the following events: (i) the
termination of the licensee's rights to possession of its current offices,
unless such termination is without fault or affirmative action on the part of
the licensee, (ii) the bankruptcy of the licensee, (iii) the making of a general
assignment by the licensee for the benefit of creditors, and (iv) the
appointment of a receiver or similar officer to take charge of the licensee's
business, or any attachment, execution, levy, seizure, or appropriation of the
licensee's interest in the license agreement.
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In the event the licensee proposes to sell the business operated pursuant
to the license agreement to any party other than a controlled corporation, the
licensee must first notify the Company of such proposed sale. The Company shall
have the right to purchase the business on the same terms as stated in such
proposed sale. If the Company does not notify the licensee of its election to
exercise such right within fourteen days, the licensee may sell the business to
the third party, but only upon the same terms and conditions and only upon the
consent of the Company.
ZERO-EMISSION ENERGY RECYCLING OXIDATION SYSTEM
The ZEROS System is a closed, energy recycling process, operating as a
thermal oxidation process. Unlike incineration, the process does not consume
ambient air and it has no smokestack or other vent to discharge emissions. The
Company believes that the ZEROS System would be classified as "Air Quality
Exempt" by state environmental agencies, acting in accordance with the
Environmental Protection Agency ("EPA") regulations, because the system has no
smoke stack and has demonstrated a 100% mass balance, thus proving to be
emission free. On April 29, 1997 the Company received a letter from the Texas
Natural Resource Conservation Commission stating that the Commission has
determined that the construction and testing of the ZEROS System will not create
a new source of air contaminants or increased emissions of air contaminants from
existing sources and that, on this basis, no permit will be required from the
Office of Air Quality. Principal components of the ZEROS System are represented
in the diagram below.
[Inserted below contains a diagram of the Zero-emission Energy Recycling
Oxidation System, showing the primary combustion chamber, secondary combustion
chamber, baghouse, combustion gas manifold, ozone oxidation chamber,
electrostatic precipitator and catalytic reactor, acid scrubber, filtration
system, distillation brine concentration, indirect heat exchanger, refrigerated
heat exchanger and carbon dioxide recovery system.]
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The ZEROS System employs a rotary kiln primary combustion chamber
followed by a cyclone separator where entrained particulate matter is removed
from combustion gasses exiting the rotary kiln before their entry into the
secondary combustion chamber. Combustion gasses are exposed to a high
temperature, high turbulence, oxidative environment for at least two seconds in
the secondary combustion chamber resulting in extremely high process oxidation
efficiency. Both the primary and secondary combustion chambers are oxygen fired
from an oxidizer source, not with ambient air, eliminating nitrogen (which
comprises approximately 78% of ambient air) and nitrous oxide, a principal
smokestack contaminant, from the system.
Hot combustion gasses from the secondary combustion chamber
(approximately 2400 degrees Fahrenheit) are circulated through an energy
recovery boiler and a baghouse filter to remove entrained fly ash. A portion of
the cleaned and cooled combustion gas is returned from the outlet of the
baghouse fabric filter and re-introduced to the primary and the secondary
combustion chambers at a temperature of up to 1200 degrees Fahrenheit together
with the pure oxygen providing for thermal oxidation of fuel and waste.
The use of recycled combustion gasses and pure oxygen provides a number
of advantages over ambient air as the oxidizer source. The absence of nitrogen
and other gasses which together comprise approximately 79% of ordinary air
greatly diminish the mass of exhaust gasses which exit the combustion chamber.
The recycled combustion gasses reenter the combustion chambers approximately
1000 degrees Fahrenheit above the ambient temperature, allowing high temperature
operation that promotes complete combustion without the energy cost that would
otherwise be incurred in continuously heating ambient air. Recycled combustion
gasses have a higher heat transfer capability than air at elevated temperatures
such as those in the operating combustion chambers and in the energy recovery
boiler. Additionally, at elevated temperatures the recycled combustion gasses
have the benefit of being reactive with carbon and some hydrocarbons to form a
synthetic fuel gas that is reinjected into the combustion chamber.
Both combustion chambers are operated at pressures below standard
atmospheric pressure during normal operations. Special seals are installed on
the rotary kiln to prevent air infiltration. These same seals additionally
prevent the expulsion of combustion gasses should the rotary kiln primary
combustion chamber become slightly pressurized due to inadvertent over feeding
or the introduction of highly volatile waste stock. As a backup for fail safe
operation a vacuum tank is provided to automatically scavenge excessive
combustion gas during an inadvertent kiln pressurization.
Upon exiting the secondary combustion chamber the combustion gasses are
routed into a heat recovery boiler. The boiler is operated at 250 pounds per
square inch of steam pressure and the combustion gasses exit the boiler at
approximately 450 degrees Fahrenheit. From the boiler, the combustion gasses are
routed to a baghouse filter where entrained particles are removed.
Steam produced by the heat recovery boiler has many uses on site. It can
be used as pure steam energy to drive wood dryers or to generate electricity by
driving a turbine generator. The Company believes that the electrical power
generated can be used as a portion of the electrical power required to operate
the facility, drive water purification equipment and sold commercially, thus
defraying a considerable portion of the operating expense of the facility.
Upon exiting the baghouse fabric filter the cleaned combustion gasses
enter the induced draft fan which provides the motive force keeping the gasses
moving through the process. At the exit of the induced draft fan the gasses
split into two streams of flow. A portion of the cleaned and cooled combustion
gas is returned to both combustion chambers where it mixes with the products of
combustion there and is re-heated. The cooler, recycled combustion gas moderates
the temperatures in the combustion chambers. Conventional combustion processes
introduce a constant four parts nitrogen with each one part oxygen delivered for
combustion. To increase temperature these conventional combustion processes
increase fuel and firing rate which results in increasing production of nitrous
oxides. In the ZEROS System, the operator can simply reduce the amount of
re-circulated combustion gas to increase combustion chamber temperature without
increasing fuel consumption and firing rate. Temperature and oxidation rate can
be readily controlled in the combustion chambers by regulating the flow of
oxygen (increasing oxygen to increase temperature and oxidation rate) and the
cooler recycled combustion gasses (which moderate temperature and oxidation
rate). This factor provides an extra measure of control to enhance the safety
and quality of operation of the ZEROS System facility.
Cleaned and cooled combustion gasses which is not returned to the
combustion chambers are routed into the wet scrubbing system to remove acidic
constituents such as Sulphur Dioxide ("SO(2)") and Hydrochloric acid ("HCl")
before the
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gas enters the Carbon Dioxide ("CO(2)") recovery plant. The first component of
the wet scrubbing system is an adiabatic quench and low pressure drop Venturi.
Combustion gas temperature is dropped from approximately 400 degrees Fahrenheit
to roughly 175 to 180 degrees Fahrenheit in the Venturi quench by direct contact
with and evaporation of water. This direct contact with water spray also
provides for absorption of HCl from the gas into the water. Approximately 90
percent of the HCl in the combustion gas will be removed by this first mechanism
in the wet scrubbing process. SO(2) and additional HCl are removed from the
combustion gas by contact with reagents in the packed bed scrubber and in
additional scrubbing columns added to insure optimum scrubbing efficiency before
the gas enters the CO(2) recovery system. There is also an activated carbon
packed bed absorber immediately before the inlet of the CO(2) recovery system to
remove trace levels of residual organic compounds and metal fume such as mercury
which might find its way into the process with certain waste streams.
The wet scrubbing process requires that a liquid brine be produced and
discharged from the scrubber. The amount of brine discharge depends on the level
of chlorine and sulfur present in the waste being processed. This brine is mixed
with the ash product and cement described below to form cinder blocks. In the
event that waste with very high chlorine and/or sulfur content is processed and
more liquid brine discharge is produced than can be mixed with ash and cement,
the excess will be filtered and steam from the boiler will be utilized to
evaporate water from this filtered brine to produce a marketable fracturing
agent (frac) for the oil industry. If required a solid salt cake can be produced
from this brine.
After treatment in the wet scrubbing system, the remaining combustion
gas, a mixture of water vapor, CO(2), excess oxygen and nitrogen (from the
combustion of natural gas, fuel oil, and certain waste streams), enters the
CO(2) recovery unit. The CO(2) recovery unit condenses and discharges the
moisture as a liquid. This water is then used as make-up to the wet scrubber
system to replace the water that is discharged there as a brine. The amount of
water recovered from the combustion gas will vary, but the Company anticipates a
typical collection rate of 10 gallons per minute. In the event that the scrubber
does not require this amount of water due to a very low chlorine and sulfur
content in the waste, the excess water will be contained, filtered, treated,
sampled and analyzed as required to allow for its discharge into the waste heat
boiler.
The gaseous combination of roughly four parts oxygen and one part
nitrogen that is discharged from the CO(2) recovery unit cannot be reintroduced
into the ZEROS System process because the nitrogen would accumulate and grow in
proportion to the other gasses until the process was overwhelmed. The gaseous
mixture is recovered as a separate product from the CO(2) and sold for oxygen
enrichment to metal smelters or used on site to fire a small clean fuel burner
for a recycling process for scrap metal or glass, or the mixture can be
processed further to yield pure oxygen.
Upon exiting the boiler the combustion gasses are routed into the
baghouse fabric filter where particulate matter entrained in the gas flow is
removed. This particulate matter is commonly referred to as fly ash because it
so readily takes flight with a moving gas. Fly ash is readily ingested by
breathing and typically contains trace levels of metals which are harmful to
human health and the environment. To prevent accidental discharge and the
consequential dispersion of fly ash into the air the system is operated below
atmospheric pressure and a wetting process is used to convert the fine dry
powder into a paste.
Ash is also discharged from the exit of the rotary kiln primary chamber,
the cyclone separator, and from the bottom of the secondary combustion chamber.
Air seals are provided at each of these discharge points to prevent air
infiltration, including rotary seals submerged in water for cooling, dust
suppression, and additional blockage of air. Ash discharged from this process is
hot (212 degrees Fahrenheit) and requires cautious handling. Cement can be added
during this period if required as a measure to bind leachable metals or other
hazardous inorganic or residual trace organic constituents.
Cement is mixed with the paste formed by mixing water with the baghouse
fly ash. The cement and fly ash is then mixed with the bottom ash from the kiln
and cyclone separator. This mixture is formed into cinder blocks for storage on
site. Walkways, barricades, fences, small storage buildings, and fire walls
separating waste storage areas can all be constructed from the cinder blocks
produced over time from the ash discharged from the facility.
The Company believes that some of the advantages of the ZEROS System over
conventional destructive waste disposal systems include:
(i) The ZEROS System produces no "emissions" (as defined by
the EPA)
(ii) No "Emergency Stack Opening" is required
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(iii) Gas velocities are not a factor in operation of the ZEROS
System
(iv) The ZEROS System provides increased system control
(v) Co-generation of electrical energy for sale and for water
purification
(vi) Production of marketable products, including dry ice,
liquid carbonics, carbon dioxide gas and brine.
The ZEROS System equipment can be manufactured in the following general
formats:
Industrial Units which are generally installed on fixed industrial
sites. These units range in the 100 to 200 ton per day processing
capacity and will handle integrated waste streams.
Mobile Processing Units are mounted on tractor trailers with
wheels and designed according to the licensee's project and required
capacity. These units will generally handle between 50 and 75 tons per
day and will be moved from site to site.
Biomedical Facilities are smaller units designed for installation
in an enclosed structure which can be placed on a hospital's premises.
The Company estimates that the processing capacity for such unit will be
between 25 to 50 tons per day. The EPA has mandated that hospitals with
in-house waste incinerators shut down their incinerators by the year
2000. The biomedical units provide hospitals an alternative waste
disposal process without emissions.
The ZEROS System technology can also be manufactured as a Special Use
System which can process waste streams which are radioactive and contaminated
with low level nuclear material. Since no systems of this type have been
proposed, the design and engineering of such unit has not progressed to a
presentation stage.
MANUFACTURE OF THE ZEROS SYSTEM EQUIPMENT
The Company has entered into an agreement with OCS, Inc., a Texas
corporation ("OCS"), to authorize OCS to manufacture the ZEROS System equipment.
Pursuant to such agreement, OCS would manufacture, install, test, and maintain
the ZEROS System equipment as well as provide each licensee with a product
warranty, training, inspections, and technical support. The Company will receive
a 10% interest in the revenues resulting from the design, manufacture, assembly
and installation of equipment in connection with the ZEROS System equipment
manufactured by OCS.
In order to manufacture the ZEROS System equipment, OCS will use its
100,000 square foot facility with storage, welding and machine works equipment
as well as an industrial laboratory for testing, inspecting and qualifying the
ZEROS System equipment. The Company believes that this facility is capable of
producing equipment for four ZEROS System facilities simultaneously during a 150
day period and a total of eight facilities per year.
The construction of the ZEROS System equipment involves conventional
petroleum refinery equipment and conventional construction techniques. The
components for the ZEROS System will be constructed and tested at the OCS
facility and transported to the site determined by the licensee for
installation.
OCS is an oilwell control services company, engaged in oilwell blowout,
fire, failure and quality assurance management services and construction and has
been in business for more than 23 years. It has serviced more than 2,000 oilwell
blowouts, failures and fires during the time it has been in business. The
Company believes that OCS has the requisite expertise to manufacture the ZEROS
System equipment. OCS was organized by Mr. Clark in January, 1975, in order to
manage his business activities in oil well blowout and failure analysis and
control. Mr. Clark is the sole shareholder of OCS.
DEPENDENCE ON CERTAIN MAJOR CUSTOMERS
Currently, the Company has five licensees. Since a significant portion
of the Company's revenues will be derived from the royalty payments to be paid
by each licensee pursuant to the license agreement, the failure of any licensee
to pay its deferred license fees or to succeed in the construction and operation
of its ZEROS System will have a substantial impact on the revenues of the
Company. However, the Company is vigorously marketing the ZEROS System to
prospective licensees. As the number of licensees grows, the effect on the
Company of the failure of a licensee will not be as significant.
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COMPETITION
Although the Company does not process waste, it sells ZEROS System
operating licenses and equipment to licensees that have a need to process waste.
Consequently, the Company competes with both national and local waste management
businesses that provide alternative waste disposal options to prospective
licensees. These businesses primarily store or bury waste in landfills,
incinerate it, or treat the waste with chemicals. The Company believes that the
ZEROS System will be able to compete effectively because of its ability to (i)
process waste with 100% mass balance zero emissions and (ii) convert the waste
into marketable energy, and (iii) produce carbon dioxide, brine and certain
other products. Some of the Company's competitors, however, are larger and have
greater financial and other resources than the Company.
MARKETING AND NEW BUSINESS DEVELOPMENT
The Company plans to establish marketing and business development offices
in key areas of the United States and in certain international locations. The
Company anticipates that the average annual cost of its business centers will be
$100,000 which will include payment of basic overhead expenses with base
salaries for an average of two commissioned marketing representatives per
office. Other forms of compensation are performance-based commissions for the
sale of licenses and equipment to the licensee. The Company's business
development offices presently in organization include the following:
1. Houston ZEROS Business Center (Houston, Texas)
2. Oakland-Alameda ZEROS Business Center (Bay Area, California)
3. Banning ZEROS Business Center (Palm Springs, California Area)
4. Syracuse ZEROS Business Center (Syracuse, New York)
5. Seattle ZEROS Business Center (Seattle, Washington)
6. BAF de Mexico ZEROS International Center (Mexico D.F., Mexico)
It is the Company's goal for each of the ZEROS business development offices to
originate and place two new licenses per year for which the Company will pay a
commission. The Company intends to market aggressively the ZEROS System
technology and equipment, utilizing its business relationship with Capital to
assist the prospective licensees and buyers in arranging financing for the
purchase of ZEROS System equipment. The Company will pursue leads from users,
staff personnel, trade shows and conferences as well as hire a professional
marketing staff. The Company has developed and currently has a "web site" on the
internet, located at www.zerosusa.com and has participated in trade shows. The
Company also distributes pamphlets, brochures and promotional packets to
prospective investors, licensees and end-users. Other new business sources
include business referrals, announcements of contractors, advertisement for bids
and requests for proposals which the licensees originate for the development of
sales opportunities. The Company will coordinate and assist the ZEROS System
licensees with plans and programs to respond to various commercial and
governmental requests for bid proposals as well as respond to advertisements
made by prospective customers in situations where the ZEROS System process is
suitable.
INTELLECTUAL PROPERTY
The Company's business depends on the continuation of the Master License
Agreement with M, Ltd., through which the Company obtains all rights to the
technology that it markets and licenses. The Master License Agreement provides
the Company with the exclusive right to develop business opportunities related
to the ZEROS System technology, and to sell, lease, license, market and use,
under terms and conditions approved by M, Ltd., the ZEROS System technology and
all improvements thereof. The rights granted under the Master License Agreement
cover an unlimited geographical area and continue perpetually unless terminated
as a result of (i) the termination of the Company's rights to possession of its
current offices, unless such termination is without fault or affirmative action
on the part of the Company, (ii) the bankruptcy of the Company, (iii) the making
of a general assignment by the Company for the benefit of creditors, and (iv)
the appointment of a receiver or similar officer to take charge of the Company's
business, or any attachment, execution, levy, seizure, or appropriation of the
Company's interest in the Master License Agreement.
The technology comprising the ZEROS System is protected by one United
States patent and three United States patent applications pending which
primarily relate to reduced emission combustion process with resource
conservation and recovery options, and non-thermal process for cleaning
hydrocarbon from soils. The patents grant M, Ltd., the right to exclude others
from making, using, offering for sale and selling the inventions in the United
States. The process of seeking patent protection can be long and expensive, and
no assurance can be given that a patent will issue from the currently
8
<PAGE> 9
pending applications of M, Ltd., or its future applications or that, if patents
are issued, that they will be of sufficient scope or strength to provide a
meaningful protection or any commercial advantage to M, Ltd., or the Company.
Litigation, which could demand significant financial and management resources,
may be necessary to enforce patents or other intellectual property rights of M,
Ltd., and the Company.
A significant portion of the ZEROS System comprises innovations based on
mature technology and is protected by M, Ltd., and the Company as confidential
proprietary information or trade secrets. Although the Company and M, Ltd., have
taken steps to maintain the confidentiality of such information, there can be no
assurance that such confidentiality can be maintained or that competitors cannot
reverse engineer key elements of the ZEROS System without access to confidential
information. Although such patents and proprietary information are material to
the operations of the Company, the Company believes that its future success will
depend more on its technological, marketing and general business skills than on
exclusive rights to its proprietary technology.
Mr. Clark initially filed a patent application for the ZEROS System. He
then transferred the rights to M, Ltd., in 1993. On November 15, 1996, pursuant
to a Master License Agreement, M, Ltd., granted the Company an exclusive license
to sell licenses and equipment in connection with the ZEROS System. In
accordance with the Master License Agreement, M, Ltd., retained all rights to
any improvements and related technologies, whether patented or not, discovered
or invented by the Company. The agreement further provides that all costs
incurred in the development and filing of the patent applications are to be paid
by the Company.
RESEARCH AND DEVELOPMENT
The Company conducts research and development to improve the quality and
efficiency of the ZEROS System and to develop specific applications of the
system according to the needs of its customers. Research and development
activities include in-house development, extensive field testing, and
development with its affiliates, OCS and M, Ltd.
Through its research and development efforts, the Company has developed
additional technologies for soil and water remediation which the Company calls
ZEROS BioDynamics and ZEROS AquaDynamics, respectively.
Pursuant to the Master License Agreement, M, Ltd., is entitled to
royalties on advances and innovations developed by the Company arising out of
the technology comprising the ZEROS System.
GOVERNMENTAL APPROVALS AND POTENTIAL FUTURE REGULATIONS
The waste management industry is a highly regulated industry by both
federal and state law. Since the Company does not operate a ZEROS System,
however, but instead sells rights to technology to its licensees who in turn
operate the systems, the Company believes there are no environmental laws that
are applicable to the Company. In addition, the Company does not intend to
manufacture the ZEROS Systems. Rather, the Company will contract with OCS and
other qualified contractors to manufacture the ZEROS System equipment for sale
to its licensees. Consequently, the Company believes there are no regulations of
a manufacturing or operational nature that are applicable to the Company.
The Company believes that the ZEROS process is currently exempt from EPA
and the Department of Environmental Quality regulation because there is no
smokestack or emissions to regulate or measure as described by Title 40 and the
Environmental Impact Statements required. The Company received a letter from the
Texas Natural Resource Conservation Commission dated April 29, 1997 stating that
the Commission has determined that the construction and testing of the ZEROS
System will not create a new source of air contaminants or increased emissions
of air contaminants from existing sources and that, on this basis, no permit
will be required from the Commission's Office of Air Quality.
Resource Conservation and Recovery Act of 1976. In 1976, Congress passed
the Resource Conservation and Recovery Act of 1976 ("RCRA") as a response to
growing public concern about problems associated with the handling and disposal
of solid and hazardous waste. RCRA required the EPA to promulgate regulations
identifying hazardous wastes. RCRA also created standards for the generation,
transportation, treatment, storage and disposal of solid and hazardous wastes,
including a manifest program for the transportation of hazardous wastes and a
permit system for solid and hazardous waste disposal facilities. The Company
believes that its existing licensees will not be subject to RCRA because the
9
<PAGE> 10
hazardous waste to be treated originated on the site where the ZEROS System is
to be located and such licensees currently have no plans to transport, transfer
or receive hazardous materials.
Comprehensive Environmental Response, Compensation and Liability Act of
1980. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), established a regulatory and remedial program to
provide for the investigation and clean-up facilities from which there has been
an actual or threatened release of hazardous substances into the environment,
including the designation of "Superfund" sites. CERCLA and similar state laws
impose strict joint and several liability on the current and former owners and
operators of facilities from which releases of hazardous substances have
occurred and on the generators and transporters of the hazardous substances that
come to be located at such facilities. Responsible parties may be liable for
substantial waste site investigation and clean-up costs and natural resource
damages, regardless of whether they exercised due care and complied with
applicable laws and regulations. If a ZEROS System licensee were found to be a
responsible party for a particular site, it could be required to pay the entire
cost of waste site investigation and clean-up, even though other parties may
also be liable. The Company believes that its existing licensees will not be
subject to CERCLA as a result of their use of the ZEROS System, however, because
the ZEROS System will be used to treat waste generated at the site and, as such,
the ZEROS System will not be the cause or a contributor to the release of
hazardous waste under CERCLA.
State and Local Regulation. The Company has licensed ZEROS Systems in
four states and is marketing throughout the United States. Each state has its
own regulations related to the handling, treatment, processing, transferring,
recycling and storage of hazardous waste subject to the priority of federal laws
and regulations. In each of the states where a licensee of the Company currently
intends to operate a ZEROS System, the licensee is required to comply with
numerous state and local laws and regulations as well as its site-specific
operating plan. Agencies writing regulations at the state level typically
include departments of health and state environmental protection agencies. In
addition, many municipalities have ordinances, local laws and regulations affect
the operations of the Company's licensee, including but not limited to zoning
and health measures.
The Company believes increased government regulation regarding landfills,
incinerators and other waste processing systems could substantially benefit the
Company. However, the demand for the ZEROS System may be adversely affected by
the amendment or repeal, or reduction in enforcement of federal, state and local
laws and regulations. The Company cannot predict the extent to which any
legislation or regulation that may be enacted, amended, repealed or enforced, or
any failure or delay in enactment of legislation or regulations in the future
may affect the Company's operations.
EMPLOYEES
As of October 1, 1997, the Company had approximately nine full-time
employees. The Company's employees are not subject to any collective bargaining
agreements and management regards its relations with employees to be good.
LOCATION
The Company maintains offices at 507 North Belt East, Suites 155 and
550, Houston, Texas 77060, (281) 448-6070. This space is leased from Capital
American Associates, Inc. ("Capital").
THE COMPANY CURRENTLY SUBLEASES ITS ADMINISTRATIVE OFFICES ADEQUATELY
FURNISHED WITH FURNITURE, COMPUTERS, TELEPHONES AND FACSIMILE EQUIPMENT WITH
APPROXIMATELY 4,500 SQUARE FEET. IT LEASES FURNISHED SPACE INCLUDING OFFICE
EQUIPMENT PLUS REIMBURSES DIRECT OUT-OF-POCKET EXPENSES FOR SUCH ITEMS AS
POSTAGE AND OFFICE SUPPLIES. THE MONTHLY RATE IS $.54/SQ. FT.
THE COMPANY LEASES THE ENTIRE FIRST FLOOR OF AN OFFICE BUILDING LOCATED
ON 504 OLD LIVERPOOL ROAD, LIVERPOOL, NEW YORK. THE LEASE TERM IS THREE YEARS,
COMMENCING ON OCTOBER 14, 1997 AND EXPIRING ON OCTOBER 15, 2002 AT A MONTHLY
RATE OF $1,500.00 PER MONTH.
ON JULY 30, 1997 THE COMPANY FORMED ZBA, A CALIFORNIA PARTNERSHIP WITH
ZEROS CALIFORNIA CORPORATION TO BUY THE PROPERTY LOCATED AT 245 NORTH MURRAY
STREET, BANNING, CALIFORNIA 92220 FOR THE SUM OF $279,000.00. THE MONTHLY
PAYMENTS FOR THAT PROPERTY ARE $4,229.17 PER MONTH. THE OFFICES ARE USED BY THE
COMPANY AND ZEROS CALIFORNIA CORPORATION.
THE COMPANY SUBLEASES 1000 ATLANTIC AVENUE, SUITE 106, ALAMEDA,
CALIFORNIA 94501. THIS SUBLEASE IS A MONTH-TO-MONTH LEASE FROM LEXICAL
TECHNOLOGIES, INC.
RISK FACTORS
In addition to the other information contained herein, the following risk
factors should be considered carefully by any interested party before investing
in the Company.
No Operating History
As an emerging company, the Company has had a limited operating history.
Thus far, the management has devoted significant efforts to raising capital and
identifying appropriate candidates with which to enter into license agreements.
The success of the Company will depend, in part, upon its ability to identify
and close license agreements with qualified licensees who can operate the ZEROS
System successfully and provide an income stream to the Company.
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<PAGE> 11
Liquidity Risk
The Company's revenues are derived from the sale of licenses and
equipment ordinarily upon deferred payment terms. As a result, although the
Company may record substantial revenues, it may not have sufficient cash flows
to finance its current operations. As a result of the Company's financing
activities, it believes that it has sufficient funds to conduct its planned
operations for the subsequent twelve months. Ultimately, the Company is
dependent upon the ability of its licensees to finance deferred licensee fee
payments and the cost of constructing, equipping and operating the ZEROS System.
There can be no assurance that sufficient cash will be available as needed to
fully execute the Company's business plans.
Financing for Licensee
Each of the current licensees have entered into an agreement with Capital
to arrange construction and permanent financing in order to build a ZEROS System
facility. There can be no assurance that each of the licensees will be able to
obtain financing sufficient to build and equip a ZEROS System or to satisfy its
obligations pursuant to the license agreement.
Risk That System Does Not Work
The ZEROS System does not have a history of commercial operation by
licensees. However, a prototype has been built, tested and operated. The ZEROS
System is not based on new technology, but rather is primarily an application of
well-established technology. The ZEROS System relies on a series of devices,
equipment and apparatus substantially all of which must function as designed for
the licensee to conduct commercial operations. Because no assurances can be
given that every piece of equipment will be fully operational at all times,
Investors should be aware that any loss of business to any licensee because of
equipment failure will affect the revenue stream to the Company.
Dependence on Success of Licensee
Although the Company will earn a one time license fee each time it sells
a new license, a significant portion of the Company's revenues will be derived
from the royalty payments to be paid by each licensee pursuant to the license
agreement. Such royalty payment is equal to fifteen percent of the gross income
(defined as income before deducting operating expenses and taxes) generated from
tipping fees and the sale of all products produced by each ZEROS System facility
operated by a licensee. Consequently, the success of the Company, in part, will
depend upon the operations and success of its licensees.
Dependence on Steve Clark
As the designer of the ZEROS System, the success of the Company will
depend on the continuing efforts of Steve Clark and his designees with whom the
Company has entered into a five-year employment agreement.
Dependence on Key Management Personnel
The success of the Company's operations will depend on the continuing
efforts of its executive officers. The business of the Company could be affected
adversely if any of the executive officers does not continue in his or her
management role and the Company is unable to attract and retain a qualified
replacement.
Limited Experience of Management
Other than Steve Clark's previous experience with OCS, none of the
executive officers or directors have had prior experience in the field of
recycling waste. The Company believes, however, that the absence of such
experience will not have a material adverse effect on the Company since the
Company is not in the waste recycling business, but rather sells licenses to the
ZEROS System technology.
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<PAGE> 12
Need for Substantial Additional Capital
As an emerging company and in order to develop its business plan, the
Company will require substantial capital for administration, operations,
marketing, legal and accounting fees and other similar expenses. There can be no
assurance that additional financing will be available on a timely basis, if at
all, or that it will be available on terms acceptable to the Company. In the
event that adequate financing is not available or is not available in the
amounts or on terms acceptable to the Company, the business plan and strategy
could be severely impeded and the Company's ability to react to the demands of
the industry in which it plans to do business could be limited, which could have
a material adverse effect on the Company's business, financial condition and
future prospects.
Environmental Regulation
The waste management industry is a highly regulated industry by both
federal and state law. Because the Company does not own or operate any ZEROS
System, but, rather, sells rights to ZEROS System technology to licensees who
operate the systems, the Company believes there are no environmental laws that
are applicable to the Company. In addition, the Company does not intend to
manufacture the ZEROS Systems. Rather, the Company will contract with OCS, and
other approved contractors to manufacture the ZEROS System equipment for sale to
the Company's licensees. Consequently, the Company believes there are no
regulations of a manufacturing or operational nature that are applicable to the
Company. Notwithstanding the foregoing, the Company has obtained from the Texas
Natural Resource Conservation Commission a letter concluding that since the
equipment as designed produces no emissions and does not contaminate the air, no
permits or exemptions are required for the operation of a ZEROS System.
Reliance on Patents and Proprietary Technologies
The Company's success depends in part on its ability to obtain patents
and other intellectual property rights covering its technology. The Company has
obtained certain patents and intends to continue to seek patents on its
technology. The process of seeking patent protection can be long and expensive,
and there can be no assurance that patents will issue from currently pending or
future applications or that, if patents are issued, they will be of sufficient
scope or strength to provide meaningful protection or any commercial advantage
to the Company. In addition, the laws of certain foreign countries may not
protect the Company's intellectual property rights to the same extent as the
laws of the United States. Litigation, which could demand financial and
management resources, may be necessary to enforce patents or other intellectual
property rights of the Company. In addition, there can be no assurance others
will not independently develop substantially equivalent or better technology
that would be free of the Company's patents and other intellectual property
rights.
Risks of Future Legal Proceedings
The Company is not currently involved in any litigation or legal
proceedings with any person and the Company is not aware of any threatened legal
proceedings or any disputed claims which it believes will lead to any legal
proceedings. The Company anticipates that it may, from time to time, be involved
in legal proceedings in the ordinary course of business. Although no assurance
can be given regarding the outcome of any legal proceeding, the Company believes
that because it does not own, operate or manufacture any equipment comprising
the ZEROS System that the Company expects to successfully defend suits based on
allegations of environmental laws. Nevertheless, the Company promotes and sells
licenses for the ZEROS System and provides custom design services intended to
accommodate the particular needs of such licensees. There can be no assurance
that legal proceedings will not arise as a result of disputes relating to
allegations involving environmental laws.
The Emergence of New Technology
The Company has no control over the emergence of new technology other
that its own. The Company's technology can be surpassed by the introduction of
other technology. The Company continues to improve and enhance its ZEROS System
design, however, so that it can remain state of the art.
Although the Company does not believe that it would suffer a direct loss
from an equipment failure or industrial accident because the Company does not
own, operate or manufacture the ZEROS System, any loss of business to any
licensee because of equipment failure will ultimately affect the revenue stream
to the Company, and if a record of industrial accidents
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<PAGE> 13
were to develop with respect to the ZEROS System, the ensuing damage to the
reputation of the system could have adverse effect on the Company's license
sales and revenue stream.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The Company was organized November 12, 1996 and operates on a fiscal year
ending March 31. The Company's revenues are derived from the sale of licenses
and equipment ordinarily upon deferred payment terms. As a result, although the
Company may record substantial revenues, it may not have sufficient cash flows
to finance its current operations. As a result of its financing activities, the
Company believes that it has sufficient funds to conduct its planned operations
for at least the next twelve months. There can be no assurance, however, that
sufficient cash will be available as needed to fully execute the Company's
business plan.
Although the Company reported revenues of $3,383,845 during its fiscal
year ended March 31, 1997, the only cash generated during the period came from
the private placement of $885,000 debentures. Negotiations are in varying stages
with regard to the sale or lease of ZEROS System equipment to existing
licensees. Although the total estimated cost of these plants has been defined,
the financing necessary to commence construction has not been finalized.
Therefore, until the buyer of the ZEROS System equipment has delivered the
required payment, the Company cannot be assured of the sale of the equipment.
The Company has entered into a Master License Agreement with M, Ltd.,
which requires the payment of $4.0 million no later than eight years after the
effective date of the agreement and an additional $3.0 million to be paid for
each of the first four plants sold by the Company to other Licensees. The
payment of $12.0 million to be made in connection with the first four plants is
not required until the Company has received payments from the licensees.
Each licensee must obtain its own financing to pay its license fees to
ZEROS and to pay a manufacturer to construct and equip its ZEROS System to the
licensee's specifications. Although the Company believes that several of its
licensees have sufficient capital to pay such fees and construction costs
without third party financing, each of the licensees has engaged Capital
American Associates, Inc. ("Capital") to arrange financing for it. The Company
and Capital believe that such financing can be obtained on terms and conditions
adequate to meet the licensees' needs. Of course, there can be no assurance that
such financing can be obtained, or if obtained, that the terms will be favorable
enough to produce a profit for the licensees.
OCS, INC. AS THE AUTHORIZED MANUFACTURER OF THE ZEROS SYSTEMS HAS THE
MANUFACTURING CAPACITIES OF AN ESTIMATED TWENTY UNITS PER YEAR. THE AVERAGE
SALES PRICE PER UNIT ESTIMATED IS $20,000,000.
THE ZEROS LICENSEE IS THE PURCHASER OF THE EQUIPMENT AND THE UNIT IS
PURCHASED WITH THE FOLLOWING PAYMENT PROVISIONS TO OCS:
O MANUFACTURING DEPOSIT FIRST DAY 50%
O FIRST PROGRESS PAYMENT ON 45TH DAY 20%
O SECOND PROGRESS PAYMENT ON 90TH DAY 20%
O DELIVERY AND FINAL INSPECTION DATE 180TH DAY
O FINAL PAYMENT 90TH DAY AFTER FINAL INSPECTION 10%
THE CAPITAL PURCHASES ESTIMATED BY OCS PER UNIT ARE AS FOLLOWS:
<TABLE>
<S> <C>
COMPONENT PARTS, MATERIAL AND SUPPLIES $ 7,500,000
PER UNIT
LABOR AND OVERHEAD COSTS PER UNIT $ 7,500,000
SALES COMMISSIONS $ 2,000,000
------------
TOTAL ESTIMATED PRODUCTION COST $ 17,000,000
GROSS MARGIN $ 3,000,000
FINAL TOTAL $ 20,000,000
</TABLE>
EACH ZEROS LICENSEE IS TO OBTAIN THEIR OWN FUNDING FOR THE PURCHASE OF
THE ZEROS UNIT. OCS HAS ESTABLISHED SUPPLIER ARRANGEMENTS FOR THE COMPONENT
PARTS, MATERIALS AND SUPPLIES REQUIRED FOR THE PRODUCTION OF THE ZEROS UNITS AND
THESE ARE ORDERED WHEN THE ZEROS LICENSEE PROVIDES CONFIRMATION OF FUNCTIONS FOR
THEIR RESPECTIVE PURCHASES AND THE INITIAL DEPOSIT OF FUNDS.
During the first two quarters of the Company's 1998 fiscal year, the
six-month period from September 30, 1997, the Company continued its efforts to
sell non-exclusive territorial licenses for the ZEROS System technology as well
as continuing its improvements of the ZEROS System technology. During the fiscal
year ended March 31, 1997, the Company raised $855,000 by the sale of its One
Year 10% Secured Debentures (the "Debentures"). As of September 30, 1997, the
total debentures sold were $1,928,084 and $135,000 of Series A Five- Year 12%
Percent Convertible Bonds.
The debentures have various maturing dates starting January 1998 with a
monthly total of $200,000 and averaging $227,664 per month in the first quarter
of 1998 and $292,367 per month in the second quarter of 1998. The Company
expects a very strong exchange of the debentures, pursuant to their terms, into
common stock versus monetary redemption at maturity. Over the succeeding twelve
months, maturity on the Company's outstanding indebtedness is $1,928,084 on the
debentures and $415,000 on secured commercial debt (See Footnote 5 to the
Financial Statements for September 30, 1997.)
The Company had an aggregate of $415,000 of commercial bank debt
outstanding as of December 31, 1997 pursuant to a series of one-year term loans
maturing at various dates from March 18, 1998 to August 12, 1998, made by
Citizens Bank & Trust of Baytown, Texas. The loans are for one year on a fully
secured basis, with interest paid quarterly at 7.00-7.35% per annum. The Company
borrowed such funds for working capital and to fund the acquisition of certain
assets from OCS.
The Company is current on all of its bank debt obligations.
CAPITAL EXPENDITURES
In November 1997, the Company entered into an asset sales agreement with
OCS under which the Company acquired certain accounts receivable, certain
contracts and certain equipment, including equipment used for testing ZEROS
Systems, in consideration of $100,000 in cash and 3,000,000 million shares of
Series C Convertible Preferred Stock. Other than such equipment, the Company
does not anticipate the need for significant fixed assets. The Company's capital
expenditures during fiscal 1997 were $16,292, not including obligations under
the Master License Agreement, and $19,644 for the six month period ended June
30, 1997 (excluding the equipment acquired from OCS), primarily for furniture,
fixtures and equipment, including computers, used by the Company's professionals
and staff. The Company currently has no plans for
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<PAGE> 14
capital expenditures except for additional expenditures for furniture, fixtures
and equipment at levels comparable to prior periods.
REVENUE SOURCES.
The Company anticipates that it will continue to obtain revenues from the
sale of licenses to independent third parties to use the ZEROS System
technology. These licenses are currently priced at $2,700,000 million per
license payable in annual installments of $900,000 each over a three year period
beginning one year from the effective date. The agreements with the Licensees
provide that they pay a 15% royalty on the tipping fees and on the sale of
by-products from operation of the ZEROS System equipment of which 5%, or one
third, is remitted to M.,Ltd., within thirty days of receipt. Under terms of
ZEROS' agreement with OCS authorizing OCS to manufacture ZEROS System equipment,
the Company anticipates that it will earn 10% of the sales price of ZEROS System
equipment manufactured by OCS. In consideration for certain covenants
restricting Mr. Clark from certain hazardous business activities, the Company
has issued 1,000,000 million shares of common stock to OCS.
RESEARCH AND DEVELOPMENT
During the company's fiscal year ended March 31, 1997, the Company had no
material research and development expenditures.
ITEM 3. DESCRIPTION OF PROPERTY
The Company currently subleases 4,112 square feet of administrative
offices adequately furnished with furniture, computers, telephones and facsimile
equipment at 507 North Belt East, Suites 155 and 550, Houston, Texas 77060.
These offices serve as both the Company's headquarters and as one of its
regional business development offices. The lease term is two years and expires
on December 31, 1998. The Company believes that the current facilities are
adequate but that it will require additional space in January 1999 to
accommodate planned growth. The Company anticipates that additional space will
be available on reasonable terms if needed.
The Company leases the entire first floor of an office building located
on 504 Old Liverpool Road, Liverpool, New York 13088. The lease term is three
years, commencing on October 15, 1997 and expiring on October 15, 2000.
THE MONTHLY RATE IS $1,500.00 PER MONTH. THE LESSOR IS NOT AFFILIATED
WITH THE COMPANY, ANY OF ITS OFFICERS, DIRECTORS OR PRINCIPAL SHAREHOLDERS.
ON JULY 30, 1997 THE COMPANY FORMED ZBA, A CALIFORNIA PARTNERSHIP WITH
ZEROS CALIFORNIA CORPORATION TO BUY THE PROPERTY LOCATED AT 245 NORTH MURRAY
STREET, BANNING, CALIFORNIA 92220 FOR THE SUM OF $279,000.00. THE MONTHLY
PAYMENTS FOR THAT PROPERTY ARE $4,229.17 PER MONTH. THE OFFICES ARE USED BY THE
COMPANY AND ZEROS CALIFORNIA CORPORATION.
The Company leases regional offices at 1000 Atlantic Avenue, Suite 106,
Alameda, CA 94501.
THE MONTHLY RATE FOR THOSE OFFICES IS $4,604.00. THE LESSOR IS NOT
AFFILIATED WITH THE COMPANY, ANY OF ITS OFFICERS, DIRECTORS OR PRINCIPAL
SHAREHOLDERS.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP SUMMARY
The following table sets forth, as of January 20, 1998, the number of
shares of each class of equity securities of the Company beneficially owned by
(i) each person known by the Company (based on filings under Section 13(d) or
13(g) of the Exchange Act) to be the holder of more than five percent of the
Company's outstanding common stock, (ii) each of the Company's directors, (iii)
the named executive officers of the Company, and (iv) all of the Company's
directors and officers as a group. Except as otherwise stated below, each person
named below has sole investment power and sole voting power with respect to all
shares attributed to such person.
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Steve Clark Common 12,407,000(2) 47.0%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 8,500,000 73.4%
Series D Convertible Preferred 7,000 .4%
- ---------------------------------------------------------------------------------------------------- ---------
Jesse Blanco Common 1,134,496(3) 4.3%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%
Series D Convertible Preferred 117,830 6.0%
- -------------------------------------------------------------------------------------------------------------
Chet Gutowsky Common 722,666(4) 2.8%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%
Series D Convertible Preferred 6,000 .3%
- -------------------------------------------------------------------------------------------------------------
R. J. Simmons, Jr. Common 820,666(5) 3.1%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%
Series D Convertible Preferred 4,000 .2%
- -------------------------------------------------------------------------------------------------------------
Susan Smith Common 2,886,119(6) 11.0%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%
Series D Convertible Preferred 105,950 5.4%
- -------------------------------------------------------------------------------------------------------------
Celso B. Suarez, Jr. Common 762,666(7) 2.9%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%
Series D Convertible Preferred 6,000 .3%
- -------------------------------------------------------------------------------------------------------------
Harendra (Anu) Mahendra Common 2,300,000(8) 8.8%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 100,000 .8%
Series D Convertible Preferred - -
- -------------------------------------------------------------------------------------------------------------
OCS, Inc. Common 4,000,000(9) 15.2%
6507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 3,000,000 25.9%
Series D Convertible Preferred - -
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 16
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAG Trust Common 1,761,431(10) 6.7%
6507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%
Series D Convertible Preferred 19,000 1.0%
- -------------------------------------------------------------------------------------------------------------
Capital American Associates, Inc. Common 1,761,431(11) 6.7%
6507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%
Series D Convertible Preferred 19,000 1.0%
- -------------------------------------------------------------------------------------------------------------
All Directors and Executive Common 21,033,613(12) 80.0%
Officers as a Group
Series C Convertible Preferred 11,099,996 95.9%
Series D Convertible Preferred 265,780 13.5%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
(1) These percentages are calculated on the basis of 10,690,000
shares of Common Stock, 13,521,796 shares of Company's Series C
Convertible Preferred Stock (convertible into Common Stock at the
rate of one share of common stock for each share of Series C
Convertible Preferred Stock), and 1,971,802 shares of Company's
Series D Convertible Preferred Stock (convertible into Common
Stock at the rate of one share of common stock for each share of
Series D Convertible Preferred Stock), outstanding on January 20,
1998, plus, with respect to each person or entity listed, such
number of shares of Common Stock as such person or entity has the
right to acquire within 60 days pursuant to options, warrants,
conversion privileges or other rights held by such person or
entity.
(2) Includes (i) 2,900,000 shares of Common Stock owned of record by
Steve Clark, (ii) 5,500,000 shares of Common Stock issuable to
Mr. Clark upon conversion of the Series C Convertible Preferred
Stock owned of record by Mr. Clark, (iii) 7,000 shares of Common
Stock issuable to Mr. Clark upon conversion of the Series D
Convertible Preferred Stock owned of record by Mr. Clark, and
(iv) the (A) 1,000,000 shares of Common stock owned of record by
OCS, Inc. and (B) 3,000,000 shares of Common Stock issuable to
OCS, Inc. upon conversion of the Series C Convertible Preferred
Stock owned of record by OCS, Inc.
(3) Includes (i) 600,000 shares of Common Stock owned of record by
Jesse Blanco, (ii) 416,666 shares of Common Stock issuable to Mr.
Blanco upon conversion of the Series C Convertible Preferred Stock
owned of record by Mr. Blanco, and (iii) 117,830 shares of Common
Stock issuable to Mr. Blanco upon conversion of the Series D
Convertible Preferred Stock owned of record by Mr. Blanco.
(4) Includes (i) 300,000 shares of Common Stock owned of record by
Chet Gutowsky, (ii) 416,666 shares of Common Stock issuable to
Mr. Gutowsky upon conversion of the Series C Convertible
Preferred Stock owned of record by Mr. Gutowsky, and (iii) 6,000
shares of Common Stock issuable to Mr. Gutowsky upon conversion
of the Series D Convertible Preferred Stock owned of record by
Mr. Gutowsky.
(5) Includes (i) 320,000 shares of Common Stock owned of record by R.
J. Simmons, Jr., (ii) 416,666 shares of Common Stock issuable to
Mr. Simmons upon conversion of the Series C Convertible Preferred
Stock owned of record by Mr. Simmons, (iii) 4,000 shares of Common
Stock issuable to Mr. Simmons upon conversion of the Series D
Convertible Preferred Stock owned of record by Mr.
Simmons, (iv) 40,000
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<PAGE> 17
shares of Common Stock issuable to Mr. Simmons upon conversion of
the One Year 10% Secured Debentures owned by Mr. Simmons, and (v)
40,000 shares of Common Stock issuable to Mr. Simmons upon
conversion of certain warrants issued by Mr. Clark if acquired
from Mr. Clark and exercised.
(6) Includes (i) 564,022 shares of Common Stock owned of record by
Susan Smith, (ii) 416,666 shares of Common Stock issuable to Ms.
Smith upon conversion of the Series C Convertible Preferred Stock
owned of record by Ms. Smith, (iii) 4,000 shares of Common Stock
issuable to Ms. Smith upon conversion of the Series D Convertible
Preferred Stock owned of record by Ms. Smith, (iv) 70,000 shares
of Common Stock issuable to Ms. Smith upon conversion of the One
Year 10% Secured Debentures owned by Ms. Smith, (v) 70,000 shares
of Common Stock issuable to Ms. Smith upon conversion of certain
warrants issued by Mr. Clark if acquired from Mr. Clark and
exercised, and (vi) beneficial ownership with respect to shares
of Common Stock and securities convertible into Common Stock held
by CAG Trust for which Ms. Smith acts as trustee, including (A)
1,325,765 shares of Common Stock owned of record by CAG Trust,
(B) 416,666 shares of Common Stock issuable to CAG Trust upon
conversion of the Series C Convertible Preferred Stock owned of
record by CAG Trust, and (C) 19,000 shares of Common Stock
issuable to CAG Trust upon conversion of the Series D Convertible
Preferred Stock owned of record by CAG Trust.
(7) Includes (i) 300,000 shares of Common Stock owned of record by
Celso B. Suarez, Jr., (ii) 416,666 shares of Common Stock
issuable to Mr. Suarez upon conversion of the Series C
Convertible Preferred Stock owned of record by Mr. Suarez, (iii)
6,000 shares of Common Stock issuable to Mr. Suarez upon
conversion of the Series D Convertible Preferred Stock owned of
record by Mr. Suarez, (iv) 20,000 shares of Common Stock issuable
to Mr. Suarez upon conversion of the One Year 10% Secured
Debentures owned by Mr. Suarez, and (v) 20,000 shares of Common
Stock issuable to Mr. Suarez upon conversion of certain warrants
issued by Mr. Clark if acquired from Mr. Clark and exercised.
(8) Includes (i) 2,000,000 shares of Common Stock owned of record by
Anu Mahendra, (ii) 100,000 shares of Common Stock issuable to Mr.
Mahendra upon conversion of the Series C Convertible Preferred
Stock owned of record by Mr. Mahendra, and (iii) 100,000 shares
of Common Stock issuable to Mr. Mahendra upon conversion of the
One Year 10% Secured Debentures owned by Mr. Mahendra, and (v)
100,000 shares of Common Stock issuable to Mr. Mahendra upon
conversion of certain warrants issued by Mr. Clark if acquired
from Mr. Clark and exercised.
(9) Includes (i) 1,000,000 shares of Common Stock owned of record by
OCS, Inc., and (ii) 3,000,000 shares of Common Stock issuable to
OCS, Inc. upon conversion of the Series C Convertible Preferred
Stock owned of record by OCS, Inc.
(10) Includes (i) 1,325,765 shares of Common Stock owned of record by
CAG Trust, (ii) 416,666 shares of Common Stock issuable to CAG
Trust upon conversion of the Series C Convertible Preferred Stock
owned of record by CAG Trust, and (iii) 19,000 shares of Common
Stock issuable to CAG Trust upon conversion of the Series D
Convertible Preferred Stock owned of record by CAG Trust.
(11) Includes the following beneficial ownership attributed to Capital
through CAG Trust: (i) 1,325,765 shares of Common Stock owned of
record by CAG Trust, (ii) 416,666 shares of Common Stock issuable
to CAG Trust upon conversion of the Series C Convertible
Preferred Stock owned of record by CAG Trust, and (iii) 19,000
shares of Common Stock issuable to CAG Trust upon conversion of
the Series D Convertible Preferred Stock owned of record by CAG
Trust.
(12) Includes an aggregate of 11,825,776 shares of Common Stock that
such persons have the right to acquire within 60 days pursuant to
warrants, conversion privileges (inclusive of those contained in
the Series C Convertible Preferred Stock, Series D convertible
Preferred Stock and One Year 10% Secured Debentures) or other
rights held by such persons.
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<PAGE> 18
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names, ages and positions of the directors and executive officers of
the Company are as follows:
<TABLE>
<CAPTION>
Year First Became
Name Age Position with the Company a Director
- ------------------------- --- ---------------------------------------- -----------------
<S> <C> <C> <C>
Steve Clark 51 Chief Executive Officer, President and 1996
Director
Jesse Blanco 51 Secretary, General Counsel and Director 1996
Chet Gutowsky 51 Chief Financial Officer and Director 1996
Susan Smith 49 Assistant Secretary and Director 1997
R. J. Simmons, Jr. 74 Director 1996
Celso B. Suarez, Jr. 41 Director 1996
Harendra (Anu) Mahendra 55 Director 1998
</TABLE>
Steve Clark, age 51, is the principal organizer of the Company and has
served as the Company's Chief Executive Officer, President and director since
1996. For more than the past five years, Mr. Clark has served as President of
OCS, Inc. ("OCS") and Blowout and Failure, Inc. ("BAF"), two companies wholly
owned by Mr. Clark, which specialize in the oilwell blowout, failures and fires
business as well as project management, construction supervision, inspection,
testing and quality assurance consulting and management. Mr. Clark developed the
predecessor to the ZEROS System in 1988 and further developed the technology
into the ZEROS System after it was conveyed to M, Ltd., in 1993.
Jesse Blanco, age 51, has served as the Company's Secretary, General
Counsel and director since 1996. For more than the past five years, Mr. Blanco
has been practicing law as a sole practitioner. He received his law degree from
the University of Houston and was formerly Assistant Dean of the University of
Houston College of Law.
Chet Gutowsky, CFA, age 51, has served as the Company's Treasurer, Chief
Financial Officer and director since 1996. During the period from 1992 to 1994,
Mr. Gutowsky was a senior contract administrator with the Federal Depository
Insurance Corporation and the Resolution Trust Company. Prior to joining the
Company, Mr. Gutowsky served as a consultant at the American National Mortgage
Company of Texas in 1995. He has had twenty years experience in the banking
industry. He received his M.B.A. in finance from the University of Texas.
Susan Smith, age 49, has served as the Company's Assistant Secretary and
director since 1997. She has served as the President of Capital from 1994 to
1998. Prior to joining Capital, Ms. Smith was the director of client services
for a Houston area staff leasing company from 1991 to 1994. She has a background
in insurance, credit guarantee programs and export-trade development. Ms. Smith
holds a bachelor degree from Louisiana Tech University.
She is the daughter of Raymond Jefferson Simmons, Jr.
Raymond Jefferson (R.J.) Simmons, Jr., age 74, has served as a director
of the Company since 1996. He retired from United Gas Pipe Line Company, a
division of United Energy, in 1986 as Executive Vice President. He has served on
committees of the Gas Research Institute, the International Gas Union and the
Pipeline Research Committee. He is the father of Susan Smith.
Celso B. Suarez, Jr., age 41, has served as a director of the Company
since 1996. Mr. Suarez has been practicing law from 1985 to 1997 as a sole
practitioner. He received his law degree from Drake University and his
undergraduate degree from the University of Houston.
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<PAGE> 19
Harendra (Anu) Mahendra, age 55, has been nominated to serve as a
director of the Company. He is a principal and founding partner of CBM
Engineers, Inc. which has been in practice for over twenty-two years. CBM
Engineers, Inc. is a consulting structural engineering firm has designed many
major buildings in the United States and abroad. Mr. Mahendra is also a member
of numerous professional societies and is a licensed professional engineer.
Other than Steve Clark's experience in connection with OCS, none of the
officers or directors have had prior experience in the field of recycling waste.
The Company believes, however, that the absence of such experience will not have
a material adverse effect on the Company since the Company is not in the waste
recycling business, but rather sells licenses to the ZEROS System technology.
See "Risk Factors."
ITEM 6. EXECUTIVE COMPENSATION
During the fiscal year ended March 31, 1997, none of the executive
officers of the Company received an annual salary. However, certain executive
officers did enter into consulting agreements with the Company. See "Certain
Relationships and Related Transactions." For services rendered in placing the
initial five ZEROS System licenses, certain officers of the Company received
warrants (convertible into shares of Common Stock held by Steve Clark) granted
on January 16, 1997 by Mr. Clark in the following amounts: 400,000 warrants to
Jesse Blanco, and 200,000 warrants to Celso B. Suarez, Jr., 200,000 warrants to
Chet Gutowsky, and 200,000 warrants to Susan Smith. The fair market value of
such warrants at the time they were awarded was $.02 per warrant as determined
by an independent appraiser. For services rendered to the Company, Mr. Clark
received 9.0 million shares of Common Stock, based upon fair market value of
services performed.
EMPLOYMENT CONTRACTS
Effective October 1, 1997, the Company entered into an employment
agreement with Steve Clark, pursuant to which Mr. Clark serves as the Chief
Executive Officer and President of the Company. The agreement requires Mr. Clark
to perform faithfully, industriously, and to the employee's ability, experience,
and talents, all of the duties that may be required by the express and implicit
terms of the employment agreement. In exchange, Mr. Clark is entitled to (i)
receive an annual salary of $120,000, (ii) earn an incentive bonus in accordance
with the Company's bonus plan to be established for its senior executives, (iii)
receive a monthly car allowance of $1,000, and (iv) participate in the Company's
other employee benefit plans, which may be adopted. Mr. Clark's employment
agreement is terminable by either party upon sixty days written notice. If the
Company shall terminate the employment agreement, Mr. Clark shall be entitled to
compensation for six months, plus full vested time in deferred compensation,
plans that maybe in place, unless Mr. Clark is in violation of the employment
agreement.
Effective October 1, 1997, the Company entered into an employment
agreement with Jesse Blanco, pursuant to which Mr. Blanco serves as the
Secretary and General Counsel of the Company. The agreement requires Mr. Blanco
to perform faithfully, industriously, and to the employee's ability, experience,
and talents, all of the duties that may be required by the express and implicit
terms of the employment agreement. In exchange, Mr. Blanco is entitled to (i)
receive an annual salary of $120,000, (ii) earn an incentive bonus in accordance
with the Company's bonus plan to be established for its senior executives, (iii)
receive a monthly car allowance of $1,000, and (iv) participate in the Company's
other employee benefit plans, which may be adopted. Mr. Blanco's employment
agreement is terminable by either party upon sixty days written notice. If the
Company shall terminate the employment agreement, Mr. Blanco shall be entitled
to compensation for six months, plus full vested time in deferred compensation,
unless Mr. Blanco is in violation of the employment agreement.
Effective October 1, 1997, the Company entered into an employment
agreement with Chet Gutowsky, pursuant to which Mr. Gutowsky serves as the Chief
Financial Officer of the Company. The agreement requires Mr. Gutowsky to perform
faithfully, industriously, and to the employee's ability, experience, and
talents, all of the duties that may be required by the express and implicit
terms of the employment agreement. In exchange, Mr. Gutowsky is entitled to (i)
receive an annual salary of $78,000, (ii) earn an incentive bonus in accordance
with the Company's bonus plan to be established for its senior executives, and
(iii) participate in the Company's other employee benefit plans, which may be
adopted. Mr. Gutowsky's employment agreement is terminable by either party upon
sixty days written notice. If the Company shall terminate the employment
agreement, Mr. Gutowsky shall be entitled to compensation for six months, plus
full vested time in deferred compensation, unless Mr. Gutowsky is in violation
of the employment agreement.
Effective October 1, 1997, the Company entered into an employment
agreement with Celso Suarez, pursuant to which Mr. Suarez agreed to provide the
Company with legal, regulatory compliance, updates and corporate filings advice.
The agreement requires Mr. Suarez to perform faithfully, industriously, and to
the employee's ability, experience, and talents, all of the duties that may be
required by the express and implicit terms of the employment agreement.
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<PAGE> 20
In exchange, Mr. Suarez is entitled to (i) receive an annual salary of
$84,000, (ii) earn an incentive bonus in accordance with the Company's bonus
plan to be established for its senior executives, (iii) participate in the
Company's other employee benefit plans, which may be adopted. Mr. Suarez's
employment agreement is terminable by either party upon sixty days written
notice. If the Company shall terminate the employment agreement, Mr. Suarez
shall be entitled to compensation for six months, plus full vested time in
deferred compensation, unless Mr. Suarez is in violation of the employment
agreement.
ALL EMPLOYMENT CONTRACTS HAVE BEEN AMENDED TO MAKE THEM FOR A PERIOD OF
FIVE (5) YEARS.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Master License Agreement. The Company entered into that certain Master
License Agreement dated as of November 15, 1996, by and between M, Ltd., and the
Company. Pursuant to the terms of the Master License Agreement, M, Ltd., granted
the Company the exclusive right and license to sell operating licenses and to
sell or lease the ZEROS System equipment to customers and to use M, Ltd.'s
proprietary marks, indicia and information regarding patents in connection
therewith. In exchange for the grant, the Company agreed to pay a license fee of
$4.0 million to be paid within the first eight years of the execution of the
Master License Agreement and a royalty payment equal to $3.0 million per system
for each of the first four ZEROS Systems sold by the Company to other licensees.
In addition, M, Ltd., shall receive a five percent commission on the Company's
collections arising in connection with the sale of licenses and equipment, five
percent of the tipping fees and five percent of the value of all by-products
produced from the operation of each ZEROS System. The Company is obligated to
pay for and file any subsequent patent applications on the ZEROS System related
technology for the benefit of M, Ltd.
The Master License Agreement further provides that M, Ltd., may terminate
the Master License Agreement in the event M, Ltd., gives written notice to the
Company of a breach of the Master License Agreement, and such breach is not
cured by the Company within thirty days of receipt of such notice. In addition,
the Master License Agreement shall terminate immediately upon the occurrence of
any of the following events: (i) the termination of the Company's rights to
possession of its current offices, unless such termination is without fault or
affirmative action on the part of the Company, (ii) the bankruptcy of the
Company, (iii) the making of a general assignment by the Company for the benefit
of creditors, and (iv) the appointment of a receiver or similar officer to take
charge of the Company's business, or any attachment, execution, levy, seizure,
or appropriation of the Company's interest in the Master License Agreement.
In the event the Company proposes to sell the business operated pursuant
to the Master License Agreement to any party other than a controlled
corporation, the Company must first notify M, Ltd., of such proposed sale. M,
Ltd., shall have the right to purchase the business on the same terms as stated
in such proposed sale. If M, Ltd., does not notify the Company of its election
to exercise such right within fourteen days, the Company may sell the business
to the third party, but only upon the same terms and conditions and only upon
the consent of M, Ltd.
Independent Contractor Agreements (Steve Clark). The Company entered into
an Independent Contractor Agreement dated as of January 1, 1997 with Steve
Clark, pursuant to which Mr. Clark agreed to provide the Company with management
services, corporate and technical organization, and planning assistance during
the period between January 1, 1997 to December 31, 1997. In consideration for
Mr. Clark's services, the Company agreed to compensate Mr. Clark $10,000 per
month. The Agreement was terminated on October 1, 1997 by mutual consent of both
parties without further obligations on either party.
Independent Contractor Agreements (Jesse Blanco). The Company entered
into an Independent Contractor Agreement dated as of January 1, 1997 with Jesse
Blanco, pursuant to which Mr. Blanco agreed to assist the Company with legal and
regulatory compliance, updates and corporate filings during the period between
January 1, 1997 to December 31, 1997. In consideration for Mr. Blanco's
services, the Company agreed to compensate Mr. Blanco $10,000 per month. The
Agreement was terminated on October 1, 1997 by mutual consent of both parties
without further obligations on either party.
Independent Contractor Agreements (Chet Gutowsky). The Company entered
into an Independent Contractor Agreement dated as of January 1, 1997 with Chet
Gutowsky, pursuant to which Mr. Gutowsky agreed to provide the Company with
financial report, filing and accounting services for management during the
period between January 1, 1997 to December 31, 1997. In consideration for Mr.
Gutowsky's services, the Company agreed to compensate Mr. Gutowsky $2,500 per
month until March 15, 1997 at which time monthly compensation shall be increased
to $6,500 per month. The Agreement was terminated on October 1, 1997 by mutual
consent of both parties without further obligations on either party.
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<PAGE> 21
Independent Contractor Agreements (Celso Suarez). The Company entered
into an Independent Contractor Agreement dated as of May 1, 1997 with Celso
Suarez, pursuant to which Mr. Suarez agreed to assist the Company with legal and
regulatory compliance, updates and corporate filings during the period between
May 1, 1997 to December 31, 1997. In consideration for Mr. Suarez's services,
the Company agreed to compensate Mr. Suarez $7,000 per month. The Agreement was
terminated on October 1, 1997 by mutual consent of both parties without further
obligations on either party.
Administrative Services Agreement. The Company entered into that certain
Administrative Services Agreement dated as of January 3, 1997, by and between
the Company and Capital, pursuant to which the Company agreed to sublease its
current office space in Houston, Texas from Capital, and Capital agreed to
provide and implement an administrative plan and support for the Company. In
addition to furnishing the office space to the Company, Capital also provides
administrative services and equipment to the Company on a month-to-month basis,
for which Capital is reimbursed on an out-of-pocket or pro rata basis. In
consideration for entering into the Administrative Services Agreement, Capital
through CAG Trust acquired 416,666 shares of Common Stock for the initial five
ZEROS System licenses placed. Certain employees of Capital are also shareholders
and/or directors in the Company.
Aircraft Reimbursement Agreement. The Company has executed an Aircraft
Reimbursement Agreement dated April 1, 1997 (the "Aircraft Reimbursement
Agreement"), with BAF. Under the terms of the Aircraft Reimbursement Agreement,
the Company agrees to make 120 regular payments to BAF of at least $16,000 per
month to provide for a minimum of twenty hours of access per month calculated at
the rate of $800.00 per hour for the use of a 1976 Piper Cheyenne II airplane,
which the Company believes represents the fair market rate for comparably
equipped aircraft. Each additional hour shall be billed at $800.00 per hour. The
Company has also provided a non-interest bearing security deposit of $16,000
with BAF, which is to be returned at the conclusion of the reimbursement
agreement. BAF is wholly owned by Steve Clark.
Asset Sales Agreement. On November 15, 1997, the Company entered into an
asset sales agreement with OCS, a company wholly owned by Steve Clark, under
which the Company acquired certain accounts receivable, certain contracts and
certain equipment, including equipment used for testing ZEROS Systems, in
consideration of $100,000 in cash and 3,000,000 shares of Series C Convertible
Preferred Stock.
OCS Manufacturing Agreement. On September 30, 1997, the Company entered
into an agreement to issue 1.0 million shares of the Common Stock of the Company
in consideration for an agreement with OCS to authorize OCS to manufacture the
ZEROS System equipment. Pursuant to such agreement, OCS would manufacture,
install, test, and maintain the ZEROS System equipment as well as provide each
licensee with a product warranty, training, inspections, and technical support.
The Company will receive a 10% interest in the revenues resulting from the
design, manufacture, assembly and installation of equipment in connection with
the ZEROS System equipment manufactured by OCS.
Alameda Sublease Agreement. The Company subleases a regional office from
OCS on a month-to-month basis. The monthly payment for the office space is
$4,600, which the Company believes represents the fair market rental rate based
on the rate for comparable properties in the area. OCS is wholly owned by Steve
Clark.
ITEM 8. LEGAL PROCEEDINGS
To the knowledge of management, there is no material litigation pending
or threatened against the Company.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
To date there has been no public market for the common shares of the
Company. To the knowledge of the Company, there are no plans, proposals,
arrangements or understandings of any person with regard to the development of a
trading market in any of the Company's securities. As of January 20, 1998,
approximately 17,421,682 shares of Common Stock are subject to outstanding
warrants, debentures and preferred stock issued by the Company, and the Company
had 172 holders of record of the Common Stock.
As of this date, the Company has not declared any cash dividends on its
Common Stock. The Company currently intends to retain its earnings, if any, to
finance the expansion of its business and for general corporate purposes. There
are no immediate plans on paying any cash dividends on its Common Stock in the
near future. Any future dividends will be at the discretion of the Board of
Directors, after taking into account various factors, including among others,
the Company's financial condition, results of operations, cash flows from
operations, current and anticipated cash needs and expansion plans, the income
tax laws then in effect, the requirements of Texas law, and any restrictions
that may be imposed by the Company's future credit arrangements.
In general, under Rule 144, if a minimum of one year has elapsed since
the later of the date of acquisition of the restricted securities from the
Company or an affiliate of the Company, the holder (or holders whose shares of
Common Stock are aggregated) of such restricted securities, including holders
who may be deemed "affiliates of the Company," is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of the Common Stock or (ii) the
average weekly reported volume of trading of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. Affiliates may
sell shares not constituting restricted securities in accordance with the
foregoing volume limitations and other requirements but without regard to the
one year holding period. Under Rule 144(k), if a period of at least two years
has elapsed since the later of the date on which restricted securities were
acquired from the Company or the date they were acquired from an affiliate of
the Company, a holder of such restricted securities who is not an affiliate of
the Company at the time of the sale and has not been such an affiliate for at
least three months prior to the sale is entitled to sell the shares immediately
without regard to the volume limitations and other conditions of Rule 144
described above. The foregoing summary of Rule 144 is not intended to be a
complete description thereof and is qualified in its entirety by reference
thereto. The Commission has proposed certain amendments to Rule 144 that would,
among other things, eliminate the manner of sale requirements and revise the
notice provisions of that rule. The Commission has also solicited comments on
other possible changes to Rule 144, including possible revisions to the one-and
two-year holding periods and volume limitations described above. Following the
satisfaction of the current public information standard of Rule 144, which the
Company anticipates will occur within ninety days of the effective date of this
Form 10-SB, 1,490,000 shares of Common Stock will be eligible for sale under
Rule 144.
The Securities Enforcement and Penny Stock Reform Act of 1990 (the "Penny
Stock Act"), and the rules promulgated thereunder, are part of a comprehensive
effort by Congress and the Securities and Exchange Commission
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<PAGE> 22
("SEC") to reduce fraud and manipulation in the penny stock market and to
provide investors with important information concerning that market. The Penny
Stock Act requires a broker-dealer recommending penny stocks to document the
suitability of the investment for the specific customer and to obtain the
written agreement of the customer to purchase the penny stock. In addition, the
broker-dealers must provide the customers with a Standardized Risk Disclosure
Document, disclosure of market quotations, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account.
Generally, a penny stock is an equity security of a company that (i) is
priced less than $5.00 (ii) is not approved for quotation on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) or
registered, or approved for registration upon notice of issuance, on a national
securities exchange which makes transaction reports available or (iii) has net
tangible assets in excess of $2.0 million ($5.0 million if the issuer has been
in continuous operation for less than three years) or average revenue of at
least $6.0 million for the last three years.
In the event the Common Stock of the Company is deemed to be penny stock,
such classification may significantly limit the ability of the Company to raise
capital in the securities market due to the compliance burdens caused by the
rules, the unwillingness of broker-dealer firms to effect transactions in these
securities, or the negative connotation of being classified as a penny stock.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Since inception, the Company has issued and sold the following
unregistered securities:
1. During the period from December 1996 to March 1997, the Company
sold a total of $855,000 of One Year 10% Secured Debentures to
officers, directors and accredited investors in a private
placement. The officers and directors of the Company sold all of
the securities without payment of any commission or other
remuneration by any person.
2. During the period from April 1997 through July 1997, the Company
sold an additional $925,260 of the One Year 10% Secured Debentures
in a subsequent private placement. The combined sales of the One
Year 10% Secured Debentures were made to fewer than 35
non-accredited investors plus accredited investors. The officers
and directors of the Company sold all of the securities without
payment of any commission or other remuneration by any person.
3. On June 20, 1997, the Company issued 3,000,000 shares of Series C
Preferred Stock to Steve Clark in exchange for 4,000,000 shares of
the Company's common shares held by him.
4. During the period from August 1997 through December 1997, the
Company sold an aggregate of $1,259,000 of Series A Five-Year
Twelve Percent Convertible Bond to various investors. The officers
and directors of the Company sold all of the securities without
payment of any commission or other remuneration from any person.
5. On November 15, 1997, the Company issued to OCS 3,000,000 shares
of Series C Convertible Preferred Stock to OCS pursuant to the
Assets Sales Agreement.
6. On September 30, 1997, the Company issued 200,000 shares of Series
C Convertible Preferred Stock to ZEROS Piney Creek Corporation, a
Mississippi corporation, pursuant to that certain Agreement
Incident to Transfer dated June 30, 1997.
7. On September 30, 1997, the Company issued 250,000 shares of Series
C Convertible Preferred Stock to ZEROS California Corporation, a
California corporation, pursuant to that certain Agreement
Incident to Transfer dated March 31, 1997.
8. On September 30, 1997, the Company issued 100,000 shares of Series
C Convertible Preferred Stock to ZEROS Lawson Corporation, a
California corporation, pursuant to that certain Agreement
Incident to Transfer dated May 31, 1997.
ZEROS USA, INC., BY PRIVATE OFFERING MADE TO ACCREDITED INVESTORS AND
THE SOPHISTICATED INVESTORS BY THE DIRECTORS, OFFICERS, MANAGEMENT AND STAFF
WITHOUT BROKERS OR COMMISSION SECURITIES VENDORS OFFERED THE FOLLOWING
SECURITIES:
PRIVATE OFFERING:
ACCREDITED AND SOPHISTICATED INVESTORS WERE OFFERED ONE YEAR DEBENTURES
PAYING A 10% PER ANNUM INTEREST SECURED BY TWO SHARES OF COMMON STOCK FOR EACH
ONE DOLLAR OF PRINCIPAL. THE DEBENTURE HOLDER, AT THEIR OPTION COULD EXCHANGE
THE AMOUNT DUE ON THE DEBENTURE PER THE STOCK SECURING THE DEBENTURE.
PRIVATE OFFERING:
FIVE YEAR TWELVE PERCENT PER ANNUM CONVERTIBLE BONDS WERE OFFERED TO
ACCREDITED AND SOPHISTICATED INVESTORS. THE MINIMUM INVESTMENT UNIT WAS
$100,000.00. THE BOND IS CONVERTIBLE TO PREFERRED STOCK AT THE BONDHOLDER'S
OPTION AT THE RATE OF ONE SHARE OF THE COMPANY'S PREFERRED STOCK FOR EACH ONE
DOLLAR OF BOND PRINCIPAL.
THE SECURITIES OFFERED BY THE COMPANY WERE DEBT INSTRUMENTS CONDUCTED
BY THE DIRECTORS, OFFICERS, MANAGEMENT AND STAFF OF THE COMPANY WITHOUT
ADVERTISING AND PUBLIC PROMOTION AND WITHOUT STOCKBROKERS, INVESTMENT BANKERS OR
COMMISSIONED AGENTS.
22
<PAGE> 23
9. In September 30, 1997, the Company issued (i) an aggregate of
2,500,000 shares of Series C Convertible Preferred Stock
to Steve Clark and (ii) an aggregate of 2.5 million shares of
Series C Convertible Preferred Stock to various directors,
officers, and key professionals, for services rendered by such
individuals in placing the initial five ZEROS System licenses.
10. On September 30, 1997, the Company issued 1,000,000 shares of
Common Stock to OCS in consideration for OCS agreeing to become a
manufacturer of ZEROS System technology for revenue participation.
11. On October 29, 1997, the Company issued 100,000 shares of
Series A Convertible Preferred Stock to ZHM, Inc., a Texas
corporation, pursuant to that certain Agreement Incident to
Transfer dated October 29, 1997.
12. On November 2, 1997, the Company issued 100,000 shares of
Series C Convertible Preferred Stock to ZEROS Western Corporation,
a California corporation, pursuant to that certain Agreement
Incident to Transfer dated November 2, 1997.
13. On November 12, 1996, the Company issued 100,000 shares of
common stock to Capital in exchange for 20,000 shares of 6%
convertible preferred stock, $10.00 stated value, of Genesis
Capital Corporation ("Genesis"). This preferred stock of Genesis
is convertible into common stock of Genesis at the rate of ten
shares of common stock for each share of preferred stock.
14. In January 1998, the Company issued an aggregate of 265,780
shares of Series D Convertible Preferred Stock to certain
directors, officers and key professionals, for services rendered.
The sales and issuances of the securities referenced in numbers 2, 4 and
11 above were exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to Regulation D promulgated by the SEC,
with the recipients representing their intentions to acquire the securities for
their own accounts and not with a view to the distribution thereof. The Company
believes that each investor received full disclosure of all material facts
through the private offering memorandum provided by the Company for each of the
respective offerings.
The issuance of the securities referenced in number 3 above was exempt
from registration under the Securities Act pursuant to Section 3(a)(9) thereof.
The remaining sales and issuances of the securities referenced above were
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof as transactions not involving a public offering.
ZEROS USA, INC., BY PRIVATE OFFERING MADE TO ACCREDITED INVESTORS AND
THE SOPHISTICATED INVESTORS BY THE DIRECTORS, OFFICERS, MANAGEMENT AND STAFF
WITHOUT BROKERS OR COMMISSION SECURITIES VENDORS OFFERED THE FOLLOWING
SECURITIES:
PRIVATE OFFERING:
ACCREDITED AND SOPHISTICATED INVESTORS WERE OFFERED ONE YEAR DEBENTURES
PAYING A 10% PER ANNUM INTEREST SECURED BY TWO SHARES OF COMMON STOCK FOR EACH
ONE DOLLAR OF PRINCIPAL. THE DEBENTURE HOLDER, AT THEIR OPTION COULD EXCHANGE
THE AMOUNT DUE ON THE DEBENTURE PER THE STOCK SECURING THE DEBENTURE.
PRIVATE OFFERING:
FIVE YEAR TWELVE PERCENT PER ANNUM CONVERTIBLE BONDS WERE OFFERED TO
ACCREDITED AND SOPHISTICATED INVESTORS. THE MINIMUM INVESTMENT UNIT WAS
$100,000.00. THE BOND IS CONVERTIBLE TO PREFERRED STOCK AT THE BONDHOLDER'S
OPTION AT THE RATE OF ONE SHARE OF THE COMPANY'S PREFERRED STOCK FOR EACH ONE
DOLLAR OF BOND PRINCIPAL.
THE SECURITIES OFFERED BY THE COMPANY WERE DEBT INSTRUMENTS CONDUCTED
BY THE DIRECTORS, OFFICERS, MANAGEMENT AND STAFF OF THE COMPANY WITHOUT
ADVERTISING AND PUBLIC PROMOTION AND WITHOUT STOCKBROKERS, INVESTMENT BANKERS OR
COMMISSIONED AGENTS.
ITEM 11. DESCRIPTION OF SECURITIES
COMMON SHARES
The Company will file an Amended and Restated Articles of Incorporation
(the "Amended Articles") with the Secretary of State of Texas. The Company's
Amended Articles authorize 190 million shares of capital stock, $.001 par value,
including 115 million shares of Common Stock and 75 million shares of preferred
stock. As of January 20, 1998, the Company has 10,690,000 shares of Common
Stock, 11,549,996 shares of Series C Convertible Preferred Stock and 1,971,802
shares of Series D Convertible Preferred Stock outstanding.
The holders of Common Stock of the Company are entitled to equal
dividends and distributions per share with respect to the Common Stock when, as
and if, declared by the board of directors from funds legally available
therefor. No
23
<PAGE> 24
holder of any shares of Common Stock has a pre-emptive right to subscribe for
any securities of the Company nor are any common shares subject to redemption or
convertible into other securities of the Company. Each share of Common Stock is
entitled to one vote for each share held. Holders of the Common Stock do not
have cumulative voting rights.
PREFERRED STOCK
The Company's Amended Articles authorize 75,000,000 shares of $.001 par
value preferred stock. The Company's board of directors shall have the power,
without further action by the holders of Common Stock, to designate the relative
rights and preferences of the preferred stock, and to issue the preferred stock
in such one or more series as designated by the board of directors. The
designations of rights and preferences could include preferences as to
liquidation, redemption and conversion rights, voting rights, dividends or other
preferences, any of which may be dilutive of the interest of the holders of the
Common Stock or the preferred stock of any other series. The issuance of
preferred stock may have the effect of delaying or preventing a change in
control of the Company without further shareholder action and may adversely
affect the rights and powers, including voting rights, of the holders of Common
Stock. In certain circumstances, the issuance of preferred stock could depress
the market price of the Common Stock. The board of directors effects an
establishment of series designation of each series of preferred stock by filing
with the Secretary of State of Texas an establishment of series of designation
defining the rights and preferences of each such series.
The Company's board of directors has authorized the issuance of the
following series of preferred stock:
1. Series A Convertible Preferred. The Amended Articles authorize
15,000,000 shares of $.001 par value of Series A Convertible
Preferred Stock. The Company has no shares of Series A
Convertible Preferred Stock outstanding as of January 20, 1998.
None of the shares of the Series A Convertible Preferred is not
entitled to vote, and each share of the Series A Convertible
Preferred carries a dividend of $0.30 per share, payable annually,
provided that if the price of the Series A Convertible Preferred
Stock is $5 per share or more, the Company has the option to pay
such dividend in Common Stock. This equates to a stock dividend
of 600 shares per 10,000 shares owned. If the Company elects to
pay the dividend in Common Stock, the Company will round up to the
next whole number any fractional shares payable in the total
annual dividend to each shareholder. The holder of the Series A
Convertible Preferred Stock, may at any time, convert the Series A
Convertible Preferred Stock into the Common Stock at the
conversion ratio of one share of Series A Convertible Preferred
Stock for one share of Common Stock.
2. Series B Convertible Preferred. The Amended Articles authorize
25,000,000 shares of $.001 par value of Series B Convertible
Preferred Stock. The Company has no shares of Series B
Convertible Preferred Stock outstanding as of January 20, 1998.
None of the shares of the Series B Convertible Preferred is not
entitled to vote, and each share of the Series B Convertible
Preferred carries a dividend of $0.10 per share, payable annually,
and receives an additional dividend of 0.10 shares of common
stock, payable annually. The Company will round up to the next
whole number any fractional shares payable in the total annual
dividend to each shareholder. The holder of the Series B
Convertible Preferred Stock, may at any time, convert the Series B
Convertible Preferred Stock into the Common Stock at the
conversion ratio of one share of Series B Convertible Preferred
Stock for one share of Common Stock.
3. Series C Convertible Preferred. The Amended Articles authorize
15,000,000 shares of $.001 par value of Series C Convertible
Preferred Stock. The Company has 11,549,996 shares of Series C
Convertible Preferred Stock outstanding as of January 20, 1998.
Each share of the Series C Convertible Preferred Stock is entitled
to one vote for each share held, and receives a dividend of 0.06
shares of common stock, payable annually. The Company will round
up to the next whole number any fractional shares payable in the
total annual dividend to each shareholder. The holder of the
Series C Convertible Preferred Stock, may at any time, convert the
Series C Convertible Preferred Stock into the Common Stock at the
conversion ratio of one share of Series C Convertible Preferred
Stock for one share of Common Stock.
4. Series D Convertible Preferred. The Amended Articles
authorize 20,000,000 shares of $.001 par value of Series D
Convertible Preferred Stock. The Company has 1,971,802 shares of
Series D Convertible Preferred Stock outstanding as of January 20,
1998. None of the shares of the Series D Convertible Preferred
Stock is not entitled to vote, and each share of the Series D
Convertible Preferred Stock
24
<PAGE> 25
receives a dividend of 0.10 shares of common stock, payable
annually. The Company will round up to the next whole number any
fractional shares payable in the total annual dividend to each
shareholder. The holder of the Series D Convertible Preferred
Stock, may at any time, convert the Series D Convertible Preferred
Stock into the Common Stock at the conversion ratio of one share
of Series D Convertible Preferred Stock for one share of Common
Stock.
ONE YEAR 10% SECURED DEBENTURES
As of September 30, 1997, the Company sold a total of $1, 928,084 of One
Year 10% Secured Debentures (the "Secured Debentures") to officers, directors
and other accredited investors with the minimum purchase of one $10,000 face
amount debenture. They were all issued at face amount and each one dollar of
Secured Debenture is secured by two shares of common stock currently owned by
Steve Clark. The holder of the Secured Debentures may at any time prior to
maturity exchange the dollar face amount of the Secured Debentures into the
Common Stock at the exchange ratio of $1.00 of Secured Debentures for two shares
of common stock. Interest is due and payable at the maturity of the Secured
Debenture and is waived by the holder if the Secured Debenture is exchanged for
the Common Stock. The Secured Debentures mature one year from the actual date of
issuance. Therefore, the Secured Debentures mature at different dates depending
upon the date of sale. Sales were made by officers and directors of the Company
and no commissions were paid in connection with the sales.
SERIES A FIVE-YEAR TWELVE PERCENT CONVERTIBLE BOND
During the period from August 1997 to December 1997, the Company sold a
total of $1.5 million of Series A Five-Year Twelve Percent Convertible Bond (the
"Series A Bonds") to officers, directors and accredited investors with the
minimum purchase of one $100,000 face amount unit. Holders of the Series A Bonds
are entitled to receive $100,000 per $100,000 face amount on July 31, 2002, and
interest at the rate of twelve (12%) per annum semiannually on the last day of
January and the last day of July of each year, computed from July 31, 1997. The
maturity date of the Series A Bonds is July 31, 2002. Subject to redemption by
the Company, the holder of the Series A Bonds may at any time prior to the
maturity date convert the principal amount of the Series A Bonds into the
Company's Series A Preferred Stock at the conversion ratio of $1.00 of bond
principal for one share of Series A Preferred Stock. The Company may at any time
prepay in whole or in part, the principal amount, plus accrued interest to the
date of prepayment, of all outstanding Series A Bonds of this issue, upon 90
days' written notice by certified or registered mail to the registered owners of
all outstanding Series A Bonds.
SERIES B TEN-YEAR TEN PERCENT CONVERTIBLE BOND
The Company has authorized the creation of the Series B Ten-Year Ten
Percent Convertible Bond (the "Series B Bonds") to be sold to selected
accredited investors. Holders of the Series B Bonds are entitled to receive
$100,000 per $100,000 face amount unit on the maturity date, which has not been
set, and interest at the rate of ten percent (10%) per annum semiannually on the
last day of January and the last day of July of each year, computed from the
actual date of issuance. The maturity of the Series B Bonds is ten years.
Subject to redemption by the Company, the holder of the Series B Bonds, may at
any time, prior to the maturity date, convert the principal amount of the Series
B Bonds into the Company's Series B Preferred Stock at the conversion ratio of
$2.00 of bond principal for one share of Series B Preferred Stock. The Company
may at any time prepay in whole or in part, the principal amount, plus accrued
interest to the date of prepayment, of all outstanding Series B Bonds of this
issue, upon 90 days' written notice by certified or registered mail to the
registered owners of all outstanding Series B Bonds.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has adopted provisions in its Amended Articles which limit
the liability of its officers and directors and provisions in its bylaws which
provide for indemnification by the Company of its officers and directors to the
full extent permitted by the Texas Business Corporation Act. The Amended
Articles and the bylaws also permit the advancing of expenses incurred in
defense of claims by officers and directors.
The Company's Amended Articles and the bylaws also permit the Company to
purchase and maintain insurance, at its expense, for the benefit of any officers
and directors. The Company has a one year Directors, Officers and Corporate
25
<PAGE> 26
Liability Insurance Policy issued by American International Specialty Lines
Insurance Company, effective August 18, 1997 through August 18, 1998. The
policy has an aggregate limit of $1,000,000.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) The following financial statements are filed herein as part of the
registration statement.
(b) The following exhibits required by Item 601 of Regulation S-B are
attached.
*3.1 Articles of Incorporation of ZEROS
3.2 Amended and Restated Articles of Incorporation of
ZEROS
*3.3 Bylaws of ZEROS
4.1 Designation of Rights and References of Series A
Preferred Stock
4.2 Designation of Rights and References of Series B
Preferred Stock
4.3 Designation of Rights and References of Series C
Preferred Stock
4.4 Designation of Rights and References of Series D
Preferred Stock
*4.5 One Year 10% Secured Debentures
*4.6 Series A Five-Year 12% Convertible Bond
+4.7 Series B Ten-Year 10% Convertible Bond
*4.8 Promissory Note due April 18, 1998 in the amount of
$75,000 with interest at 7.0%
*4.9 Promissory Note (Loan Number 01693161) due May 30,
1998 in the amount of $100,000 with interest at
7.35%
*4.10 Promissory Note (Loan Number 01693162) due May 30,
1998 in the amount of $100,000 with interest at
7.35%
*4.11 Promissory Note due July 7, 1998 in the amount of
$50,000 with interest at 7.00%
*4.12 Promissory Note due August 12, 1998 in the amount
of $90,000 with interest at 7.0%
*10.1 Master License Agreement dated November 15, 1996 by
and between ZEROS and M, Ltd.
*10.2 Agreement in Principle to Acquire OCS Assets
*10.3 Reimbursement Agreement dated April 1, 1997 by and
between ZEROS and M, Ltd.
*10.4 Agreement for Sale of ZEROS Approved License dated
May 31, 1997 by and among ZEROS, ZEROS California
Corporation and Lawson ZEROS Corporation
*10.5 Agreement for Sale of ZEROS Indian Approved License
dated March 31, 1997 by and between ZEROS and ZEROS
California Corporation
*10.6 Agreement for Sale of ZEROS Approved License dated
February 28, 1997 by and between ZEROS and ZEROS
Piney Creek
*10.7 Agreement for Sale of ZEROS Environmental Approved
License dated October 29, 1997 by and between ZEROS
and ZHM, Inc.
*10.8 Agreement for Sale of ZEROS Environmental Approved
License dated November 2, 1997 by and among ZEROS,
ZEROS California Corporation and ZEROS Western
Corporation
*10.9 Form of Financial Services Agreement between ZEROS
and Capital American Associates, Incorporated
*10.10 Directors and Officers Insurance and Company
Reimbursement Policy
26
<PAGE> 27
*10.11 Asset Sales Agreement dated November 15, 1997 by and
between ZEROS and OCS, Inc.
*10.12 Employment Agreement dated October 1, 1997 by and
between ZEROS and Steve Clark
*10.13 Employment Agreement dated October 1, 1997 by and
between ZEROS and Jesse Blanco
*10.14 Employment Agreement dated October 1, 1997 by and
between ZEROS and Chet Gutowsky
*10.15 Employment Agreement dated October 1, 1997 by and
between ZEROS and Celso Suarez
*10.16 Manufacturing Agreement dated September 30, 1997 by
and between ZEROS and OCS, Inc.
*10.17 Supplement to Master License Agreement dated
November 15, 1996 by and between ZEROS and M, Ltd.
10.18 Professional Services Agreement by and between
ZEROS and James Winchester
*99.1 Texas Natural Resources letter dated April 29, 1997
- ---------------
* Previously filed.
+ To be filed by amendment.
27
<PAGE> 28
ZEROS USA, Inc. and Subsidiary
---------------------------------
Consolidated Financial Statements
---------------------------------
Inception (November 12, 1996)
to March 31, 1997
<PAGE> 29
[GRANT, PALMA & WALKER, P.C. LETTERHEAD]
Independent Auditor's Report
July 3, 1997
To the Board of Directors and Stockholders
ZEROS USA, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of ZEROS
USA, Inc. and Subsidiary as of March 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from inception (November 12, 1996) to March 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ZEROS USA, Inc. and
Subsidiary as of March 31, 1997, and the results of its operations and its cash
flows for the initial period then ended in conformity with generally accepted
accounting principles.
/s/ GRANT, PALMA & WALKER, P.C.
Houston, Texas
<PAGE> 30
ZEROS USA, Inc. and Subsidiary
Consolidated Balance Sheet
March 31, 1997
Assets
<TABLE>
<S> <C>
Current assets:
Cash $ 299,741
Contracts receivable, current net of an
allowance for doubtful contracts
of $0 (Note 2) 1,800,000
----------
Total current assets 2,099,741
----------
Property and equipment:
Office equipment 16,292
Less accumulated depreciation (815)
----------
Property and equipment, net 15,477
----------
other assets:
Contracts receivable, noncurrent (Note 2) 2,729,752
Master license costs 30,000
Investment (Note 3) 25,000
organizational costs less
amortization of $2,665 63,385
Permit costs 10,000
----------
2,858,137
----------
Total assets $4,973,355
==========
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE> 31
ZEROS USA, Inc. and Subsidiary
Consolidated Balance Sheet
March 31, 1997
Liabilities and Stockholders' Equity
<TABLE>
<S> <C>
Current liabilities:
Debentures payable (Note 5) $ 885,500
Accounts payable 59,992
Accrued interest 9,957
Deferred income taxes (Note 8) 639,600
----------
Total current liabilities 1,595,049
Long-term contract payable (Note 6) 45,096
Deferred income taxes (Note 8) 399,320
Deferred revenue, licensing contracts (Note 7) 1,127,948
Minority interest 3,235
----------
Total liabilities 3,170,648
----------
Stockholders' equity (Notes 9 and 12):
Common stock, no par value,
1,000,000 shares authorized,
1,000,000 issued and outstanding 26,000
Retained earnings 1,776,707
----------
Total stockholders' equity 1,802,707
----------
Total liabilities and
stockholders' equity $4,973,355
==========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 32
ZEROS USA, Inc. and Subsidiary
Consolidated Statement of Operations
From Inception (November 12, 1996) to March 31, 1997
<TABLE>
<S> <C>
Revenues - licensing (Notes 1 and 11) $ 3,383,845
General and administrative expenses 536,792
Other income (expense)
Interest expense (55,053)
Interest income 18,172
-----------
Earnings before income taxes
and minority interest 2,810,172
Income taxes (Note 8) 1,038,920
-----------
Net earnings before minority interest 1,771,252
Minority interest in net loss of
consolidated subsidiary (Notes 1 and 12) 5,455
-----------
Net earnings $ 1,776,707
===========
Earnings per share (Notes 1 and 12) $ 1.78
===========
Earnings per share pro-forma (Note 12) $ .15
===========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 33
ZEROS USA, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
March 31, 1997
<TABLE>
<CAPTION>
Common Stock Total
---------------------- Retained Stockholders'
Shares Amount Earnings Equity
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at
November 12, 1996
(inception) 0 $ 0 $ 0 $ 0
Stock issuance 900,000 1,000 1,000
Stock issuance 100,000 25,000 25,000
Net earnings 1,776,707 1,776,707
--------- --------- ---------- ----------
Balance at
March 31, 1997 1,000,000 $ 26,000 $1,776,707 $1,802,707
========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 34
ZEROS USA, Inc. and Subsidiary
Consolidated Statement of Cash Flows
From Inception (November 12, 1296) to March 31, 1997
<TABLE>
<S> <C>
Cash flows due to operating activities:
Net earnings $ 1,776,707
Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Depreciation and amortization 3,480
Minority interest in loss of
consolidated subsidiary (5,455)
(Increase) decrease in:
contract receivables, trade (3,401,804)
Increase (decrease) in:
Accounts payable, trade 60,992
Accrued interest 9,957
Deferred income taxes 1,038,920
Accrued interest on contract payable 45,096
-----------
Net cash provided (used) by
operating activities (472,107)
-----------
Cash flows provided (used) from investing activities:
Purchase of equipment (16,292)
Organization costs (57,360)
Master license costs (30,000)
Permit costs (10,000)
Net cash provided (used) by
investing activities (113,652)
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<PAGE> 35
ZEROS USA, Inc. and Subsidiary
Consolidated Statement of Cash Flows
From Inception (November 12, 1296) to March 31, 1997
<TABLE>
<S> <C>
Cash flows provided (used) by
financing activities:
Proceeds from debentures 885,500
--------
Net cash provided (used) by
financing activities 885,500
--------
Increase (decrease) in cash and
cash equivalents 299,741
Cash and cash equivalents,
beginning of period 0
--------
Cash and cash equivalents,
end of period $299,741
========
Supplemental cash flow information non-cash items:
Common stock (900,000 shares) issued
for services rendered $ 1,000
Common stock (100,000 shares) issued
for investment in preferred stock
of capital corporation at fair value $ 25,000
</TABLE>
See accompanying notes to consolidated financial statements.
-7-
<PAGE> 36
ZEROS USA, Inc. and Subsidiary Notes to
Consolidated Financial Statements
From Inception (November 12, 1996) to March 31, 1997
Note 1 - Significant accounting policies
Organization
ZEROS USA, Inc. (the "Company") formerly "ZEROS," Inc. (Note 12) was
incorporated in the state of Texas on November 12, 1996. The Company develops
and sells technology for industrial waste systems. The Company has a master
license on the system (the "System") called "Zero Emission Energy Recycling
Oxidation System" or "ZEROS" - an energy recycling oxidation system. The Company
sells licenses for the System to sub-licensees both nationally and
internationally. The books and records of the Company are prepared on the
accrual basis for financial reporting purposes and the cash basis for federal
income tax purposes. The Company has elected a March 31 fiscal year end for both
financial and tax reporting purposes. The financial statements include the
records of the majority (91%) owned subsidiary, ZEROS USA, Inc. - Utah, a Utah
corporation. The subsidiary had no active operations from inception to March 31,
1997. All significant intercompany transactions have been eliminated in
consolidation.
Revenue recognition
The Company sells sub-licenses to the System and recognizes revenue on
licenses based upon milestones in the contract process. The milestones include
contract signing and delivery of the technology (75%), training on the
technology (15%) and testing of the system equipment (10%).
Organization costs
Organization costs, primarily legal costs, are being amortized over a
sixty month (60) period.
Investment
Investments are recorded at an estimated fair market value based upon
the investment held available for sale criteria in accordance with FASB #115
Accounting for Certain Debt and Equity Securities.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided
on an accelerated method over the estimated useful lives of the assets as
follows:
Office equipment 5 year
-8-
<PAGE> 37
Property and equipment (continued)
All expenditures for major renewals and betterments are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
When property and equipment are retired or disposed of the related costs and
accumulated depreciation are removed from the applicable accounts and any gain
or loss is reflected in income. Depreciation expense from inception to March 31,
1997 was $815.
Acquisition
In February 1997 the Company acquired the majority stock (91%) of
Gunner Holdings, Inc. - a Utah corporation and changed its name to ZEROS USA,
Inc. - Utah. The acquisition was accounted for by using the purchase method for
business combinations. Under the purchase method the purchase price of $90,000
was allocated to assets acquired and liabilities assumed.
Income taxes
The Company accounts for its income taxes using the Financial
Accounting Standards Board Statement No.109, "Accounting for Income Taxes" (SFAS
No. 109) which requires the establishment of a deferred tax asset or liability
for taxable amounts and operating loss and tax credit carryforwards. Deferred
tax assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be "cash equivalents" for purposes of
the statement of cash flows.
Concentration of credit risk
The Company extends credit to its customers. The Company may extend
certain credit during the normal course of business operations which may be
unsecured. A substantial portion of the customers' ability to pay their debts
(Note 13) to the Company is dependent on the waste management economic sector.
-9-
<PAGE> 38
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Earnings per share
Net earnings per share is based upon the weighted average number of
shares of common stock outstanding. For the period from inception (November 12,
1996) to March 31, 1997 an amount of one million shares was used to compute the
earnings per share. Primary and fully diluted earnings per share are the same
for the period. 11,490,000 shares were used to compute earnings per share pro
forma to give effect to the restructuring of common stock in June 1997 (Note
12). Primary and fully diluted earnings per share are the same for the pro-forma
period.
Note 2 - Contracts receivable
The Company utilized installment contracts to finance the sale of
sub-licenses by the Company. The terms of each contract indicate a license price
of $2,700,000 to be paid in three annual installments of $900,000. These
contracts are secured by certain assets and guarantees of the licensees and
their guarantors. Unamortized discount is based upon an imputed interest rate of
9%. The analysis of the contracts at March 31, 1997 is as follows:
<TABLE>
<S> <C>
Total contracts receivable $5,400,000
Less current amount 1,800,000
----------
Contracts receivable, noncurrent 3,600,000
Unamortized discount (870,248)
----------
Noncurrent contracts less
unamortized amount $2,729,752
----------
</TABLE>
The Company at March 31, 1997 had two contracts with three year terms.
One contract matures in February 2000 and the other contract matures in March
2000. The contracts include the right of the licensor to charge the licensee a
royalty of 15% of gross income for each operating system. Each licensee obtains
a geographical area and is allowed to sell sub-licenses subject to the approval
of the licensor. The licensor is obligated primarily to provide a training
program and counsel on operational assistance.
Note 3 - Investment
The Company holds an investment in preferred stock of a capital
corporation company with a 6% dividend per annum. The Company holds twenty
thousand shares of preferred stock recorded
-10-
<PAGE> 39
Note 3 - Investment (continued)
at an estimated market value of $25,000. Each preferred stock share is
convertible into ten shares of common stock at the end of two years (December
1998). The common stock of the capital corporation is traded on the NASDAQ
exchange (bulletin board) with a trading range of 1/2 to 1/8 per share at March
31, 1997. The investment is held as available for sale based upon a contributed
cost of $25,000 and estimated fair market value of $25,000. No additional
valuation allowance has been recorded.
Note 4 - Master license costs
The Company acquired a master license for the energy recycling
oxidation system in January 1997. The major terms of the acquisition of the
master license indicates that the Company is to pay $4,000,000 plus certain
legal costs for the master license to a foreign entity ("the Master Licensor").
The Company paid $30,000 in legal costs to transfer the master
licensing rights. Per the contract the initial master license cost of $4,000,000
has been earned by the licensor upon the signing of the contract. The $4,000,000
contract amount is payable in January 2005. The present value of the contract of
$1,926,848 reflects a discount of 9% imputed interest rate and has been deferred
until paid. The master license cost has been initially recorded at legal
transfer costs of $30,000.
Per the contract an additional $12,000,000 in master licensing costs
will be earned by the Master Licensor when the sale of four equipment systems
occurs by the Company at the rate of $3,000,000 per equipment system sale. These
costs will be payable as the equipment systems construction deposits are
collected.
The contract also indicates that the Company will pay certain
commissions and fees to the Master Licensor as follows:
(1) 5% of license fees sold to third parties.
(2) 5% of gross profit resulting from sales of energy recycling
systems by the licensee to sub-licensees.
(3) 5% of gross income resulting from the sale of products produced
from energy recycling systems sold through sub-licensees.
(4) 5% royalty fees on gross income on units owned and operated by
the licensee (ZEROS USA, Inc.).
-11-
<PAGE> 40
Note 5 - Debentures payable
The Company has $885,500 debentures payable to various individuals and
entities. The debentures including interest are due and payable on various dates
ranging from January 1, 1998 to March 15, 1998. The interest rate on the
debentures is 10% per annum. Each dollar of debenture is securitized by two
shares of Company common stock owned by the Company's President. Effective June
1997, the Company authorized 20 million shares of common stock to complete the
securitization of Company stock for the debenture holders. The debentures are
also exchangeable during the term of the debenture into Company common stock
from the President's shares of common stock.
Note 6 - Long term contract payable
The Company has entered into a long term contract payable for the
purchase of the exclusive master license of the "ZEROS" System Technology (Note
4). The purchase price of the contract is $4,000,000 due in January 2005.
Interest expense has been imputed at 9% per annum for the contract with the
calculation as follows:
<TABLE>
<S> <C>
Contract amount $ 4,000,000
Unamortized discount (2,028,056)
Deferred recognition (1,926,848)
-----------
Contract payable long term $ 45,096
===========
</TABLE>
Note 7 - Deferred revenue
Deferred revenue is recorded based upon milestones achieved in the
contract process (Note 2). The milestones include the contract signing and
delivery of the technology (75%), training on the technology (15%) and
engineering support in testing of the equipment used in the system (10%). The
analysis of deferred revenue at March 31, 1997 is as follows:
<TABLE>
<S> <C>
Total contract revenue $ 5,400,000
Less discount on imputed interest at 9% (888,207)
-----------
Total licensing income 4,511,793
Less current portion (3,383,845)
-----------
Total deferred revenue $ 1,127,948
===========
</TABLE>
The deferred revenue represents deferred revenue on installment
contracts from licensees with maturity dates in February and March of 2000.
-12-
<PAGE> 41
Note 8 - Income taxes
The Company's deferred tax assets relate principally to non-deductible
accrued expenses, a net operating loss carryforward, and deferred revenue.
Deferred tax liabilities relate to contracts receivable that are not recognized
for taxable income purposes.
A summary of deferred tax assets and liabilities follows:
<TABLE>
<S> <C>
Deferred tax assets:
Temporary differences,
primarily deferred revenue $ 442,863
Net operating loss carryforward 192,866
Asset valuation reserve 0
-----------
635,729
Deferred tax liabilities (1,674,649)
-----------
Net deferred tax liabilities $ 1,038,920
===========
</TABLE>
The net operating loss of $522,000 as of March 31, 1997, expires in the
year ending March 31, 2012. The provision for income taxes in the statement of
income for the period ended March 31, 1997, includes the following:
<TABLE>
<S> <C>
Current tax expense $ 0
Deferred income taxes primarily
related to contracts receivable:
Deferred - current 639,600
Deferred - noncurrent 399,320
-----------
Provision for income taxes $ 1,038,920
===========
</TABLE>
Note 9 - Stockholders' equity
In November 1996 the Company was formed with one million shares of
authorized common stock at no par value. The Company issued 900,000 shares of
common stock to its President for a stated value of $1,000 for services
rendered. The Company also issued 100,000 shares of common stock to a business
trust in exchange for twenty thousand shares of preferred stock of a capital
corporation valued at an estimated market value of $25,000.
Note 10 - Related Party transactions
The Company incurred approximately $34,900 in administrative fees for
office expenses from a company controlled by a shareholder. The Company incurred
master license transfer costs of $30,000 from a foreign corporation, and will
pay fees and royalties for this master license based upon certain terms of the
agreement with an initial contract amount of $4,000,000. The Company incurred
air charter travel expenses and administrative expenses of approximately $93,400
and $30,000 respectively from entities under the control of the President of the
Company.
-13-
<PAGE> 42
Note 11 - Major customers
The Company had revenue from licenses sold to two licensees at
approximately $1,692,000 for each licensee. Each sub-license represents
approximately 50% of total revenue.
Note 12 - Subsequent events
In April 1997 the Company entered into a loan agreement with a bank for
a line of credit of $75,000 secured by a certificate of deposit of $78,000 at
the bank. The bank line of credit is due in April 1998 at an interest rate of
7%. As of June 1997 the Company also obtained additional debentures payable
proceeds totaling $808,410. The additional debentures are at 10% per annum
maturing between April 1998 and June 1998 with principal and interest due at
maturity. Each dollar of debenture is securitized by two shares of Company
common stock owned by the Company's President. The debentures are also
exchangeable during the term of the debenture into Company common stock from the
President's shares of common stock.
In June 1997 the Company amended its articles of incorporation to
authorize twenty million shares of common stock at a $.001 par value and ten
million shares of preferred stock at a $5 stated value. The Company also changed
its name from "ZEROS", inc. to ZEROS USA, Inc. The Company by shareholder
ratification of a share structure by issuing 8,100,000 of common stock at $.001
par value to the President in June 1997 fair valued at $8,100 and 900,000 shares
rendered in June 1997 of common stock at $.001 to another shareholder for
services fair valued at $900. Effective June 1997 in conjunction with the merger
of the parent and the subsidiary, the Company also purchased the minority shares
interest in the subsidiary by exchanging 1,490,000 shares of common stock of the
parent for the minority shares of the subsidiary on a one share of minority
interest for a one share of parent Company common stock basis.
The effect of earnings per share calculation based upon the
restructuring and merger of the common stock of the Company and Subsidiary is as
follows:
<TABLE>
<CAPTION>
Before After
Restructuring Restructuring
and and
Merger Merger
------------- -------------
<S> <C> <C>
Primary earnings per share $1.78 .15
Fully diluted earnings per share $1.78 .15
</TABLE>
The net earnings per share before the restructuring and merger is based
upon 1,000,000 shares outstanding. The net pro forma earnings per share after
the merger is based upon the 11,490,000 shares of common stock outstanding after
the restructuring and merger of the common stock. Primary and fully diluted
earnings per share were the same for the period.
-14-
<PAGE> 43
Note 13 - Financial instruments
The Company's financial instruments consist of cash, contracts
receivable, an investment in preferred stock, a long term contract payable, and
debentures payable.
Cash
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits and a money market investment account
at a brokerage firm. The Company has not experienced any losses and it believes
it is not exposed to any significant credit risks affecting cash. At March 31,
1997, $88,542 of its cash at a bank was maintained in excess of federally
insured amounts.
Investment
Management believes this investment in preferred stock (Note 3) is
fairly stated at its estimated net realizable value and a reserve for additional
valuation allowances is not required.
Contracts receivable
Management believes the carrying value of contracts receivable (Note 2)
is fairly stated at estimated net realizable values and a reserve for
uncollectibility is not required. Management also believes the carrying value of
these contracts receivable represents fair value of these financial instruments
because terms are similar to those in the lending market for comparable loans
with comparable risks using an imputed interest rate of 9% (Note 2).
Long-term contract payable
Management believes the carrying value of the long term contract
payable represents the fair value of this financial instrument because its terms
are similar to those in the lending market for comparable loans with comparable
risks utilizing a present value rate of 9% (Note 6).
Debentures payable
Management believes the carrying value of debentures payable represents
fair value of these financial instruments because terms are similar to those in
the lending market for comparable loans with comparable risks.
-15-
<PAGE> 44
ZEROS USA, Inc.
--------------------------------
Financial Statements
--------------------------------
Three months ended June 30, 1997
<PAGE> 45
ZEROS USA, Inc.
Balance Sheet - Unaudited
June 30, 1997
Assets
<TABLE>
<S> <C>
Current assets:
Cash $ 299,248
Certificates of deposit 275,000
Contracts receivable, current net of an
allowance for doubtful contracts
of $0 (Note 2) 2,700,000
-----------
Total current assets 3,274,248
-----------
Property and equipment:
Office equipment 19,644
Less accumulated depreciation (1,713)
-----------
Property and equipment, net 17,931
-----------
Other assets:
Contracts receivable, noncurrent (Note 2) 4,211,361
Master license costs 30,000
Investment (Note 3) 25,000
Due from affiliate 216,663
Organizational costs less
amortization of $5,967 60,083
Permit costs 10,000
Deposits 40,000
-----------
Total other assets 4,593,107
-----------
Total assets $ 7,885,286
===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-1-
<PAGE> 46
ZEROS USA, Inc.
Balance sheet - Unaudited
June 30, 1997
Liabilities and Stockholders' Equity
<TABLE>
<S> <C>
Current liabilities:
Note payable (Note 5) $ 275,000
Debentures payable (Note 6) 1,780,260
Accrued interest 41,922
Deferred income taxes (Note 9) 982,692
-----------
Total current liabilities 3,079,874
Long-term contract payable (Note 7) 90,191
Deferred income taxes (Note 9) 485,498
Deferred revenue, licensing contracts (Note 8) 1,691,923
-----------
Total liabilities 5,347,486
-----------
Stockholders' equity (Note 10):
Common stock, $.001 par value,
20,000,000 shares authorized,
11,490,000 issued and outstanding 11,490
Paid in capital 26,745
Retained earnings 2,499,565
-----------
Total stockholders' equity 2,537,800
-----------
Total liabilities and
stockholders' equity $ 7,885,286
===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-2-
<PAGE> 47
ZEROS USA, Inc.
Statement of Operations - Unaudited
Three months ended June 30, 1997
<TABLE>
<S> <C>
Revenues - licensing (Notes 1 and 12) $ 1,691,923
General and administrative expenses 590,032
Other income (expense)
Interest expense (77,060)
Interest income 127,297
------------
Earnings before income taxes 1,152,128
Income taxes (Note 9) 429,270
------------
Net earnings before $ 722,858
============
Earnings per share (Note 1) $ .65
============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-3-
<PAGE> 48
ZEROS USA, Inc.
Statement of Stockholders' Equity - Unaudited
Three months ended June 30, 1997
<TABLE>
<CAPTION>
Common Stock
------------------------ Paid in Retained
Shares Amount Capital Earnings
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at
March 31, 1997 1,000,000 $ 26,000 $ 0 $1,776,707
Amendment of
articles of
incorporation,
June 24, 1997 to
change common stock
to $.001 par value
from no par value 0 (25,000) 25,000
Issuance of common
stock for services
by the company's
President 8,100,000 8,100
Issuance of common
stock for services
by a stockholder 900,000 900
Issuance of common
stock to minority
stockholder of
subsidiary related
to merger 1,490,000 1,490 1,745
Net earnings 722,858
----------- ----------- ----------- -----------
Balance at
June 30, 1997 11,490,000 $ 11,490 $ 26,745 $ 2,499,565
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE> 49
ZEROS USA, Inc.
Statement of Cash Flows - Unaudited
Three months ended June 30, 1997
<TABLE>
<S> <C>
Cash flows due to operating activities:
Net earnings $ 722,858
Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Depreciation and amortization 4,201
Common stock issued for services
rendered to the Company 9,000
(Increase) decrease in:
Contract-receivables, trade (1,817,635)
Increase (decrease) in:
Accounts payable, trade (59,992)
Accrued interest 31,965
Deferred income taxes 429,270
Accrued interest on contract payable: 45,096
-----------
Net cash provided (used) by
operating activities (635,237)
-----------
Cash flows provided (used) from investing activities:
Deposits (40,000)
Purchase of certificates of deposit (275,000)
Purchase of equipment (3,353)
Due from affiliate (216,663)
-----------
Net cash provided (used) by
investing activities (535,016)
-----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-5-
<PAGE> 50
ZEROS USA, Inc.,
Statement of Cash Flows - Unaudited
Three months ended June 30, 1997
<TABLE>
<S> <C>
Cash flows provided (used) by
financing activities:
Proceeds from debentures 894,760
Proceeds from bank note payable 275,000
----------
Net cash provided (used) by
financing activities 1,169,760
----------
Increase (decrease) in cash and
cash equivalents (493)
cash and cash equivalents,
beginning of period 299,741
----------
Cash and cash equivalents,
end of period $ $299,248
==========
Supplemental cash flow information non-cash items:
Common stock (9,000,000 shares) issued
for services rendered to the Company $ 9,000
==========
Common stock (1,490,000 shares) issued
to the subsidiary minority shareholders,
(see Note 9) in connection with the
merger of subsidiary into the Company $ 3,235
==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-6-
<PAGE> 51
ZEROS USA, Inc.
Notes to Financial Statements - Unaudited
Three months ended June 30, 1997
Note 1 - Significant accounting policies
Organization
ZEROS USA, Inc. (the "Company") formerly "ZEROS", inc. was incorporated
in the state of Texas on November 12, 1996. The Company develops and sells
technology for industrial waste systems. The Company has a master license on the
system (the "System") called "Zero Emission Energy Recycling Oxidation System"
or "ZEROS" - an energy recycling oxidation system. The Company sells licenses
for the System to sub-licensees both nationally and internationally. The books
and records of the Company are prepared on the accrual basis for financial
reporting purposes and the cash basis for federal income tax purposes. The
Company has elected a March 31 fiscal year end for both financial and tax
reporting purposes.
Basis of presentation and interim period
The accompanying unaudited financial statements, which are for the
interim period, may not include all disclosures provided in the annual audited
financial statements. In the opinion of the Company, the accompanying unaudited
financial statements contain all adjustments (which are of a normal recurring
nature) necessary for a fair presentation of the financial statements. The
results of operations for the three months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
Revenue recognition
The Company sells sub-licenses to the System and recognizes revenue on
licenses based upon milestones in the contract process. The milestones include
contract signing and delivery of the technology (75%), training on the
technology (15%) and testing of the system equipment (10%).
Organization costs
Organization costs, primarily legal costs, are being amortized over a
sixty month (60) period. Amortization expense for the 3 months ended June 30,
1997 was $3,303.
Investment
Investments are recorded at an estimated fair market value based upon
the investment held available for sale criteria in accordance with FASB #115
Accounting for Certain Debt and Equity Securities.
-7-
<PAGE> 52
Note 1 - Significant accounting policies (continued)
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided
on an accelerated method over the estimated useful lives of the assets as
follows:
Office equipment 5 year
All expenditures for major renewals and betterments are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
When property and equipment are retired or disposed of the related costs and
accumulated depreciation are removed from the applicable accounts and any gain
or loss is reflected in income. Depreciation expense for the 3 months ended June
30, 1997 was $898.
Acquisition
In February 1997 the Company acquired the majority stock (91%) of
Gunner Holdings, Inc. - a Utah corporation and changed its name to ZEROS USA,
Inc. - Utah. In June 1997, the subsidiary corporation was merged into ZERO USA,
Inc. by issuance of 1,490,000 shares of parent stock on a one share for one
share basis to minority shareholders of the subsidiary and the merger of the
subsidiary into the parent under applicable state corporate law.
Income taxes
The Company accounts for its income taxes using the Financial
Accounting Standards Board Statement No.109, "Accounting for Income Taxes" (SFAS
No.109) which requires the establishment of a deferred tax asset or liability
for taxable amounts and operating loss and tax credit carryforwards. Deferred
tax assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be "cash equivalents" for purposes of
the statement of cash flows.
-8-
<PAGE> 53
Note 1 - Significant accounting policies (continued)
Concentration of credit risk
The Company extends credit to its customers. The Company may extend
certain credit during the normal course of business operations which may be
unsecured. A substantial portion of the customers' ability to pay their debts
(Note 14) to the Company is dependent on the waste management economic sector.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Earnings per share
Net earnings per share is based upon the weighted average number of
shares of common stock outstanding. For the three months ended June 30, 1997,
1,115,275 shares was used to compute the earnings per share. Primary and fully
diluted earnings per share are the same for the period.
Note 2 - Contracts receivable
The Company utilized installment contracts to finance the sale of
sub-licenses by the Company. The terms of each contract indicate a license price
of $2,700,000 to be paid in three annual installments of $900,000. These
contracts are secured by certain assets and guarantees of the licensees and
their guarantors. Unamortized discount is based upon an imputed interest rate of
9%. The analysis of the contracts at June 30, 1997 is as follows:
<TABLE>
<S> <C>
Total contracts receivable $ 8,100,000
Less current amount 2,700,000
-----------
Contracts receivable, noncurrent 5,400,000
Unamortized discount (1,188,639)
-----------
Noncurrent contracts less
unamortized amount $ 4,211,361
===========
</TABLE>
The Company at June 30, 1997 had three contracts with three year terms.
The contracts mature in February 2000, March 2000 and April 2000. The contracts
include the right of the licensor to charge the licensee a royalty of 15% of
gross income for each operating system. Each licensee obtains a geographical
area and is allowed to sell sub-licenses subject to the approval of the
licensor. The licensor is obligated primarily to provide a training program and
counsel on operational assistance.
-9-
<PAGE> 54
Note 3 - Investment
The Company holds an investment in preferred stock of a capital
corporation company with a 6% dividend per annum. The Company holds twenty
thousand shares of preferred stock recorded at an estimated market value of
$25,000. Each preferred stock share is convertible into ten shares of common
stock at the end of two years (December 1998). The common stock of the capital
corporation is traded on the NASDAQ exchange (bulletin board) with a trading
range of 1/2 to 1/8 per share at June 30, 1997. The investment is held as
available for sale based upon a contributed cost of $25,000 and estimated fair
market value of $25,000. No additional valuation allowance has been recorded.
Note 4 - Master license costs
The Company acquired a master license for the energy recycling
oxidation system in January 1997. The major terms of the acquisition of the
master license indicates that the Company is to pay $4,000,000 plus certain
legal costs for the master license to a foreign entity ("the Master Licensor").
The Company paid $30,000 in legal costs to transfer the master
licensing rights. Per the contract the initial master license cost of $4,000,000
has been earned by the licensor upon the signing of the contract. The $4,000,000
contract amount is payable in January 2005. The present value of the contract at
its signing date of $1,926,848 reflects a discount of 9% imputed interest rate
and has been deferred until paid. The master license cost has been initially
recorded at the transfer costs of $30,000.
Per the contract an additional $12,000,000 in master licensing costs
will be earned by the Master Licensor when the sale of four equipment systems
occurs by the Company at the rate of $3,000,000 per equipment system sale. These
costs will be payable as the equipment systems construction deposits are
collected.
The contract also indicates that the Company will pay certain
commissions and fees to the Master Licensor as follows:
(1) 5% of license fees sold to third parties.
(2) 5% of gross profit resulting from sales of energy recycling
systems by the licensee to sub-licensees.
(3) 5% of gross income resulting from the sale of products produced
from energy recycling systems sold through sub-licensees.
(4) 5% royalty fees on gross income on units owned and operated by
the licensee (ZEROS USA, Inc.).
-10-
<PAGE> 55
Note 5 - Notes Payable
At June 30, 1997 notes payable consisted of:
<TABLE>
<S> <C>
Bank note, due April, 1998 with,
interest at 7.0%, collateralized
by $75,000 certificate of deposit $ 75,000
Bank note, interest due quarterly
at 7.35% and principal due May,
1998 collateralized by $100,000
certificate of deposit 100,000
Bank note, interest due quarterly
at 7.35% and principal due May,
1998 collateralized by $100,000
certificate of deposit 100,000
--------
$275,000
========
</TABLE>
Note 6 - Debentures payable
The Company has $1,780,260 debentures payable to various individuals
and entities. The debentures including interest are due and payable on various
dates ranging from January 1, 1998 to June 1, 1998. The interest rate on the
debentures is 10% per annum. Each dollar of debenture is securitized by two
shares of Company common stock owned by the Company's President. Effective June
1997, the Company authorized 20 million shares of common stock to complete the
securitization of Company stock for the debenture holders. The debentures are
exchangeable during the term of the debenture into Company common stock from the
President's shares of common stock.
Note 7 - Long term contract Payable
The Company has entered into a long term contract payable for the
purchase of the exclusive master license of the "ZEROS" System Technology (Note
4). The purchase price of the contract is $4,000,000 due in January 2005.
Interest expense has been imputed at 9% per annum for the contract with the
calculation as follows:
<TABLE>
<S> <C>
Contract amount $ 4,000,000
Unamortized discount (1,982,961)
Deferred recognition of cost (1,926,848)
-----------
Contract payable long term $ 90,191
===========
</TABLE>
Note 8 - Deferred revenue
Deferred revenue is recorded based upon milestones achieved in the
contract process (Note 2). The milestones include the contract signing and
delivery of the technology (75%), training on the technology (15%) and
engineering support
-11-
<PAGE> 56
Note 8 - Deferred revenue (continued)
in testing of the equipment used in the system (10%). The analysis of deferred
revenue at June 30, 1997 is as follows:
<TABLE>
<CAPTION>
For 3 months From contract signing
ended June 30, 1997 date to June 30,
------------------- ---------------------
<S> <C> <C>
Total contract revenue $ 2,700,000 $ 8,100,000
Less discount inputed
interest of 9% (444,103) (1,332,310)
----------- -----------
Total licensing income 2,255,897 6,767,690
Less portion recognized (1,691,923) (5,075,767)
----------- -----------
Deferred revenue $ 563,974 $ 1,691,923
=========== ===========
</TABLE>
The deferred revenue represents deferred revenue on installment
contracts from licensees with maturity dates in February, March, and April of
the year 2000.
Note 9 - Income taxes
The Company's deferred tax assets relate principally to non-deductible
accrued expenses, a net operating loss carryforward, and deferred revenue.
Deferred tax liabilities relate to contracts receivable that are not recognized
for taxable income purposes.
A summary of deferred tax assets and liabilities follows:
<TABLE>
<S> <C>
Deferred tax assets:
Temporary differences,
primarily deferred revenue $ 674,346
Net operating loss carryforward 412,594
Asset valuation reserve 0
-----------
1,086,940
Deferred tax liabilities (2,555,130)
-----------
Net deferred tax liabilities $ 1,468,190
===========
</TABLE>
The net operating losses of $1,116,025 as of June 30, 1997, begins to
expire in the year ending March 31, 2012. The provision for income taxes in the
statement of income for the 3 month period ended June 30, 1997, includes the
following:
<TABLE>
<S> <C>
Current tax expense $ 0
Deferred income taxes primarily
related to contracts receivable:
Deferred - current 343,092
Deferred - noncurrent 86,178
-----------
Provision for income taxes $ 429,270
===========
</TABLE>
-12-
<PAGE> 57
Note 10 Stockholders' equity
In June 1997 the Company amended its articles of incorporation to
authorize twenty million shares of common stock at a $.001 par value and ten
million shares of preferred stock at a $5 stated value. The Company also changed
its name from "ZEROS", inc. to ZEROS USA, Inc. The Company by shareholders
ratification due to the merger issued an additional 8,100,000 of common stock at
$.001 par value to the President in June 1997 fair valued at $8,100 and 900,000
shares rendered in June 1997 of common stock at $.001 to another shareholder for
services fair valued at $900. Effective June 1997 in conjunction with the merger
of the parent and the subsidiary, the Company also purchased the minority shares
interest in the subsidiary by exchanging 1,490,000 shares of common stock of the
parent for the minority shares of the subsidiary on a one share of minority
interest for a one share of parent Company common stock basis.
Note 11 - Related party transactions
The Company incurred approximately $57,975 in administrative fees for
office expenses from a company controlled by a shareholder.
The Company incurred master license transfer costs of $30,000 from a
foreign corporation and will pay fees and royalties for this master license
based upon certain terms of the agreement with an initial contract amount of
$4,000,000.
The Company incurred air charter travel expenses of approximately
$143,452 from entities under the control of the President of the Company. In
April 1997 the Company entered into an aircraft reimbursement agreement with an
related party which requires the Company to pay 120 regular payments of $16,000
per month for aircraft rental plus other expenses. The commitments for the next
five years based upon a fiscal year ending March 31, are as follows:
<TABLE>
<S> <C>
1998 $ 192,000
1999 192,000
2000 192,000
2001 192,000
2002 192,000
Thereafter 960,000
-----------
Total $ 1,920,000
===========
</TABLE>
At June 30, 1997, $216,663 is carried as an account receivable from an
affiliated company.
-13-
<PAGE> 58
Note 12 - Major customers
The Company since its inception in November 12, 1996, has had revenue
from licenses sold to three licensees of approximately $1,692,000 each. Each
sublicense represents one-third of total revenue since inception of the Company.
Note 13 - Subsequent events
As Of July 1997 the Company also obtained additional debenture proceeds
totaling $146,600. The additional debentures are at 10% per annum maturing in
July 1998 with principal and interest due at maturity. Each dollar of debenture
is securitized by two shares of Company common stock owned by the Company's
President. The debentures are also exchangeable during the term of the debenture
into Company common stock from the President's shares of common stock.
The system equipment purchase (OCS assets purchase) from a related
party is currently under discussion. Currently, the Company anticipates issuance
of preferred stock to acquire the OCS assets.
Note 14 - Financial instruments
The Company's financial instruments consist of cash, certificate of
deposit, contracts receivable, an investment in preferred stock, a long term
contract payable, note payable, and debentures payable.
Cash
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits and a money market investment account
at a brokerage firm. The Company has not experienced any losses and it believes
it is not exposed to any significant credit risks affecting cash. At June 30,
1997, $306,822 of its cash in banks wan maintained in excess of federally
insured amounts.
Certificates of Deposit
The Company has one year certificates of deposit with the bank which
exceed federally insured limits. The Company has not experienced any losses and
believes it is not exposed to any significant risks affecting certificates of
deposit.
Investment
Management believes this investment in preferred stock (Note 3) is
fairly stated at its estimated not realizable value and a reserve for additional
valuation allowances is not required.
-14-
<PAGE> 59
Note 14 - Financial instruments (continued)
Contracts receivable
Management believes the carrying value of contracts receivable (Note 2)
is fairly stated at estimated net realizable values and a reserve for
uncollectibility is not required. Management also believes the carrying value of
these contracts receivable represents fair value of these financial instruments
because terms are similar to those in the lending market for comparable loans
with comparable risks using an imputed interest rate of 9% (Note 2).
Long-term contract payable
Management believes the carrying value of the long term contract
payable represents the fair value of this financial instrument because its terms
are similar to those in the lending market for comparable loans with comparable
risks utilizing a present value rate of 9% (Note 7).
Notes payable
Management believes the carrying value of notes payable approximates
fair value of these financial instruments.
Debentures payable
Management believes the carrying value of debentures payable represents
fair value of these financial instruments because terms are similar to those in
the lending market for comparable loans with comparable risks.
-15-
<PAGE> 60
ZEROS USA, Inc.
Balance Sheet - Unaudited
September 30, 1997
Assets
<TABLE>
<S> <C>
Current assets:
Cash $ 64,915
Certificates of deposit (Note 5) 415,000
Contracts receivable, current net of an
allowance for doubtful contracts
of $0 (Note 2) 2,700,000
------------
Total current assets 3,179,915
------------
Property and equipment:
Office equipment 25,823
Less accumulated depreciation (2,850)
------------
Property and equipment, net 22,973
------------
Other assets:
Contracts receivable, noncurrent (Note 2) 4,372,991
Master license costs (Note 4) 30,000
Investment (Note 3) 25,000
Investments - other 108,764
Organizational costs less
amortization of $9,270 56,780
Permit costs 10,000
Deposits 43,000
------------
Total other assets 4,646,535
------------
Total assets $ 7,849,423
============
</TABLE>
The accompanying notes are an integral part of these Financial Statements
1
<PAGE> 61
ZEROS USA, Inc.
Balance Sheet - Unaudited
September 30, 1997
Liabilities and Stockholders Equity
<TABLE>
<S> <C>
Current liabilities:
Accounts payable $ 46,700
Note payable (Note 5) 415,000
Debentures payable (Note 6) 1,928,084
Accrued interest 92,208
Deferred income taxes (Note 10) 946,836
----------
Total current liabilities 3,428,828
Long-term contract payable (Note 7) 135,287
Series A convertible bonds (Note 8) 135,000
Deferred income taxes (Note 10) 172,276
Deferred revenue, licensing contracts (Note 9) 1,691,923
----------
Total liabilities 5,563,314
----------
Stockholders' equity (Note 11):
Preferred stock, $.001 par value,
20,000,000 authorized, 10,115,000 shares
issued and outstanding 10,115
Common stock $.001 par value, 20,000,000
shares authorized, 12,490,000 shares
issued and 8,490,000 shares outstanding 12,490
Additional paid in capital 440,080
Retained earnings 1,913,424
Less - common stock in treasury,
4,000,000 shares, at cost (Note 11) (90,000)
----------
Total stockholders' equity 2,286,109
----------
Total liabilities and
stockholders' equity $7,849,423
==========
</TABLE>
The accompanying noted are an integral part of theme Financial Statements
2
<PAGE> 62
ZEROS USA, Inc.
Statement of Operations - Unaudited
<TABLE>
<CAPTION>
Three Months Six Months
ended ended
Sept 30, 1997 Sept 30,1997
------------- ------------
<S> <C> <C>
Revenues-licensing (Notes 1 and 13) $ -- $ 1,691,923
General and administrative expenses 996,093 1,586,125
Other income (expense)
Interest expense (101,885) (178,945)
Interest income 162,759 290,056
------------- ------------
Earnings (loss) before income taxes (935,219) 216,909
Income tax provision (benefit) (Note 10) (349,078) 80,192
------------- ------------
Net earnings (loss) $ (586,141) $ 136,717
============= ============
Primary earnings (loss) per share (Note 1) $ (.051) $ .021
============= ============
Fully diluted earnings (loss)
per share (Note 1) $ (.047) $ .029
============= ============
</TABLE>
The accompanying notes are an integral part of these Financial Statements
3
<PAGE> 63
ZEROS USA, Inc.
Statement of Stockholders' Equity - Unaudited
Six Months ended September 30, 1997
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------ ------------------- Paid in Retained Treasury
Shares Amount Shares Amount Capital Earnings Stock
--------- ------- ---------- ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 1,000,000 $26,000 0 $ 0 $ 0 $1,776,707 $ 0
Amendment of articles of incorporation, June 24,
1997 to change common stock to .001
par value from no par value (25,000) 25,000
Issuance of common stock to the
company's president 8,100,000 8,100
Issuance of common stock for services performed
by the stockholder 900,000 900
Issuance of common stock to minority stockholder
or subsidiary related to merger 1,490,000 1,490 1,745
Issuance of common stock to a related party
for manufacturing rights 1,000,000 1,000 29,000
Issuance of preferred stock to company's
president in exchange for common stock (4,000,000) 3,000,000 3,000 87,000 (90,000)
Issuance of preferred stock to licensees
pursuant to agreements 550,000 550 15,950
Issuance of preferred stock for services performed
by company's president 2,500,000 2,500 72,500
Issuance of preferred stock for services performed
by officers and shareholders 4,065,000 4,065 117,885
Reissue shares of common stock for services
performed by officers and shareholders 91,000
Net earnings 136,717
---------- ------- ---------- ------- -------- ---------- --------
Balance at September 30, 1997 8,490,000 $12,490 10,115,000 $10,115 $440,080 $1,913,424 $(90,000)
========== ======= ========== ======= ======== ========== ========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
4
<PAGE> 64
ZEROS USA, Inc.
Statement of Cash Flows - Unaudited
<TABLE>
<CAPTION>
Three Months Six Months
ended ended
Sept 30, 1997 Sept 30, 1997
------------- -------------
<S> <C> <C>
Cash flows due to operating activities:
Net earnings (loss) $ (586,141) $ 136,717
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,439 8,640
Preferred and common stock
issued for services rendered
to the Company 287,950 296,950
Preferred stock issued to
licensees pursuant to agreements 16,500 16,500
Common stock issued to related
party for manufacturing rights 30,000 30,000
Increase in contract receivables,
trade (161,630) (1,979,265)
Increase (decrease) in:
Accounts payable, trade 46,700 (13,292)
Accrued interest 50,286 82,251
Deferred income taxes (349,078) 80,192
Accrued interest on
contract payable 45,096 90,192
------------- -------------
Net cash used in
operating activities (615,878) (1,251,115)
------------- -------------
Cash flows provided by (used in) investing activities:
Deposits (3,000) (43,000)
Purchase of certificates of deposit (140,000) (415,000)
Purchase of equipment (6,179) (9,532)
Investments - other 107,900 (108,763)
------------- -------------
Net cash used in
investing activities (41,279) (576,295)
------------- -------------
</TABLE>
5
<PAGE> 65
ZEROS USA, Inc.
Statement of Cash Flows - Unaudited
<TABLE>
<CAPTION>
Three Months Six Months
ended ended
Sept 30, 1997 Sept 30, 1997
------------- -------------
<S> <C> <C>
Cash flows provided (used in) by
financing activities:
Proceeds from debentures 147,824 1,042,584
Proceeds from notes payable 140,000 415,000
Proceeds from Series A
convertible bonds 135,000 135,000
------------- -------------
Net cash provided by
financing activities 422,824 1,592,584
------------- -------------
Increase (decrease) in cash and
cash equivalents (234,333) (234,826)
Cash and cash equivalents,
beginning of period 299,248 299,741
------------- -------------
Cash and cash equivalents,
end of period $ 64,915 $ 64,915
============= =============
Supplemental cash flow information - non-cash items:
Common stock (9,000,000 shares) issued
for services rendered to the Company $ 9,000
=============
Common stock (1,490,000 shares) issued
to the subsidiary minority
shareholders in conjunction with the
merger of subsidiary into the Company $ 3,235
=============
</TABLE>
The accompanying notes are an integral part of these Financial Statements
6
<PAGE> 66
ZEROS USA, Inc.
Notes to Financial Statements - Unaudited
Six Month Period ended September 30, 1997
Note 1 - Significant accounting policies
Organization
ZEROS USA, Inc. (the "Company") formerly "ZEROS", inc. was incorporated in
the state of Texas on November 12, 1996. The Company develops and sells
technology for industrial waste systems. The Company has a master license on the
system (the "System") called "Zero Emission Energy Recycling Oxidation System"
or "ZEROS" - an energy recycling oxidation system. The Company sells licenses
for the System to sub-licensees both nationally and internationally. The books
and records of the Company are prepared on the accrual basis for financial
reporting purposes and the cash basis for federal income tax purposes. The
Company has elected a March 31 fiscal year end for both financial and tax
reporting purposes.
Basis of presentation and interim period
The accompanying unaudited financial statements, which are for the interim
period, may not include all disclosures provided in the annual audited financial
statements. In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (which are of a normal recurring nature)
necessary for a fair presentation of the financial statements. The results of
operations for the 3 and 6 month periods ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
Revenue recognition
The Company sells sub-licenses to the System and recognizes revenue on
licenses based upon milestones in the contract process. The milestones include
contract signing and delivery of the technology (75%), training on the
technology (15%) and testing of the system equipment (10%).
Organization costs
Organization costs, primarily legal costs, are being amortized over a sixty
month (60) period. Amortization expense for the 3 and 6 month periods ended
September 30, 1997 were $3,303 and $6,605, respectively.
7
<PAGE> 67
Note 1 - Significant accounting policies (continued)
Investment
Investments are recorded at an estimated fair market value based upon the
investment held available for sale criteria in accordance with FASB #115
Accounting for Certain Debt and Equity Securities.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided on an
accelerated method over the estimated useful lives of the assets as follows:
Office equipment 5 year
All expenditures for major renewals and betterments are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
When property and equipment are retired or disposed of the related costs and
accumulated depreciation are removed from the applicable accounts and any gain
or loss is reflected in income. Depreciation expense for the 3 and 6 month
periods ended September 30, 1997 were $1,1378 and $2,037, respectively.
Acquisition
In February 1997 the Company acquired the majority stock (91%) of Gunner
Holdings, Inc. - a Utah corporation and changed its name to ZEROS USA, Inc. -
Utah. In June 1997, the subsidiary corporation was merged into ZERO USA, Inc. by
issuance of 1,490,000 shares of parent stock on a one share for one share basis
to minority shareholders of the subsidiary and the merger of the subsidiary into
the parent under applicable state corporate law.
8
<PAGE> 68
Note 1 - Significant accounting policies (continued)
Income taxes
The Company accounts for its income taxes using the Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" (SFAS No. 109)
which requires the establishment of a deferred tax asset or liability for
taxable amounts and operating loss and tax credit carryforwards. Deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of three
months or less, when purchased, to be "cash equivalents" for purposes of the
statement of cash flows.
Concentration of credit risk
The Company extends credit to its customers. The Company may extend certain
credit during the normal course of business operations which may be unsecured. A
substantial portion of the customers' ability to pay their debts (Note 14) to
the Company is dependent on the waste management economic sector.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
9
<PAGE> 69
Note 1 - Significant accounting policies (continued)
Earnings per share
Primary earnings per share is based upon the weighted average number of
shares of common stock and common stock equivalents(convertible preferred
stock). Primary earnings per share is computed by dividing (a) net income by (b)
average number of common shares outstanding, increased by common equivalent
shares (convertible preferred stock) determined by using the treasury method.
Fully diluted earnings per share is computed by dividing (a) net income plus
interest on debentures and Series A bonds net of applicable income taxes by (b)
common and common stock equivalents shares outstanding plus shares which would
by issued upon conversion of the debentures and Series A bonds. For the 3 and 6
month periods ended September 30, 1997, 11,567,337 and 6,369,863 shares were
used to compute primary earnings (loss) per share. For the 3 and 6 month periods
ended September 30, 1997, 11,698,762 and 6,435,935 shares were used to compute
fully diluted earnings (loss) per share.
Note 2 - Contracts receivable
The Company utilized installment contracts to finance the sale of
sub-licenses by the Company. The terms of each contract indicate a license price
of $2,700,000 to be paid in 3 annual installments of $900,000. These contracts
are secured by certain assets and guarantees of the licensees and their
guarantors. Unamortized discount is based upon an imputed interest rate of 9%.
The analysis of the contracts at September 30, 1997 is as follows:
<TABLE>
<S> <C>
Total contracts receivable $ 8,100,000
Less current amount 2,700,000
-------------
Contracts receivable, noncurrent 5,400,000
Unamortized discount (1,027,009)
Noncurrent contracts less -------------
unamortized amount $ 4,372,991
=============
</TABLE>
The Company at September 30, 1997 had three contracts with three year terms.
The contracts mature in February 2000, March 2000 and April 2000. The contracts
include the right of the licensor to charge the licensee a royalty of 15% of
gross income for each operating system. Each licensee obtains a geographical
area and is allowed to sell sub-licenses subject to the approval of the
licensor. The licensor is obligated primarily to provide a training program and
counsel on operational assistance.
10
<PAGE> 70
Note 3 - Investment
The Company holds an investment in preferred stock of a capital corporation
company with a 6% dividend per annum. The Company holds twenty thousand shares
of preferred stock recorded at an estimated market value of $25,000. Each
preferred stock share is convertible into ten shares of common stock at the end
of two years (December 1998). The common stock of the capital corporation is
traded on the NASDAQ exchange (bulletin board) with a trading range of 1/2 to
1/8 per share at September 30, 1997. The investment is held as available for
sale based upon a contributed cost of $25,000 and estimated fair market value of
$25,000. No additional valuation allowance has been recorded.
Note 4 - Master license costs
The Company acquired a master license for the energy recycling oxidation
system in January 1997. The major terms of the acquisition of the master license
indicates that the Company is to pay $4,000,000 plus certain legal costs for the
master license to a foreign entity ("the Master Licensor").
The Company paid $30,000 in legal costs to transfer the master licensing
rights. Per the contract the initial master license cost of $4,000,000 has been
earned by the licensor upon the signing of the contract. The $4,000,000 contract
amount is payable in January 2005. The present value of the contract at its
signing date of $1,926,848 reflects a discount of 9% imputed interest rate and
has been deferred until paid. The master license cost has been initially
recorded at the transfer costs of $30,000.
Per the contract an additional $12,000,000 in master licensing costs will be
earned by the Master Licensor when the sale of four equipment systems occurs by
the Company at the rate of $3,000,000 per equipment system sale. These costs
will be payable as the equipment systems construction deposits are collected.
11
<PAGE> 71
Note 4 - Master license costs (continued)
The contract also indicates that the Company will pay certain commissions and
fees to the Master Licensor as follows:
(1) 5% of license fees sold to third parties.
(2) 5% of gross profit resulting from sales of energy recycling systems
by the licensee to sub-licensees.
(3) 5% of gross income resulting from the sale of products produced
from energy recycling systems sold through sub-licensees.
(4) 5% royalty fees on gross income on units owned and operated by the
licensee (ZEROS USA, Inc.).
Note 5 Notes payable
At September 30, 1997 notes payable consisted of:
<TABLE>
<S> <C>
Bank note, due April, 1998 with
interest at 7.0%, collateralized
by $75,000 certificate of deposit $ 75,000
Bank note, interest due quarterly
at 7.35% and principal due May,
1998 collateralized by $100,000
certificate of deposit 100,000
Bank note, interest due quarterly
at 7.35% and principal due May,
1998 collateralized by $100,000
certificate of deposit 100,000
Bank note, interest due quarterly
at 7.25% and principal due July, 1998
collateralized by $50,000 certificate
of deposit 50,000
Bank note, interest due quarterly
at 7.0% and principal due July, 1998
collateralized by $90,000 certificate
of deposit 90,000
---------
$ 415,000
=========
</TABLE>
12
<PAGE> 72
Note 6 - Debentures payable
The Company has $1,928,084 of debentures payable to various individuals and
entities. The debentures including interest are due and payable on various dates
ranging from January 1, 1998 to June 1, 1998. The interest rate on the
debentures is 10% per annum. Each dollar of debenture is securitized by two
shares of Company common stock owned by the Company's president. Effective June
1997, the Company authorized 20 million shares of common stock to complete the
securitization of Company stock for the debenture holders. The debentures are
exchangeable during the term of the debenture into Company common stock.
Note 7 - Long-term contract payable
The Company has entered into a long-term contract payable for the purchase of
the exclusive master license of the "ZEROS" System Technology (Note 4). The
purchase price of the contract is $4,000,000 due in January 2005. Interest
expense has been imputed at 9% per annum for the contract with the calculation
as follows:
<TABLE>
<S> <C>
Contract amount $ 4,000,000
Unamortized discount (1,937,865)
Deferred recognition of cost (1,926,848)
------------
Contract payable long-term $ 135,287
============
</TABLE>
Note 8 - Series A convertible bonds
The Company has $135,000 of Series A convertible bonds payable to various
individuals and entities. Principal on the Five year Convertible bonds are due
July 31, 2002. The interest rate on the bonds is 12% per annum and is payable
semiannually. The bonds may be converted at the holder's option for Series A
Preferred Stock. Each dollar of bond principal is convertible into one share of
stock.
Note 9 - Deferred revenue
Deferred revenue is recorded based upon milestones achieved in the contract
process (Note 2). The milestones include the contract signing and delivery of
the technology (75%), training on the technology (15%) and engineering support
13
<PAGE> 73
Note 9 - Deferred revenue (continued)
in testing of the equipment used in the system (10%). The analysis of deferred
revenue at September 30, 1997 is as follows:
<TABLE>
<CAPTION>
From contract
signing date to
September 30, 1997
------------------
<S> <C>
Total contract revenues $ 8,100,000
Less discount inputed interest of 9% (1,332,310)
------------------
Total licensing income 6,767,690
Less portion recognized (5,075,767)
------------------
Deferred revenue $ 1,691,923
==================
</TABLE>
The deferred revenue represents deferred revenue on installment contracts
from licensees with maturity dates in February, March, and April of the year
2000.
Note 10 - Income taxes
The Company's deferred tax assets relate principally to non-deductible
accrued expenses, a net operating loss carryforward and deferred revenue.
Deferred tax liabilities relate to contracts receivable that are not recognized
for taxable income purposes.
A summary of deferred tax assets and liabilities follows:
<TABLE>
<S> <C>
Deferred tax assets:
Temporary differences,
primarily deferred revenue $ 676,857
Net operating loss carryforward 818,915
Asset valuation reserve 0
-------------
1,495,772
Deferred tax liabilities (2,614,884)
-------------
Net deferred tax liabilities $ 1,119,112
=============
</TABLE>
14
<PAGE> 74
Note 10 - Income taxes (continued)
The net operating losses of $2,215,079 as of September 30, 1997, begins
to expire in the year ending March 31, 2012. The provision for income taxes in
the statement of income for the 3 and 6 month periods ended September 30, 1997,
includes the following:
<TABLE>
<CAPTION>
For 3 Month For 6 month
period ended period ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Current tax expense $ 0 $ 0
Deferred income taxes primarily
related to contracts receivable:
Deferred - current (35,856) 307,237
Deferred - noncurrent (313,222) (227,045)
------------------ ------------------
Income tax provision (benefit) $ (349,078) $ 80,192
================== ==================
</TABLE>
Note 11 - Stockholders' equity
In June 1997 the Company amended its articles of incorporation to
authorize twenty million shares of common stock at a $.001 par value and ten
million shares of preferred stock at a $5 stated value. The Company also changed
its name from "ZEROS", inc. to ZEROS USA, Inc. The Company by shareholder
ratification due to the merger issued 8,100,000 of common stock at $.001 par
value to the president in June 1997 fair valued at $8,100 and 900,000 shares
rendered in June 1997 of common stock at $.001 to another shareholder for
services fair valued at $900. Effective June 1997 in conjunction with the merger
of the parent and the subsidiary, the Company also purchased the minority shares
interest in the subsidiary by exchanging 1,490,000 shares of common stock of the
parent for the minority shares of the subsidiary on a one share of minority
interest for a one share of parent Company common stock basis. The preferred
stock was amended in August 1997 in conjunction with the merger to authorize
twenty million shares of preferred stock at $.001 par value.
15
<PAGE> 75
Note 11 - Stockholders' equity (continued)
In September 1997 the Company exchanged 3,000,000 preferred stock shares for
4,000,000 common shares of the president's common stock. The Company also issued
1,000,000 shares of common stock to a related party for manufacturing rights and
a split revenue agreement. The Company also issued preferred stock of 550,000
shares, 2,500,000 shares and 4,065,000 shares, respectively, to licensees, the
Company president, key officers and shareholders for services rendered. The
preferred stock is convertible one for one into common stock.
Note 12 - Related party transactions
The Company incurred approximately $75,000 and $133,000 for the 3 and 6 month
periods ended September 30, 1997, respectively in administrative fees for office
expenses including subleases, from affiliated companies.
The Company incurred master license transfer costs of $30,000 from a foreign
corporation and will pay fees and royalties for this master license based upon
certain terms of the agreement with an initial contract amount of $4,000,000.
16
<PAGE> 76
Note 12 - Related party transactions (continued)
The Company incurred air charter travel expenses of approximately $96,000
and $239,000 for the 3 and 6 month periods ended September 30, 1997,
respectively from entities under the control of the president of the Company. In
April 1997 the Company entered into an aircraft reimbursement agreement with a
related party which requires the Company to pay 120 regular payments of $16,000
per month for aircraft rental plus other expenses. The commitments for the next
five years based upon a fiscal year ending March 31, are as follows:
<TABLE>
<S> <C>
1998 $ 192,000
1999 192,000
2000 192,000
2001 192,000
2002 192,000
Thereafter 960,000
----------
Total $1,920,000
==========
</TABLE>
Note 13 - Major customers
The Company since its inception in November 12, 1996, has had revenue from
licenses sold to three licensees of approximately $1,692,000 each. Each
sub-license represents one-third of total revenue since inception of the
Company.
Note 14 - Financial instruments
The Company's financial instruments consist of cash, certificate of deposit,
contracts receivable, an investment in preferred stock, a long-term contract
payable, note payable, debentures payable and Series A convertible bonds.
Cash
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits and a money market investment account at a
brokerage firm. The Company has not experienced any losses and it believes it is
not exposed to any significant credit risks affecting cash. At September 30,
1997, $288,928 of its cash in banks was maintained in excess of federally
insured amounts.
17
<PAGE> 77
Note 14 - Financial instruments (continued)
Certificates of Deposit
The Company has one year certificates of deposit with the bank which exceed
federally insured limits. The Company has not experienced any losses and
believes it is not exposed to any significant risks affecting certificates of
deposit.
Investment
Management believes this investment in preferred stock (Note 3) is fairly
stated at its estimated net realizable value and a reserve for additional
valuation allowances is not required.
Contracts receivable
Management believes the carrying value of contracts receivable (Note 2) is
fairly stated at estimated net realizable values and a reserve for
uncollectibility is not required. Management also believes the carrying value of
these contracts receivable represents fair value of these financial instruments
because terms are similar to those in the lending market for comparable loans
with comparable risks using an imputed interest rate of 9% (Note 2).
Long-term contract payable
Management believes the carrying value of the long-term contract payable
represents the fair value of this financial instrument because its terms are
similar to those in the lending market for comparable loans with comparable
risks utilizing a present value rate of 9% (Note 7).
Notes payable
Management believes the carrying value of notes payable approximates fair
value of these financial instruments.
Debentures payable
Management believes the carrying value of debentures payable represents
fair value of these financial instruments because terms are similar to those in
the lending market for comparable loans with comparable risks.
18
<PAGE> 78
Note 14 - Financial instruments (continued)
Series A convertible bonds
Management believes the carrying value of the series A convertible bond
represents fair value of these financial instruments because terms are similar
to those in the lending market for comparable loans with comparable risks.
19
<PAGE> 79
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZEROS USA, INC.
By: /s/ CHET GUTOWSKY
----------------------------------
Chet Gutowsky
Chief Financial Officer
<PAGE> 80
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
*3.1 Articles of Incorporation of ZEROS
3.2 Amended and Restated Articles of Incorporation of
ZEROS
*3.3 Bylaws of ZEROS
4.1 Designation of Rights and References of Series A
Preferred Stock
4.2 Designation of Rights and References of Series B
Preferred Stock
4.3 Designation of Rights and References of Series C
Preferred Stock
4.4 Designation of Rights and References of Series D
Preferred Stock
*4.5 One Year 10% Secured Debentures
*4.6 Series A Five-Year 12% Convertible Bond
+4.7 Series B Ten-Year 10% Convertible Bond
*4.8 Promissory Note due April 18, 1998 in the amount of
$75,000 with interest at 7.0%
*4.9 Promissory Note (Loan Number 01693161) due May 30,
1998 in the amount of $100,000 with interest at
7.35%
*4.10 Promissory Note (Loan Number 01693162) due May 30,
1998 in the amount of $100,000 with interest at
7.35%
*4.11 Promissory Note due July 7, 1998 in the amount of
$50,000 with interest at 7.00%
*4.12 Promissory Note due August 12, 1998 in the amount
of $90,000 with interest at 7.0%
*10.1 Master License Agreement dated November 15, 1996 by
and between ZEROS and M, Ltd.
*10.2 Agreement in Principle to Acquire OCS Assets
*10.3 Reimbursement Agreement dated April 1, 1997 by and
between ZEROS and M, Ltd.
*10.4 Agreement for Sale of ZEROS Approved License dated
May 31, 1997 by and among ZEROS, ZEROS California
Corporation and Lawson ZEROS Corporation
*10.5 Agreement for Sale of ZEROS Indian Approved License
dated March 31, 1997 by and between ZEROS and ZEROS
California Corporation
*10.6 Agreement for Sale of ZEROS Approved License dated
February 28, 1997 by and between ZEROS and ZEROS
Piney Creek
*10.7 Agreement for Sale of ZEROS Environmental Approved
License dated October 29, 1997 by and between ZEROS
and ZHM, Inc.
*10.8 Agreement for Sale of ZEROS Environmental Approved
License dated November 2, 1997 by and among ZEROS,
ZEROS California Corporation and ZEROS Western
Corporation
*10.9 Form of Financial Services Agreement between ZEROS
and Capital American Associates, Incorporated
*10.10 Directors and Officers Insurance and Company
Reimbursement Policy
<PAGE> 81
*10.11 Asset Sales Agreement dated November 15, 1997 by and
between ZEROS and OCS, Inc.
*10.12 Employment Agreement dated October 1, 1997 by and
between ZEROS and Steve Clark
*10.13 Employment Agreement dated October 1, 1997 by and
between ZEROS and Jesse Blanco
*10.14 Employment Agreement dated October 1, 1997 by and
between ZEROS and Chet Gutowsky
*10.15 Employment Agreement dated October 1, 1997 by and
between ZEROS and Celso Suarez
*10.16 Manufacturing Agreement dated September 30, 1997 by
and between ZEROS and OCS, Inc.
*10.17 Supplement to Master License Agreement dated
November 15, 1996 by and between ZEROS and M, Ltd.
10.18 Professional Services Agreement by and between
ZEROS and James Winchester
*99.1 Texas Natural Resources letter dated April 29, 1997
- -----------
* Previously filed.
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ZEROS USA, INC.
ARTICLE FIRST
ZEROS USA Inc., pursuant to the provisions of Article 4.07 of the Texas Business
Corporation Act, hereby adopts its Restated Articles of Incorporation which
accurately copy the Articles of Incorporation and all amendments thereto that
are in effect to date and has further amended by such Restated Articles of
Incorporation as hereinafter set forth and which contain no other change in any
provision thereof.
ARTICLE SECOND
The Articles of Incorporation of the corporation are amended by the Restated
Articles of Incorporation as follows: (i) Article IV is amended to (a) increase
the authorized capital stock of the corporation, (b) authorize the issuance of
Preferred Stock, from time to time, with such rights, designations and
preferences as may be determined by the board of directors of the corporation,
(c) provide certain authorizations and assurances concerning payment of
dividends and voting rights to holders of common stock of the corporation, (d)
prohibit cumulative voting by shareholders of the corporation, (e) deny
preemptive rights to all shareholders of the corporation, and (f) require
certain restrictive legends on stock certificates issued by the corporation;
(ii) Article VI is amended to change the name and address of the corporation's
Registered Agent and Registered Office; (iii) Article VII is amended to include
the name and address of each member of the corporation's current board of
directors; (iv) Article VIII is added in order to limit the liability of
directors of the corporation to the fullest extent permitted under Texas law (v)
Article IX has been deleted and replaced with a new provision (a) providing,
indemnification for certain persons serving at the request of the corporation,
including officers and directors of the corporation, to the fullest extent
permitted by Texas law, (b) authorizing the corporation to insure any indemnitee
against certain liabilities, and (c) authorizing Indemnification, of certain
employees and agents serving at the request of the corporation to the extent
authorized by the board of directors of the corporation; (vi) Article X is
added to authorize certain persons to call a special meeting of the
shareholders of the corporation; and (vii) Article XI is added to authorize the
board of directors of the corporation to amend the bylaws of the
corporation.
ARTICLE THIRD
Each such amendment by the Restated Articles of Incorporation has been effected
in conformity with the provisions of the Texas Business Corporation Act and such
Restated Articles of Incorporation and each such amendment made by the Restated
Articles of Incorporation were duly adopted by the shareholders of the
corporation on the 17 day of February, 1998.
<PAGE> 2
ARTICLE FOURTH
The number of shares outstanding was 24,211,798; the number of shares entitled
to vote on the Restated Articles of Incorporation as so amended was 22,239,996;
the number of shares voted for such Restated Articles as so amended was
22,068,178; and the number shares voted against such Restated Articles as so
amended was -0- .
ARTICLE FIFTH
The Articles of Incorporation and all amendments and supplement thereto are
hereby superseded by the following Restated Articles of Incorporation which
accurately copy the entire text thereof and as amended as above set forth:
ARTICLE I.
NAME
The name of the Corporation is ZEROS USA, Inc.
ARTICLE II.
DURATION
The period of the Corporation's duration is perpetual.
ARTICLE III.
PURPOSE
The purpose for which the Corporation is organized is the transaction of
any and all lawful business for which corporations may be incorporated under the
Texas Business Corporation Act (the "TBCA").
ARTICLE IV.
CAPITAL STOCK
The total number of shares of all classes of stock that the Corporation may
issue is 100,000,000, which shall be divided into (a) 50,000,000 shares of
common stock having a par value of $.001 per share ("Common Stock") and (b)
50,000,000 shares of preferred stock having a par value of $.001 per share
("Preferred Stock").
2
<PAGE> 3
AMENDMENT TO ARTICLE IV
The total number of shares of all classes of stock that the Corporation
may issue is 190,000,000, which shall be divided into (a) 115,000,000 shares of
common stock having a par value of $.001 per share ("Common Stock") and (b)
75,000,000 shares of preferred stock having a par value of $.001 per share
("Preferred Stock").
A description of the different classes of the Corporation's stock and a
statement of the designations, preferences, limitations and relative rights,
including voting rights, of the various classes of stock are as follows:
1. Preferred Stock. The shares of Preferred Stock may be divided into and
issued in series. The board of directors may establish series of unissued shares
of Preferred Stock by fixing and determining the relative rights and preferences
of the shares of any series so established. The board of directors shall by
resolution establish the designations, preferences, limitations, and relative
rights of each series, including without limitation:
(a) the designation of, and the number of shares that shall
constitute, the series, which number (except as otherwise provided in the
resolutions establishing the series) may be increased or decreased (but not
below the number of shares of the series then issued) from time to time by
resolution of the board of directors;
(b) the rights to dividends, if any, of the series, the preference or
relation, if any, of these dividends to the dividends payable on any other
class or series of the same or other class or series of the Corporation's
capital stock and whether the dividends shall be cumulative or
noncumulative;
(c) the right, if any, of the holders of shares of the series to
convert the shares into, or exchange the shares for, shares of any other
class or series of the same or other class or series of capital stock,
obligations, indebtedness, rights to purchase securities or other
securities of the Corporation or other entities, domestic or foreign, or
for other property or for any combination of the foregoing, and the terms
and conditions of the conversion or exchange;
(d) whether or not shares of the series are subject to redemption, and
the terms and conditions on which, shares of the series may be redeemed;
(e) the rights, if any, of the holders of shares of the series upon
the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation or in the event of any merger or consolidation of, or sale of
assets by, the Corporation;
(f) the terms of any sinking fund or redemption or repurchase or
purchase account, if any, to be provided for shares of the series;
(g) the voting powers, if any, of the holders of shares of the series
generally or with respect to any particular matter, which may be less than,
equal to or greater than one Vote per share, and which may include the
right to vote as a class, to elect one or more directors of the Corporation
generally or under specific circumstances, which circumstances may include
default in the payment of dividends on, or redemption of, the same or any
other class or series of the Corporation's capital stock; and
3
<PAGE> 4
(h) the other powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, that the, board of directors may determine.
2. Common Stock.
(a) Subject to any prior or superior rights of the Preferred Stock,
and on the conditions set forth in Section 1. of this Article or in any
resolution of the board of directors providing for the issuance of any
series of Preferred Stock, and not otherwise, dividends may be declared and
paid to the holders of shares of the Corporation's Common Stock (payable in
cash, stock or otherwise) as may be determined from time to time by
resolution of the board of directors out of any funds legally available
therefor.
(b) Each holder of shares of the Corporation's Common Stock shall be
entitled to one vote for each share held.
3. Cumulative Voting Denied. Shares of the Corporation's voting stock,
whether Common Stock or Preferred Stock, may not be voted cumulatively.
4. Preemptive Rights. Except as may be established by the board of
directors with respect to any series of Preferred Stock, shares of the
Corporation's capital stock do not carry preemptive rights.
5. Stock Certificates. There shall be set forth on the face or back of
each certificate for shares of the Corporation's capital stock a statement that
each of the following is set forth in the articles of incorporation of the
Corporation on file in the Office of the Secretary of State of the State of
Texas, and that the Corporation will furnish a copy of each statement to the
record holder of the certificate without charge on written request to the
Corporation at its principal place of business or registered office: (i) a
statement of the designations, preferences, limitations and relative rights,
including voting rights, of each class or series of the Corporation's capital
stock to the extent that they have been fixed and determined; (ii) a statement
of the authority of the board of directors to fix and determine the
designations, preferences, limitations, and relative rights, including voting
rights, of any series; and (iii) a statement of the extent to which the
Corporation has by its articles of incorporation limited or denied the
preemptive right of shareholders to acquire the Corporation's unissued or
treasury shares.
ARTICLE V.
INITIAL CONSIDERATION FOR ISSUANCE OF SHARES
The Corporation will not commence business until it has received for the
issuance of its shares consideration of a value of at least One Thousand and
No/100 Dollars ($1,000.00), consisting of money, labor done, or property
actually received.
4
<PAGE> 5
ARTICLE VI.
INITIAL REGISTERED OFFICE AND AGENT
The address of the Corporation's initial registered office is 507 North
Belt East, Suite 550, Houston, Texas 77060. The name of the Corporation's
initial registered agent at this address is Jesse Blanco.
ARTICLE VII.
INITIAL BOARD OF DIRECTORS
1. The number of directors shall from time to time be fixed by the
Corporation's Bylaws. The number of directors constituting the initial board of
directors is one. Directors need not be residents of the State of Texas or
shareholders of the Corporation. The name and address of the person elected to
serve as director until the first annual meeting of the shareholders, or until
his successor is duly elected, unless he shall sooner die, resign or be removed,
in accordance with the Corporation's Bylaws, are as follows:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Steve Clark 507 North Belt East, Suite 550
Houston, Texas 77060
Chet Gutowsky 507 North Belt East, Suite 550
Houston, Texas 77060
Jesse BLANCO 507 North Belt East, Suite 550
Houston, Texas 77060
Jeff Simmons 507 North Belt East, Suite 550
Houston, Texas 77060
Celso B. Suarez, Jr. 507 North Belt East, Suite 550
Houston, Texas 77060
Susan Smith 507 North Belt East, Suite 550
Houston, Texas 77060
</TABLE>
2. No director of the Corporation may be removed from his office as a
director by vote or other action of the shareholders or otherwise except for
cause.
5
<PAGE> 6
ARTICLE VIII.
LIMITATION OF DIRECTOR LIABILITY
To the greatest extent permitted by law, a director of the Corporation
shall not be liable to the Corporation or its shareholders for monetary damages
for an act or omission in the director's capacity as a director except for
liability for: (i) a breach of a director's duty or loyalty to the
Corporation or its shareholders; (ii) an act or omission not in good faith that
constitutes a breach of duty of the director to the Corporation or that
involves intentional misconduct or a knowing violation of the law; (iii) a
transaction from which a director received an improper benefit, whether or not
the benefit resulted from an action taken within the scope of the director's
office; (iv) an act or omission for which the liability of a director is
expressly provided for by statute; or (v) an act related to an unlawful stock
repurchase or unlawful payment of a dividend.
ARTICLE IX.
INDEMNIFICATION
1. Right to Indemnification. Each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, any appeal in such action, suit
or proceeding, and any inquiry or investigation that would lead to an action,
suit or proceeding (hereinafter a "proceeding"), by reason of the fact that he
or she, or a person of whom he or she is the legal representative, is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director or officer of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee bent plan (hereinafter an "indemnitee") whether the
basis of the proceeding is alleged action in an official capacity as a director
or officer or in any other capacity while serving as a director or officer,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the TBCA, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that the amendment permits
the Corporation to provide broader indemnification rights than permitted prior
thereto), against all judgments, fines, penalties (including excise tax and
similar taxes), settlements, and reasonable expenses actually incurred by the
indemnitee in connection therewith. The right to indemnification conferred in
this Article shall include the right to be paid by the Corporation the expenses
incurred in defending any proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"; provided, however, that, if the TBCA
requires, an advancement of expenses incurred by an indemnitee shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of the
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined that the indemnitee is not entitled to be indemnified for the
expenses under this Article or otherwise.
2. Insurance. The Corporation may purchase and maintain insurance, at
its expense, on behalf of any indemnitee against any liability asserted
against him and incurred by him in such a capacity or arising out of his status
as a representative of the Corporation, whether or not the
6
<PAGE> 7
Corporation would have the power to indemnify the indemnities against the
expense, liability or loss under the TBCA.
3. Indemnity of Employees and Agents of the Corporation. The Corporation
may, to the extent authorized from time to time by the board of directors, grant
rights to indemnification and to the advancement of expenses to any employee or
agent of the Corporation to the fullest extent of the provisions of this
Article or as otherwise permitted under the TBCA with respect to the
indemnification and advancement of expenses of the Corporation's directors and
officers,
ARTICLE X.
CALL OF SPECIAL MEETINGS OF THE SHAREHOLDERS
Special meetings of the Corporation's shareholders may be called by the
president, the board of directors, or such other person or persons as may be
authorized in the Bylaws.
ARTICLE XI.
AMENDMENT OF BYLAWS
In furtherance and not in limitation of the powers conferred by the laws
of the State of Texas, the board of directors is expressly authorized to alter,
amend or repeal the Bylaws of the Corporation or to adopt new Bylaws.
Dated: 17th day of February, 1998.
ZEROS USA, Inc., a Texas corporation
By: /s/ JESSE BLANCO
----------------------------------
Jesse Blanco, Secretary
7
<PAGE> 8
OATH OF OFFICE
I, Chet Gutowsky, Chief Financial Officer for ZEROS USA, Inc., hereby
assume the office of Inspector of Election. Further, I do solemnly swear to
discharge my duties as Inspector of Election according to all applicable and
pertinent provisions of law to the best of ability, so help me God.
/s/ CHET GUTOWSKY
----------------------------------
Chet Gutowsky, Chief Financial Officer
Dated: February 16,1998
Subscribed and sworn to before me this 16th day of February, 1998.
/s/ CELSO B. SUAREZ, JR.
- ----------------------------------
Notary Public Harris County
State of Texas
=============================================
CELSO B. SUAREZ, JR.
[LOGO] MY COMMISSION EXPIRES
JULY 15, 2001
=============================================
<PAGE> 9
AFFIDAVIT OF SERVICE OF NOTICE OF MEETING
THE STATE OF TEXAS
COUNTY OF HARRIS
JESSE BLANCO, being duly sworn, deposes and says that he, as the
Secretary of ZEROS USA, Inc., a Texas corporation (the "Corporation"), caused
notices of the Special Meeting of Shareholders of the Corporation to be held on
February 17, 1998, a copy of which is attached, to be deposited in the United
States mail, in a sealed envelope, postage prepaid, addressed to each
shareholder of record of the Corporation at his last known address as the same
appeared on the books of the Corporation as of the close of business on
February 6, 1998.
/s/ JESSE BLANCO
----------------------------------
Jesse Blanco
Subscribed and sworn to before me this 16th day of February, 1998.
/s/ CELSO B. SUAREZ, JR.
- ----------------------------------
Notary Public of Harris County
State of Texas
=============================================
CELSO B. SUAREZ, JR.
[LOGO] MY COMMISSION EXPIRES
JULY 15, 2001
=============================================
<PAGE> 1
EXHIBIT 4.1
ZEROS USA, INC.
STATEMENT OF DESIGNATION
OF THE SERIES A CONVERTIBLE PREFERRED STOCK
Pursuant to Article 2.13 of Texas Business Corporation Act
1. The Name of the corporation is ZEROS USA, Inc.
2. The following preambles and resolutions were duly adopted by the Board of
Directors (the "Board of Directors") of ZEROS USA, Inc., a Texas
corporation (the "Company"), by unanimous written consent effective as of
February 17, 1998, pursuant to the provisions of article 2.13 of the Texas
Business Corporation Act:
WHEREAS, the Amended and Restated Articles of Incorporation of the Company
("Amended Articles of Incorporation") authorize the issuance of a class of
convertible preferred stock, par value $.001 per share ("Preferred Stock"), by
the Company:
RESOLVED, that pursuant to the authority expressly granted to and vested in the
Board of Directors by the provisions of the Amended Articles of Incorporation,
the Board of Directors hereby authorizes the issuance of a series of Preferred
Stock, and the Board of Directors hereby fixes the designation, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, of the shares of such
series (in addition to the designation, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, sct forth in the Amended Articles of
Incorporation which are applicable to the Preferred Stock) as follows:
a. Establishment and Designation of Series. There is hereby established
out of the authorized but unissued shares of Preferred Stock a series
of convertible Preferred Stock to be designated Series A Convertible
Preferred Stock ("Series A Preferred Stock"), to consist of an
aggregate of 15,000,000 shares and to have the limitations and rights
as set forth herein. The per share liquidation preference of the
Series A Preferred Stock shall be $1.00 per share (the "Liquidation
Preference").
b. Dividends.
i. The holders of record of shares of Series A Preferred Stock shall
be entitled to be paid dividends (which shall accrue commencing
July 31, 1998 out of funds of the Company available for the
payment of dividends subject to applicable laws and any agreements
to which the Company is a party, at the annual rate of $.30 per
whole share, and no more, payable annually, provided that if the
price of the Series A Convertible Preferred Stock is $5.00 per
share or more, the Company has the option to pay the dividend in
Common Stock. If the Company elects to pay the dividend in Common
Stock, the Company will
<PAGE> 2
round up to the next whole number of any shares payable in the
total annual dividend to each shareholder. The dividend is
payable on the last day of August in each year, beginning on
August 31, 1998, except that if any such date is a Saturday,
Sunday or legal holiday, then such dividend shall be payable on
the first immediately succeeding day that is not a Saturday,
Sunday or legal holiday, (each of such dates being referred to
herein as a "Series A Dividend Payment Date").
ii. Such dividends shall be payable in cash or stock at the
Company's discretion, or, in the event such payment in cash is
prohibited by any loan agreement, indenture, mortgage, note,
security agreement, deed of trust, guaranty or other instrument
evidencing, securing or guaranteeing indebtedness for borrowed
money (collectively, "Debt Agreements" and individually a "Debt
Agreement"), in lieu of payment in cash of all or any portion of
any dividend otherwise payable, such dividends may be paid, at the
option of the Board of Directors, and if permitted by the Debt
Agreements then in effect, in duly authorized, fully paid and non-
assessable shares of Series A Preferred Stock (the "Additional
Shares"). If the Board of Directors determines to pay all or any
portion of a dividend in Additional Shares, the number of such
Additional Shares issuable by the Company shall be one (1) whole
share of Series A Preferred Stock for each $1.00 of dividend
declared. No fractional shares of Series A Preferred Stock
("Fractional Shares") shall be issued as a dividend payment;
provided, however, that the cash amount determined by multiplying
such fraction of a share by $1.00 shall cumulate pursuant to
Section b.iii.
iii. If at any time dividends with respect to the shares of Series
A Preferred Stock are not paid in full but are payable pursuant to
Section b.i, on any Series A Dividend Payment Date whether in
cash, Additional Shares or a combination thereof (the "Omitted
Dividend"), the Series A Preferred Stock shall cumulate such
dividend and accrue additional dividends as though such Omitted
Dividends had been paid in Additional Shares (or Fractional
Shares) and such Additional Shares (or Fractional Shares) had
thereafter accrued dividends in accordance herewith (the
"Cumulative Dividends"). Such Cumulative Dividends shall be fully
cumulative (whether or not earned or declared) and shall be deemed
to constitute accrued and unpaid dividends for all purposes hereof
even if such additional dividends are not specifically mentioned
in any particular context.
iv. Dividends will be payable to the holders of record of the
Series A Preferred Stock appearing on the stock books of the
Company on such record dates as may be declared by the Board of
Directors, not more than 60 days nor less than 10 days before a
Series A Dividend Payment Date. Dividends on account of arrears
for any past dividend periods for which dividends were payable may
be declared and paid at any time, without reference to any regular
Series A
<PAGE> 3
Dividend Payment Date, to holders of record on a date not more
than 60 days nor less than 10 days before the payment date
thereof.
v. If any shares of Series A Preferred Stock are outstanding on or
after July 31, 2003, the Company thereafter (a) will not declare
or pay or set apart for payment any dividends or make any other
distribution on any "Junior Securities" (as defined below) and (b)
will not redeem, purchase or otherwise acquire for value, or set
apart money for any sinking or other analogous fund for the
redemption or purchase of, any shares of Junior Securities, unless
all accrued but unpaid dividends with respect to the Series A
Preferred Stock shall have been paid by the Company; provided,
however, that the foregoing provisions shall not prohibit (1) the
payment or declaration and setting aside of a dividend payable in
Junior Securities or a redemption, purchase or acquisition of
Junior Securities with shares of Junior Securities or (2) a
redemption purchase or acquisition of Junior Securities from any
terminated employee of the Company or any of its affiliated
corporations. No dividend will be declared or paid or set apart
for payment on any "Parity Securities" (as defined below) for any
dividend period, unless at the same time a dividend for the same
dividend period, determined ratably in proportion to the
respective aggregate dividends otherwise payable with respect
thereto, shall be paid or declared and set apart for payment (in
cash and/or Additional Shares, as provided in Section b.ii) on the
Series A Preferred Stock.
c. Liquidation Preference.
i. The shares of Series A Preferred Stock shall be preferred
over the shares of Common Stock and any other class of stock of
the Company ranking junior to the Series A Preferred Stock
(together with the Common Stock, the "Junior Securities") upon the
liquidation, dissolution or winding up of the affairs of the
Company (the "Liquidation"); provided, however, that the shares of
Series A Preferred Stock shall rank on a parity with any series of
Preferred Stock hereafter issued by the Company, the terms of
which do not provide specifically that such series will rank
senior to or junior to the Series A Preferred Stock or provide
specifically that such series will rank on a parity with the
Series A Preferred Stock (together with any Series A Preferred
Stock, the "Parity Securities") as to assets and shall rank junior
to any series of Preferred Stock, now or hereafter issued by the
Company, whose terms provide specifically that such series will
rank senior to the Series A Preferred Stock (the "Senior
Securities") as to assets; provided, however, the issuance of any
Senior Securities must be approved by the holders of a majority of
the then outstanding shares of Series A Preferred Stock. In the
event of a Liquidation, whether voluntary or involuntary, the
holders of the Series A Preferred Stock shall be entitled to
receive out of the assets of the Company available for
distribution to its shareholders, whether from capital, surplus or
earnings, before any distribution is made to holders of Junior
Securities, and on a parity
<PAGE> 4
with the Parity Securities (all Parity Securities being treated as
a single class for such purposes), and after payment in full to
all holders of Senior Securities, an amount equal to the aggregate
Liquidation Preference with respect to all outstanding Series A
Preferred Stock. If, upon a Liquidation, the assets of the
Company, or proceeds thereof, distributable among the holders of
shares of Series A Preferred Stock are insufficient to pay in full
the Liquidation Preference with respect to all outstanding Series
A Preferred Stock, then such assets, or the proceeds thereof,
shall be distributable among such holders and holders of all other
of Parity Securities ratably in accordance with the respective
amounts that would be payable on such shares of Series A Preferred
Stock and other Parity Securities if all amounts payable thereon
were payable in full.
ii. For purposes of this Section 3, neither the sale, conveyance,
exchange of transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all or part of the
property or assets of the Company nor the consolidation or merger
of the Company into or with one or more other corporations or
entities shall be deemed to be a liquidation, dissolution or
winding up, voluntary or involuntary, of the affairs of the
Company.
d. Conversion.
i. The shares of the Series A Preferred Stock are convertible,
at the option of the holder of the Series A Preferred Stock, into
shares of fully paid and non-assessable shares of common stock of
the Company. The shares of the Series A Preferred Stock may be
converted at any time. Each share of the Series A Preferred Stock
may be converted into one (1) share of common stock of the
Company.
ii. To convert shares of Series A Preferred Stock, the holder of
the shares must surrender the certificate or certificates
representing the shares to be converted, duly endorsed to the
Company or in blank, at the principal office of the Company, and
give written notice to the Company at that office that the holder
desires to convert the shares. The notice must set forth the name,
address and taxpayer identification number of the person or
persons to whom a certificate or certificates representing the
common stock of the Company are to be issued.
iii. Shares of the Series A Preferred Stock shall be deemed to be
converted at the close of business on the date of the surrender to
the Company of the properly endorsed certificate or certificates
representing the shares. The rights of the holders of the Series
A Preferred Stock surrendered shall cease at that time, and the
person or persons in whose name or names the certificate or
certificates for the common stock are to be issued shall be
treated for all purposes as having become record owners of the
common stock of the
<PAGE> 5
Company at that time. However, if certificates are surrendered on
a day in which the stock transfer books of the Company arc closed,
the surrender shall be deemed to have occurred on the next
succeeding day on which the stock transfer books are open.
iv. The Company shall at all times reserve and keep available
solely for the purpose of issuing upon conversion of the Series A
Preferred Stock the number of shares of common stock issuable upon
conversion of all outstanding Series A Preferred Stock.
v. At the time of conversion, the Company shall pay to the holder
of record of any share or shares of the Series A Preferred Stock
surrendered for conversion any accrued and unpaid dividends on the
stock.
vi. The issuance of certificates for shares of common stock upon
the conversion of the Series A Preferred Stock shall be made
without charge for any tax with respect to issuance. However, if
any certificate is to be issued, in a name or names other than the
name of names of the holder of record of the Series A Preferred
Stock converted, the person or persons requesting the issuance
shall pay to the Company the amount of any tax that may be payable
in connection with any transfer involved in the issuance, or shall
establish to the satisfaction of the Company that the tax has been
paid or is not due and payable.
vii. The Company shall not be required to issue any fractional
shares of common stock upon the conversion of the Series A
Preferred Stock. If more than one share of the Series A Preferred
Stock is surrendered for conversion at one time by the same
holder, the number of full shares of common stock that shall be
issued upon the conversion of the Series A Preferred Stock shall
be computed on the basis of the aggregate number of shares of the
Series A Preferred Stock surrendered. If any interest in a
fractional share of common stock would otherwise be deliverable
upon the conversion of the Series A Preferred Stock, the Company
shall make adjustment for that fractional share interest by
payment of an amount in cash equal to the same fraction of the
market value at that time of a full share of common stock of the
Company.
viii. If the Company subdivides or combines in a larger or smaller
number of shares its outstanding shares of common stock, then the
number of shares of common stock issuable upon the conversion of
the Series A Preferred Stock shall be proportionally increased in
the case of a subdivision and decreased in the case of a
combination, effective in either case at the close of business on
the date that the subdivision or combination becomes effective.
ix. If the Company at any time pays to the holders of its common
stock a dividend in common stock, the number of shares of common
stock issuable
<PAGE> 6
upon the conversion of the Series A Preferred Stock shall be
proportionally increased, effective: at the close of business on
the record date for determination of the holders of the common
stock entitled to the dividend.
x. Except as provided below if the Company at anytime pays any
dividend or makes any distribution on its common stock in property
other than cash or in common stock of the Company, then provisions
shall be made as part of the terms of the dividend or distribution
so that the holders of the Series A Preferred Stock surrendered
for conversion after the record date for the determination of
holders of common stock entitled to the dividend or distribution
shall be entitled to receive the same proportionate share of
property that they would have been entitled to receive had the
Series A Preferred Stock been converted immediately prior to the
record date.
xi. These adjustments shall be made successively if more than one
of these events occurs. However, no adjustment in the conversion
ratio of the Series A Preferred Stock into common stock shall be
made by reason of:
(1) the payment of a cash dividend on the common stock or on any
other class of stock of the Company;
(2) the purchase, acquisition redemption, or retirement by the
Company of any shares of common stock or of any other class of
stock of the Company, except as provided above in connection
with a subdivision or combination of the outstanding common
stock of the Company;
(3) the issuance, other than as provided above, of any shares of
common stock, or of any securities of the Company convertible
into common stock or into other securities of the Company, or
of any rights, warrants or options to subscribe for or
purchase shares of common stock or other securities of the
Company, or of any other securities of the Company, provided
that if the Company offers any of its securities or any
rights, warrants or options to subscribe for or purchase any
of its securities to the holders of its common stock, pursuant
to any preemptive or preferential lights granted to the
holders of common stock by the certificate of incorporation of
the Company, or pursuant to any similar rights granted by the
board of directors of the Company, the Company shall mail
written notice of the offer to the holders of the Series A
Preferred Stock at least 20 days prior to the record date for
determination of the holders of common stock entitled to
receive the offer;
(4) the offer by the Company to redeem or acquire shares of its
common stock by paying or exchanging the stock of another
corporation or the carrying out of a transaction contemplated
by an offer of this nature; provided that
<PAGE> 7
the Company shall mail written notice of the offer to the
holders of Series A Preferred Stock at least 20 days prior to
the expiration of the offer:
(5) the distribution of stock to holders of common stock of the
Company, if the issuer of the stock distributed is at the time
of the distribution engaged in a business that was previously
operated as a division or subsidiary by a corporation acquired
by the Company and that was distinct from the principal
business of the corporation acquired.
e. Voting Rights.
i. Except as required by the Texas Business Corporation Act,
holders of the Series A Preferred Stock shall have no voting
rights.
ii. So long as any shares of Series A Preferred Stock are
outstanding, the Company shall not, without the affirmative
consent of holders representing a majority of the outstanding
shares of Series A Preferred Stock amend, alter or repeal any of
the provisions of its Amended Articles of incorporation which
would in any way adversely affect the rights of the holders of the
Series A Preferred Stock.
f. Exclusion of Other Rights. Except as may be otherwise required by
applicable law, the shares of Series A Preferred Stock shall not have
any designations, preferences, limitations or relative rights
(including preemptive rights), other than those specifically set forth
in these resolutions (as the resolutions may be amended) and in the
Amended Articles of Incorporation,
g. Reorganization: Mergers. If at any time there shall be a capital
reorganization of the Company or in the case of the consolidation or
merger of the Company with or into any other person or entity (but not
in the case of any sale, conveyance or disposition of all or
substantially all of the assets of the Company to an unaffiliated
party in an arm's length transaction), the Company and the person or
entity formed by such consolidation or resulting from such capital
reorganization or merger, as the case may be, shall make appropriate
provision in the articles or certificate of incorporation or other
governing instruments of such person or entity such that the rights of
the holders of the Series A Preferred Stock after such capital
reorganization, consolidation or merger shall be as nearly equivalent
as may be practicable to such rights of such holder immediately prior
to that event and if the Company is not the surviving corporation or
entity, such surviving corporation or entity, shall issue an
appropriate number of replacement securities for the Series A
Preferred Stock in accordance such rights. If not otherwise required
by law, the Company shall give to the holders of record of the shares
of Series A Preferred Stock at least ten (10) days' prior written
notice of any capital reorganization, consolidation or merger or of
any sale, conveyance or disposition of all or substantially all of the
assets of the Company.
<PAGE> 8
h. Notices. Any notice to be given to the holders of shares of Series A
Preferred Stock shall be deemed given if sent by facsimile
transmission, telex or if deposited in the United States mail, postage
prepaid and addressed to each holder of record at his, her or its
address appearing on the books of the Company.
IN WITNESS WHEREOF, ZEROS USA, INC., has caused this Statement of
Designation to be duly executed this 17th day of February, 1998. ZEROS USA,
Inc.
By:
--------------------
Steve Clark, President
<PAGE> 1
EXHIBIT 4.2
ZEROS USA, INC.
STATEMENT OF DESIGNATION
OF THE SERIES B CONVERTIBLE PREFERRED STOCK
Pursuant to Article 2.13 of Texas Business Corporation Act
1. The Name of the corporation is ZEROS USA, Inc.
2. The following preambles and resolutions were duly adopted by the Board of
Directors (the "Board of Directors") of ZEROS USA, Inc., a Texas corporation
(the "Company"), by unanimous written consent effective as of February 17th
1998, pursuant to the provisions of article 2.13 of the Texas Business
Corporation Act:
WHEREAS, the Amended and Restated Articles of Incorporation of the Company
("Amended Articles of Incorporation") authorize the issuance of a class of
convertible preferred stock, par value $.001 per share ("Preferred Stock"), by
the Company:
RESOLVED, that pursuant to the authority expressly granted to and vested in the
Board of Directors by the provisions of the Amended Articles of Incorporation,
the Board of Directors hereby authorizes the issuance of a series of Preferred
Stock, and the Board of Directors hereby fixes the designation, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, of the shares of such
series (in addition to the designation, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, sct forth in the Amended Articles of Incorporation which
are applicable to the Preferred Stock) as follows:
a. Establishment and Designation of Series. There is hereby established out
of the authorized but unissued shares of Preferred Stock a series of
convertible Preferred Stock to be designated Series B Convertible Preferred
Stock ("Series B Preferred Stock"), to consist of an aggregate of
25,000,000 shares and to have the limitations and rights as set forth
herein. The per share liquidation preference of the Series B Preferred
Stock shall be $1.00 per share (the "Liquidation Preference").
b. Dividends.
i. The holders of record of shares of Series B Preferred Stock shall
be entitled to be paid dividends (which shall accrue commencing
February 29. 1999 out of funds of the Company available for the
payment of dividends subject to applicable laws and any agreements
to which the Company is a party, at the annual rate of $.10 per
whole share and an additional dividend of 10% of common shares, and
no more, payable annually on the first day of March in each year,
beginning on March 1, 2000, except that if any such date is a
Saturday, Sunday or legal holiday, then such dividend shall be
payable on
<PAGE> 2
the first immediately succeeding day that is not a Saturday, Sunday or
legal holiday, (each of such dates being referred to herein as a
"Series B Dividend Payment Date"). The Company will round up to the
next whole number of any shares payable in the total annual dividend
to each shareholder.
ii. Such dividends shall be payable in cash and common stock at the
Company's discretion, or, in the event such payment in cash is
prohibited by any loan agreement, indenture, mortgage, note, security
agreement, deed of trust, guaranty or other instrument evidencing,
securing or guaranteeing indebtedness for borrowed money
(collectively, "Debt Agreements" and individually a "Debt Agreement"),
in lieu of payment in cash of all or any portion of any dividend
otherwise payable, such dividends may be paid, at the option of the
Board of Directors, and if permitted by the Debt Agreements then in
effect, in duly authorized, fully paid and non-assessable shares of
Series B Preferred Stock (the "Additional Shares"). If the Board of
Directors determines to pay all or any portion of a dividend in
Additional Shares, the number of such Additional Shares issuable by
the Company shall be one (1) whole share of Series B Preferred Stock
for each $1.00 of dividend declared. No fractional shares of Series B
Preferred Stock ("Fractional Shares") shall be issued as a dividend
payment; provided, however, that the cash amount determined by
multiplying such fraction of a share by $1.00 shall cumulate pursuant
to Section b.iii.
iii. If at any time dividends with respect to the shares of Series B
Preferred Stock are not paid in full but are payable pursuant to
Section b.i, on any Series B Dividend Payment Date whether in cash,
Additional Shares or a combination thereof (the "Omitted Dividend"),
the Series B Preferred Stock shall cumulate such dividend and accrue
additional dividends as though such Omitted Dividends had been paid in
Additional Shares (or Fractional Shares) and such Additional Shares
(or Fractional Shares) had thereafter accrued dividends in accordance
herewith (the "Cumulative Dividends"). Such Cumulative Dividends shall
be fully cumulative (whether or not earned or declared) and shall be
deemed to constitute accrued and unpaid dividends for all purposes
hereof even if such additional dividends are not specifically
mentioned in any particular context.
iv. Dividends will be payable to the holders of record of the Series B
Preferred Stock appearing on the stock books of the Company on such
record dates as may be declared by the Board of Directors, not more
than 60 days nor less than 10 days before a Series B Dividend Payment
Date. Dividends on account of arrears for any past dividend periods
for which dividends were payable may be declared and paid at any time,
without reference to any regular Series B Dividend Payment Date, to
holders of record on a date not more than 60 days nor less than 10
days before the payment date thereof.
<PAGE> 3
v. If any shares of Series B Preferred Stock are outstanding on or
after March 31, 2008, the Company thereafter (a) will not declare or
pay or set apart for payment any dividends or make any other
distribution on any "Junior Securities" (as defined below) and (b)
will not redeem, purchase or otherwise acquire for value, or set apart
money for any sinking or other analogous fund for the redemption or
purchase of, any shares of Junior Securities, unless all accrued but
unpaid dividends with respect to the Series B Preferred Stock shall
have been paid by the Company; provided, -------- however, that the
foregoing provisions shall not prohibit (1) the payment or declaration
and setting aside of a dividend payable in Junior Securities or a
redemption, purchase or acquisition of Junior Securities with shares
of Junior Securities or (2) a redemption purchase or acquisition of
Junior Securities from any terminated employee of the Company or any
of its affiliated corporations. No dividend will be declared or paid
or set apart for payment on any "Parity Securities" (as defined below)
for any dividend period, unless at the same time a dividend for the
same dividend period, determined ratably in proportion to the
respective aggregate dividends otherwise payable with respect thereto,
shall be paid or declared and set apart for payment (in cash and/or
Additional Shares, as provided in Section b.ii) on the Series B
Preferred Stock.
vi. Each share of the Series B Convertible Preferred carries a dividend
of $.10 per share payable annually and receives an additional dividend
of 10% shares of common stock, payable annually.
c. Liquidation Preference.
i. The shares of Series B Preferred Stock shall be preferred over the
shares of Common Stock and any other class of stock of the Company
ranking junior to the Series B Preferred Stock (together with the
Common Stock, the "Junior Securities") upon the liquidation,
dissolution or winding up of the affairs of the Company (the
"Liquidation"); provided, however, that the shares of Series B
Preferred Stock shall rank on a parity with any series of Preferred
Stock hereafter issued by the Company, the terms of which do not
provide specifically that such series will rank senior to or junior to
the Series B Preferred Stock or provide specifically that such series
will rank on a parity with the Series B Preferred Stock (together with
any Series B Preferred Stock, the "Parity Securities") as to assets
and shall rank junior to any series of Preferred Stock, now or
hereafter issued by the Company, whose terms provide specifically that
such series will rank senior to the Series B Preferred Stock (the
"Senior Securities") as to assets; provided, however, the issuance of
any Senior Securities must be approved by the holders of a majority of
the then outstanding shares of Series B Preferred Stock. In the event
of a Liquidation, whether voluntary or involuntary, the holders of the
Series B Preferred Stock shall be entitled to receive out of the
assets of the Company available for distribution to its shareholders,
whether from capital, surplus or earnings,
<PAGE> 4
before any distribution is made to holders of Junior Securities, and
on a parity with the Parity Securities (all Parity Securities being
treated as a single class for such purposes), and after payment in
full to all holders of Senior Securities, an amount equal to the
aggregate Liquidation Preference with respect to all outstanding
Series B Preferred Stock. If, upon a Liquidation, the assets of the
Company, or proceeds thereof, distributable among the holders of
shares of Series B Preferred Stock are insufficient to pay in full the
Liquidation Preference with respect to all outstanding Series B
Preferred Stock, then such assets, or the proceeds thereof, shall be
distributable among such holders and holders of all other of Parity
Securities ratably in accordance with the respective amounts that
would be payable on such shares of Series B Preferred Stock and other
Parity Securities if all amounts payable thereon were payable in full.
ii. For purposes of this Section 3, neither the sale, conveyance,
exchange of transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all or part of the property or
assets of the Company nor the consolidation or merger of the Company
into or with one or more other corporations or entities shall be
deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the affairs of the Company.
d. Conversion.
i. The shares of the Series B Preferred Stock are convertible, at the
option of the holder of the Series B Preferred Stock, into shares of
fully paid and non-assessable shares of common stock of the Company.
The shares of the Series B Preferred Stock may be converted at any
time. Each share of the Series B Preferred Stock may be converted into
one (1) share of common stock of the Company.
ii. To convert shares of Series B Preferred Stock, the holder of the
shares must surrender the certificate or certificates representing the
shares to be converted, duly endorsed to the Company or in blank, at
the principal office of the Company, and give written notice to the
Company at that office that the holder desires to convert the shares.
The notice must set forth the name, address and taxpayer
identification number of the person or persons to whom a certificate
or certificates representing the common stock of the Company are to be
issued.
iii. Shares of the Series B Preferred Stock shall be deemed to be
converted at the close of business on the date of the surrender to the
Company of the properly endorsed certificate or certificates
representing the shares. The rights of the holders of the Series B
Preferred Stock surrendered shall cease at that time, and the person
or persons in whose name or names the certificate or certificates for
the common stock are to be issued shall be treated for all
<PAGE> 5
purposes as having become record owners of the common stock of the
Company at that time. However, if certificates are surrendered on a
day in which the stock transfer books of the Company arc closed, the
surrender shall be deemed to have occurred on the next succeeding day
on which the stock transfer books are open.
iv. The Company shall at all times reserve and keep available solely
for the purpose of issuing upon conversion of the Series B Preferred
Stock the number of shares of common stock issuable upon conversion of
all outstanding Series B Preferred Stock.
v. At the time of conversion, the Company shall pay to the holder of
record of any share or shares of the Series B Preferred Stock
surrendered for conversion any accrued and unpaid dividends on the
stock.
vi. The issuance of certificates for shares of common stock upon the
conversion of the Series B Preferred Stock shall be made without
charge for any tax with respect to issuance. However, if any
certificate is to be issued, in a name or names other than the name of
names of the holder of record of the Series B Preferred Stock
converted, the person or persons requesting the issuance shall pay to
the Company the amount of any tax that may be payable in connection
with any transfer involved in the issuance, or shall establish to the
satisfaction of the Company that the tax has been paid or is not due
and payable.
vii. The Company shall not be required to issue any fractional shares of
common stock upon the conversion of the Series B Preferred Stock. If
more than one share of the Series B Preferred Stock is surrendered for
conversion at one time by the same holder, the number of full shares
of common stock that shall be issued upon the conversion of the Series
B Preferred Stock shall be computed on the basis of the aggregate
number of shares of the Series B Preferred Stock surrendered. If any
interest in a fractional share of common stock would otherwise be
deliverable upon the conversion of the Series B Preferred Stock, the
Company shall make adjustment for that fractional share interest by
payment of an amount in cash equal to the same fraction of the market
value at that time of a full share of common stock of the Company.
viii. If the Company subdivides or combines in a larger or smaller
number of shares its outstanding shares of common stock, then the
number of shares of common stock issuable upon the conversion of the
Series B Preferred Stock shall be proportionally increased in the case
of a subdivision and decreased in the case of a combination, effective
in either case at the close of business on the date that the
subdivision or combination becomes effective.
<PAGE> 6
ix. If the Company at any time pays to the holders of its common stock
a dividend in common stock, the number of shares of common stock
issuable upon the conversion of the Series B Preferred Stock shall be
proportionally increased, effective: at the close of business on the
record date for determination of the holders of the common stock
entitled to the dividend.
x. Except as provided below if the Company at anytime pays any
dividend or makes any distribution on its common stock in property
other than cash or in common stock of the Company, then provisions
shall be made as part of the terms of the dividend or distribution so
that the holders of the Series B Preferred Stock surrendered for
conversion after the record date for the determination of holders of
common stock entitled to the dividend or distribution shall be
entitled to receive the same proportionate share of property that they
would have been entitled to receive had the Series B Preferred Stock
been converted immediately prior to the record date.
xi. These adjustments shall be made successively if more than one of
these events occurs. However, no adjustment in the conversion ratio of
the Series B Preferred Stock into common stock shall be made by reason
of:
(1) the payment of a cash dividend on the common stock or on any
other class of stock of the Company;
(2) the purchase, acquisition redemption, or retirement by the Company
of any shares of common stock or of any other class of stock of
the Company, except as provided above in connection with a
subdivision or combination of the outstanding common stock of the
Company;
(3) the issuance, other than as provided above, of any shares of
common stock, or of any securities of the Company convertible into
common stock or into other securities of the Company, or of any
rights, warrants or options to subscribe for or purchase shares of
common stock or other securities of the Company, or of any other
securities of the Company, provided that if the Company offers any
of its securities or any rights, warrants or options to subscribe
for or purchase any of its securities to the holders of its common
stock, pursuant to any preemptive or preferential lights granted
to the holders of common stock by the certificate of incorporation
of the Company, or pursuant to any similar rights granted by the
board of directors of the Company, the Company shall mail written
notice of the offer to the holders of the Series B Preferred Stock
at least 20 days prior to the record date for determination of the
holders of common stock entitled to receive the offer;
(4) the offer by the Company to redeem or acquire shares of its common
stock by paying or exchanging the stock of another corporation or
the carrying
<PAGE> 7
out of a transaction contemplated by an offer of this nature;
provided that the Company shall mail written notice of the offer
to the holders of Series B Preferred Stock at least 20 days prior
to the expiration of the offer:
(5) the distribution of stock to holders of common stock of the
Company, if the issuer of the stock distributed is at the time of
the distribution engaged in a business that was previously
operated as a division or subsidiary by a corporation acquired by
the Company and that was distinct from the principal business of
the corporation acquired.
e. Voting Rights.
i. Except as required by the Texas Business Corporation Act, holders
of the Series B Preferred Stock shall have no voting rights.
ii. So long as any shares of Series B Preferred Stock are outstanding,
the Company shall not, without the affirmative consent of holders
representing a majority of the outstanding shares of Series B
Preferred Stock amend, alter or repeal any of the provisions of
its Amended Articles of incorporation which would in any way
adversely affect the rights of the holders of the Series B
Preferred Stock.
f. Exclusion of Other Rights. Except as may be otherwise required by
applicable law, the shares of Series B Preferred Stock shall not have any
designations, preferences, limitations or relative rights (including
preemptive rights), other than those specifically set forth in these
resolutions (as the resolutions may be amended) and in the Amended
Articles of Incorporation,
g. Reorganization: Mergers. If at any time there shall be a capital
reorganization of the Company or in the case of the consolidation or
merger of the Company with or into any other person or entity (but not in
the case of any sale, conveyance or disposition of all or substantially
all of the assets of the Company to an unaffiliated party in an arm's
length transaction), the Company and the person or entity formed by such
consolidation or resulting from such capital reorganization or merger, as
the case may be, shall make appropriate provision in the articles or
certificate of incorporation or other governing instruments of such person
or entity such that the rights of the holders of the Series B Preferred
Stock after such capital reorganization, consolidation or merger shall be
as nearly equivalent as may be practicable to such rights of such holder
immediately prior to that event and if the Company is not the surviving
corporation or entity, such surviving corporation or entity, shall issue
an appropriate number of replacement securities for the Series B Preferred
Stock in accordance such rights. If not otherwise required by law, the
Company shall give to the holders of record of the shares of Series B
Preferred Stock at least ten (10) days' prior written notice of any
capital reorganization,
<PAGE> 8
consolidation or merger or of any sale, conveyance or disposition of all
or substantially all of the assets of the Company.
h. Notices. Any notice to be given to the holders of shares of Series B
Preferred Stock shall be deemed given if sent by facsimile transmission,
telex or if deposited in the United States mail, postage prepaid and
addressed to each holder of record at his, her or its address appearing on
the books of the Company.
IN WITNESS WHEREOF, ZEROS USA, INC., has caused this Statement of
Designation to be duly executed this 17th day of February, 1998.
ZEROS USA, Inc.
By:
----------------------------
Steve Clark, President
<PAGE> 1
EXHIBIT 4.3
ZEROS USA, INC.
STATEMENT OF DESIGNATION
OF THE SERIES C CONVERTIBLE PREFERRED STOCK
Pursuant to Article 2.13 of Texas Business Corporation Act
1. The Name of the corporation is ZEROS USA, Inc.
2. The following preambles and resolutions were duly adopted by the Board of
Directors (the "Board of Directors") of ZEROS USA, Inc., a Texas
corporation (the "Company"), by unanimous written consent effective as of
February 17th 1998, pursuant to the provisions of article 2.13 of the Texas
Business Corporation Act:
WHEREAS, the Amended and Restated Articles of Incorporation of the Company
("Amended Articles of Incorporation") authorize the issuance of a class of
convertible preferred stock, par value $.001 per share ("Preferred Stock"), by
the Company:
RESOLVED, that pursuant to the authority expressly granted to and vested in the
Board of Directors by the provisions of the Amended Articles of Incorporation,
the Board of Directors hereby authorizes the issuance of a series of Preferred
Stock, and the Board of Directors hereby fixes the designation, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, of the shares of such
series (in addition to the designation, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, set forth in the Amended Articles of
Incorporation which are applicable to the Preferred Stock) as follows:
a. Establishment and Designation of Series. There is hereby established
out of the authorized but unissued shares of Preferred Stock a series
of convertible Preferred Stock to be designated Series C Convertible
Preferred Stock ("Series C Preferred Stock"), to consist of an
aggregate of 15,000,000 shares and to have the limitations and rights
as set forth herein. The per share liquidation preference of the
Series C Preferred Stock shall be $1.00 per share (the "Liquidation
Preference").
b. Dividends.
i. The holders of record of shares of Series C Preferred Stock
shall be entitled to be paid dividends (which shall accrue
commencing July 1, 1997, out of funds of the Company available for
the payment of dividends subject to applicable laws and any
agreements to which the Company is a party, at the annual rate of
6% per whole share, and no more, payable annually on the last day
of August in each year, beginning on August 31, 1998, except that
if any such date is a Saturday, Sunday or legal holiday, then such
dividend shall be payable on the first immediately succeeding day
that is not a Saturday, Sunday
<PAGE> 2
or legal holiday, (each of such dates being referred to herein as
a "Series C Dividend Payment Date"). The Company will round up to
the next whole number of any shares payable in the total annual
dividend to each shareholder.
ii. Such dividends shall be payable in cash or stock at the
Company's discretion, or, in the event such payment in cash is
prohibited by any loan agreement, indenture, mortgage, note,
security agreement, deed of trust, guaranty or other instrument
evidencing, securing or guaranteeing indebtedness for borrowed
money (collectively, "Debt Agreements" and individually a "Debt
Agreement"), in lieu of payment in cash of all or any portion of
any dividend otherwise payable, such dividends may be paid, at the
option of the Board of Directors, and if permitted by the Debt
Agreements then in effect, in duly authorized, fully paid and non-
assessable shares of Series C Preferred Stock (the "Additional
Shares"). If the Board of Directors determines to pay all or any
portion of a dividend in Additional Shares, the number of such
Additional Shares issuable by the Company shall be one (1) whole
share of Series C Preferred Stock for each $1.00 of dividend
declared. No fractional shares of Series C Preferred Stock
("Fractional Shares") shall be issued as a dividend payment;
provided, however, that the cash amount determined by multiplying
such fraction of a share by $1.00 shall cumulate pursuant to
Section b.iii.
iii. If at any time dividends with respect to the shares of Series
C Preferred Stock are not paid in full but are payable pursuant to
Section b.i, on any Series C Dividend Payment Date whether in
cash, Additional Shares or a combination thereof (the "Omitted
Dividend"), the Series C Preferred Stock shall cumulate such
dividend and accrue additional dividends as though such Omitted
Dividends had been paid in Additional Shares (or Fractional
Shares) and such Additional Shares (or Fractional Shares) had
thereafter accrued dividends in accordance herewith (the
"Cumulative Dividends"). Such Cumulative Dividends shall be fully
cumulative (whether or not earned or declared) and shall be deemed
to constitute accrued and unpaid dividends for all purposes hereof
even if such additional dividends are not specifically mentioned
in any particular context.
iv. Dividends will be payable to the holders of record of the
Series C Preferred Stock appearing on the stock books of the
Company on such record dates as may be declared by the Board of
Directors, not more than 60 days nor less than 10 days before a
Series C Dividend Payment Date. Dividends on account of arrears
for any past dividend periods for which dividends were payable may
be declared and paid at any time, without reference to any regular
Series C Dividend Payment Date, to holders of record on a date not
more than 60 days nor less than 10 days before the payment date
thereof.
<PAGE> 3
v. If any shares of Series C Preferred Stock are outstanding on
or after July 31, 2003, the Company thereafter (a) will not
declare or pay or set apart for payment any dividends or make any
other distribution on any "Junior Securities" (as defined below)
and (b) will not redeem, purchase or otherwise acquire for value,
or set apart money for any sinking or other analogous fund for the
redemption or purchase of, any shares of Junior Securities, unless
all accrued but unpaid dividends with respect to the Series C
Preferred Stock shall have been paid by the Company; provided,
however, that the foregoing provisions shall not prohibit (1) the
payment or declaration and setting aside of a dividend payable in
Junior Securities or a redemption, purchase or acquisition of
Junior Securities with shares of Junior Securities or (2) a
redemption purchase or acquisition of Junior Securities from any
terminated employee of the Company or any of its affiliated
corporations. No dividend will be declared or paid or set apart
for payment on any "Parity Securities" (as defined below) for any
dividend period, unless at the same time a dividend for the same
dividend period, determined ratably in proportion to the
respective aggregate dividends otherwise payable with respect
thereto, shall be paid or declared and set apart for payment (in
cash and/or Additional Shares, as provided in Section b.ii) on the
Series C Preferred Stock.
c. Liquidation Preference.
i. The shares of Series C Preferred Stock shall be preferred
over the shares of Common Stock and any other class of stock of
the Company ranking junior to the Series C Preferred Stock
(together with the Common Stock, the "Junior Securities") upon the
liquidation, dissolution or winding up of the affairs of the
Company (the "Liquidation"); provided, however, that the shares of
Series C Preferred Stock shall rank on a parity with any series of
Preferred Stock hereafter issued by the Company, the terms of
which do not provide specifically that such series will rank
senior to or junior to the Series C Preferred Stock or provide
specifically that such series will rank on a parity with the
Series C Preferred Stock (together with any Series C Preferred
Stock, the "Parity Securities") as to assets and shall rank junior
to any series of Preferred Stock, now or hereafter issued by the
Company, whose terms provide specifically that such series will
rank senior to the Series C Preferred Stock (the "Senior
Securities") as to assets; provided, however, the issuance of any
Senior Securities must be approved by the holders of a majority of
the then outstanding shares of Series C Preferred Stock. In the
event of a Liquidation, whether voluntary or involuntary, the
holders of the Series C Preferred Stock shall be entitled to
receive out of the assets of the Company available for
distribution to its shareholders, whether from capital, surplus or
earnings, before any distribution is made to holders of Junior
Securities, and on a parity with the Parity Securities (all Parity
Securities being treated as a single class for such purposes), and
after payment in full to all holders of Senior Securities, an
amount equal to the aggregate Liquidation Preference with respect
to all
<PAGE> 4
outstanding Series C Preferred Stock. If, upon a Liquidation, the
assets of the Company, or proceeds thereof, distributable among
the holders of shares of Series C Preferred Stock are insufficient
to pay in full the Liquidation Preference with respect to all
outstanding Series C Preferred Stock, then such assets, or the
proceeds thereof, shall be distributable among such holders and
holders of all other of Parity Securities ratably in accordance
with the respective amounts that would be payable on such shares
of Series C Preferred Stock and other Parity Securities if all
amounts payable thereon were payable in full.
ii. For purposes of this Section 3, neither the sale, conveyance,
exchange of transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all or part of the
property or assets of the Company nor the consolidation or merger
of the Company into or with one or more other corporations or
entities shall be deemed to be a liquidation, dissolution or
winding up, voluntary or involuntary, of the affairs of the
Company.
d. Conversion.
i. The shares of the Series C Preferred Stock are convertible,
at the option of the holder of the Series C Preferred Stock, into
shares of fully paid and non-assessable shares of common stock of
the Company. The shares of the Series C Preferred Stock may be
converted at any time. Each share of the Series C Preferred Stock
may be converted into one (1) share of common stock of the
Company.
ii. To convert shares of Series C Preferred Stock, the holder of
the shares must surrender the certificate or certificates
representing the shares to be converted, duly endorsed to the
Company or in blank, at the principal office of the Company, and
give written notice to the Company at that office that the holder
desires to convert the shares. The notice must set forth the name,
address and taxpayer identification number of the person or
persons to whom a certificate or certificates representing the
common stock of the Company are to be issued.
iii. Shares of the Series C Preferred Stock shall be deemed to be
converted at the close of business on the date of the surrender to
the Company of the properly endorsed certificate or certificates
representing the shares. The rights of the holders of the Series
C Preferred Stock surrendered shall cease at that time, and the
person or persons in whose name or names the certificate or
certificates for the common stock are to be issued shall be
treated for all purposes as having become record owners of the
common stock of the Company at that time. However, if
certificates are surrendered on a day in which the stock transfer
books of the Company arc closed, the surrender shall
<PAGE> 5
be deemed to have occurred on the next succeeding day on which the
stock transfer books are open.
iv. The Company shall at all times reserve and keep available
solely for the purpose of issuing upon conversion of the Series C
Preferred Stock the number of shares of common stock issuable upon
conversion of all outstanding Series C Preferred Stock.
v. At the time of conversion, the Company shall pay to the
holder of record of any share or shares of the Series C Preferred
Stock surrendered for conversion any accrued and unpaid dividends
on the stock.
vi. The issuance of certificates for shares of common stock upon
the conversion of the Series C Preferred Stock shall be made
without charge for any tax with respect to issuance. However, if
any certificate is to be issued, in a name or names other than the
name of names of the holder of record of the Series C Preferred
Stock converted, the person or persons requesting the issuance
shall pay to the Company the amount of any tax that may be payable
in connection with any transfer involved in the issuance, or shall
establish to the satisfaction of the Company that the tax has been
paid or is not due and payable.
vii. The Company shall not be required to issue any fractional
shares of common stock upon the conversion of the Series C
Preferred Stock. If more than one share of the Series C Preferred
Stock is surrendered for conversion at one time by the same
holder, the number of full shares of common stock that shall be
issued upon the conversion of the Series C Preferred Stock shall
be computed on the basis of the aggregate number of shares of the
Series C Preferred Stock surrendered. If any interest in a
fractional share of common stock would otherwise be deliverable
upon the conversion of the Series C Preferred Stock, the Company
shall make adjustment for that fractional share interest by
payment of an amount in cash equal to the same fraction of the
market value at that time of a full share of common stock of the
Company.
viii. If the Company subdivides or combines in a larger or smaller
number of shares its outstanding shares of common stock, then the
number of shares of common stock issuable upon the conversion of
the Series C Preferred Stock shall be proportionally increased in
the case of a subdivision and decreased in the case of a
combination, effective in either case at the close of business on
the date that the subdivision or combination becomes effective.
ix. If the Company at any time pays to the holders of its common
stock a dividend in common stock, the number of shares of common
stock issuable upon the conversion of the Series C Preferred Stock
shall be proportionally
<PAGE> 6
increased, effective: at the close of business on the record date
for determination of the holders of the common stock entitled to
the dividend.
x. Except as provided below if the Company at anytime pays any
dividend or makes any distribution on its common stock in property
other than cash or in common stock of the Company, then provisions
shall be made as part of the terms of the dividend or distribution
so that the holders of the Series C Preferred Stock surrendered
for conversion after the record date for the determination of
holders of common stock entitled to the dividend or distribution
shall be entitled to receive the same proportionate share of
property that they would have been entitled to receive had the
Series C Preferred Stock been converted immediately prior to the
record date.
xi. These adjustments shall be made successively if more than one
of these events occurs. However, no adjustment in the conversion
ratio of the Series C Preferred Stock into common stock shall be
made by reason of:
(1) the payment of a cash dividend on the common stock or on any
other class of stock of the Company;
(2) the purchase, acquisition redemption, or retirement by the
Company of any
shares of common stock or of any other class of stock of the
Company, except as provided above in connection with a
subdivision or combination of the outstanding common stock of
the Company;
(3) the issuance, other than as provided above, of any shares of
common stock, or of any securities of the Company convertible
into common stock or into other securities of the Company, or
of any rights, warrants or options to subscribe for or
purchase shares of common stock or other securities of the
Company, or of any other securities of the Company, provided
that if the Company offers any of its securities or any
rights, warrants or options to subscribe for or purchase any
of its securities to the holders of its common stock, pursuant
to any preemptive or preferential lights granted to the
holders of common stock by the certificate of incorporation of
the Company, or pursuant to any similar rights granted by the
board of directors of the Company, the Company shall mail
written notice of the offer to the holders of the Series C
Preferred Stock at least 20 days prior to the record date for
determination of the holders of common stock entitled to
receive the offer;
(4) the offer by the Company to redeem or acquire shares of its
common stock by paying or exchanging the stock of another
corporation or the carrying out of a transaction contemplated
by an offer of this nature; provided that the Company shall
mail written notice of the offer to the holders of Series C
Preferred Stock at least 20 days prior to the expiration of
the offer:
<PAGE> 7
(5) the distribution of stock to holders of common stock of the
Company, if the issuer of the stock distributed is at the time
of the distribution engaged in a business that was previously
operated as a division or subsidiary by a corporation acquired
by the Company and that was distinct from the principal
business of the corporation acquired.
e. Voting Rights.
i. Each holder of the Series C Preferred Stock shall be entitled
to one vote for each share held.
ii. So long as any shares of Series C Preferred Stock are
outstanding, the Company shall not, without the affirmative
consent of holders representing a majority of the outstanding
shares of Series C Preferred Stock amend, alter or repeal any of
the provisions of its Amended Articles of incorporation which
would in any way adversely affect the rights of the holders of the
Series C Preferred Stock.
iii. In any case in which the holders of Series C Preferred Stock
shall be entitled to vote as a separate class pursuant to Texas
law or this Statement of Designation, each holder of Series C
Preferred Stock shall be entitled to one vote for each share of
Series C Preferred Stock.
f. Exclusion of Other Rights. Except as may be otherwise required by
applicable law, the shares of Series C Preferred Stock shall not have
any designations, preferences, limitations or relative rights
(including preemptive rights), other than those specifically set forth
in these resolutions (as the resolutions may be amended) and in the
Amended Articles of Incorporation,
g. Reorganization: Mergers. If at any time there shall be a capital
reorganization of the Company or in the case of the consolidation or
merger of the Company with or into any other person or entity (but not
in the case of any sale, conveyance or disposition of all or
substantially all of the assets of the Company to an unaffiliated
party in an arm's length transaction), the Company and the person or
entity formed by such consolidation or resulting from such capital
reorganization or merger, as the case may be, shall make appropriate
provision in the articles or certificate of incorporation or other
governing instruments of such person or entity such that the rights of
the holders of the Series C Preferred Stock after such capital
reorganization, consolidation or merger shall be as nearly equivalent
as may be practicable to such rights of such holder immediately prior
to that event and if the Company is not the surviving corporation or
entity, such surviving corporation or entity, shall issue an
appropriate number of replacement securities for the Series C
Preferred Stock in accordance such rights. If not otherwise required
by law, the Company shall give to the holders of record of the shares
of Series C Preferred
<PAGE> 8
Stock at least ten (10) days' prior written notice of any capital
reorganization, consolidation or merger or of any sale, conveyance or
disposition of all or substantially all of the assets of the Company.
h. Notices. Any notice to be given to the holders of shares of Series C
Preferred Stock shall be deemed given if sent by facsimile
transmission, telex or if deposited in the United States mail, postage
prepaid and addressed to each holder of record at his, her or its
address appearing on the books of the Company.
IN WITNESS WHEREOF, ZEROS USA, INC., has caused this Statement of
Designation to be duly executed this 17th day of February, 1998. ZEROS USA,
Inc.
By:
-------------------------
Steve Clark, President
<PAGE> 1
EXHIBIT 4.4
ZEROS USA, INC.
STATEMENT OF DESIGNATION
OF THE SERIES D CONVERTIBLE PREFERRED STOCK
Pursuant to Article 2.13 of Texas Business Corporation Act
1. The Name of the corporation is ZEROS USA, Inc.
2. The following preambles and resolutions were duly adopted by the Board of
Directors (the "Board of Directors") of ZEROS USA, Inc., a Texas
corporation (the "Company"), by unanimous written consent effective as of
February 17th 1998, pursuant to the provisions of article 2.13 of the Texas
Business Corporation Act:
WHEREAS, the Amended and Restated Articles of Incorporation of the Company
("Amended Articles of Incorporation") authorize the issuance of a class of
convertible preferred stock, par value $.001 per share ("Preferred Stock"), by
the Company:
RESOLVED, that pursuant to the authority expressly granted to and vested in the
Board of Directors by the provisions of the Amended Articles of Incorporation,
the Board of Directors hereby authorizes the issuance of a series of Preferred
Stock, and the Board of Directors hereby fixes the designation, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, of the shares of such
series (in addition to the designation, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, sct forth in the Amended Articles of Incorporation which
are applicable to the Preferred Stock) as follows:
a. Establishment and Designation of Series. There is hereby established
out of the authorized but unissued shares of Preferred Stock a series
of convertible Preferred Stock to be designated Series D Convertible
Preferred Stock ("Series D Preferred Stock"), to consist of an
aggregate of 20,000,000 shares and to have the limitations and rights
as set forth herein. The per share liquidation preference of the
Series D Preferred Stock shall be $1.00 per share (the "Liquidation
Preference").
b. Dividends.
i. The holders of record of shares of Series D Preferred Stock
shall be entitled to be paid dividends (which shall accrue
commencing WI out of funds of the Company available for the
payment of --- dividends subject to applicable laws and any
agreements to which the Company is a party, at the annual rate of
$.10 per whole share and an additional dividend of 10% of common
shares, and no more, payable annually on the first day of March
in each year, beginning on March 1, 2000, except that if any such
date is a Saturday, Sunday or legal holiday, then such dividend
shall be payable on the first immediately
<PAGE> 2
succeeding day that is not a Saturday, Sunday or legal holiday,
(each of such dates being referred to herein as a "Series D
Dividend Payment Date"). The Company will round up to the next
whole number of any shares payable in the total annual dividend
to each shareholder.
ii. Such dividends shall be payable in cash and common stock
at the Company's discretion, or, in the event such payment in
cash is prohibited by any loan agreement, indenture, mortgage,
note, security agreement, deed of trust, guaranty or other
instrument evidencing, securing or guaranteeing indebtedness for
borrowed money (collectively, "Debt Agreements" and individually
a "Debt Agreement"), in lieu of payment in cash of all or any
portion of any dividend otherwise payable, such dividends may be
paid, at the option of the Board of Directors, and if permitted
by the Debt Agreements then in effect, in duly authorized, fully
paid and non-assessable shares of Series D Preferred Stock (the
"Additional Shares"). If the Board of Directors determines to pay
all or any portion of a dividend in Additional Shares, the number
of such Additional Shares issuable by the Company shall be one
(1) whole share of Series D Preferred Stock for each $1.00 of
dividend declared. No fractional shares of Series D Preferred
Stock ("Fractional Shares") shall be issued as a dividend
payment; provided, however, that the cash amount determined by
multiplying such fraction of a share by $1.00 shall cumulate
pursuant to Section b.iii.
iii. If at any time dividends with respect to the shares of
Series D Preferred Stock are not paid in full but are payable
pursuant to Section b.i, on any Series D Dividend Payment Date
whether in cash, Additional Shares or a combination thereof (the
"Omitted Dividend"), the Series D Preferred Stock shall cumulate
such dividend and accrue additional dividends as though such
Omitted Dividends had been paid in Additional Shares (or
Fractional Shares) and such Additional Shares (or Fractional
Shares) had thereafter accrued dividends in accordance herewith
(the "Cumulative Dividends"). Such Cumulative Dividends shall be
fully cumulative (whether or not earned or declared) and shall be
deemed to constitute accrued and unpaid dividends for all
purposes hereof even if such additional dividends are not
specifically mentioned in any particular context.
iv. Dividends will be payable to the holders of record of
the Series D Preferred Stock appearing on the stock books of the
Company on such record dates as may be declared by the Board of
Directors, not more than 60 days nor less than 10 days before a
Series D Dividend Payment Date. Dividends on account of arrears
for any past dividend periods for which dividends were payable
may be declared and paid at any time, without reference to any
regular Series D Dividend Payment Date, to holders of record on a
date not more than 60 days nor less than 10 days before the
payment date thereof.
<PAGE> 3
v. If any shares of Series D Preferred Stock are outstanding
on or after March 31, 2008, the Company thereafter (a) will not
declare or pay or set apart for payment any dividends or make any
other distribution on any "Junior Securities" (as defined below)
and (b) will not redeem, purchase or otherwise acquire for value,
or set apart money for any sinking or other analogous fund for
the redemption or purchase of, any shares of Junior Securities,
unless all accrued but unpaid dividends with respect to the
Series D Preferred Stock shall have been paid by the Company;
provided, -------- however, that the foregoing provisions shall
not prohibit (1) the payment or declaration and setting aside of
a dividend payable in Junior Securities or a redemption, purchase
or acquisition of Junior Securities with shares of Junior
Securities or (2) a redemption purchase or acquisition of Junior
Securities from any terminated employee of the Company or any of
its affiliated corporations. No dividend will be declared or paid
or set apart for payment on any "Parity Securities" (as defined
below) for any dividend period, unless at the same time a
dividend for the same dividend period, determined ratably in
proportion to the respective aggregate dividends otherwise
payable with respect thereto, shall be paid or declared and set
apart for payment (in cash and/or Additional Shares, as provided
in Section b.ii) on the Series D Preferred Stock.
vi. Each share of the Series D Convertible Preferred carries
a dividend of $.10 per share payable annually and receives an
additional dividend of 10% shares of common stock, payable
annually.
c. Liquidation Preference.
i. The shares of Series D Preferred Stock shall be preferred
over the shares of Common Stock and any other class of stock of
the Company ranking junior to the Series D Preferred Stock
(together with the Common Stock, the "Junior Securities") upon
the liquidation, dissolution or winding up of the affairs of the
Company (the "Liquidation"); provided, however, that the shares
of Series D Preferred Stock shall rank on a parity with any
series of Preferred Stock hereafter issued by the Company, the
terms of which do not provide specifically that such series will
rank senior to or junior to the Series D Preferred Stock or
provide specifically that such series will rank on a parity with
the Series D Preferred Stock (together with any Series D
Preferred Stock, the "Parity Securities") as to assets and shall
rank junior to any series of Preferred Stock, now or hereafter
issued by the Company, whose terms provide specifically that such
series will rank senior to the Series D Preferred Stock (the
"Senior Securities") as to assets; provided, however, the
issuance of any Senior Securities must be approved by the holders
of a majority of the then outstanding shares of Series D
Preferred Stock. In the event of a Liquidation, whether voluntary
or involuntary, the holders of the Series D Preferred Stock shall
be entitled to receive out of the assets of the Company available
for distribution to its shareholders, whether from capital,
surplus or earnings,
<PAGE> 4
before any distribution is made to holders of Junior Securities,
and on a parity with the Parity Securities (all Parity Securities
being treated as a single class for such purposes), and after
payment in full to all holders of Senior Securities, an amount
equal to the aggregate Liquidation Preference with respect to all
outstanding Series D Preferred Stock. If, upon a Liquidation, the
assets of the Company, or proceeds thereof, distributable among
the holders of shares of Series D Preferred Stock are
insufficient to pay in full the Liquidation Preference with
respect to all outstanding Series D Preferred Stock, then such
assets, or the proceeds thereof, shall be distributable among
such holders and holders of all other of Parity Securities
ratably in accordance with the respective amounts that would be
payable on such shares of Series D Preferred Stock and other
Parity Securities if all amounts payable thereon were payable in
full.
ii. For purposes of this Section 3, neither the sale,
conveyance, exchange of transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all or
part of the property or assets of the Company nor the
consolidation or merger of the Company into or with one or more
other corporations or entities shall be deemed to be a
liquidation, dissolution or winding up, voluntary or involuntary,
of the affairs of the Company.
d. Conversion.
i. The shares of the Series D Preferred Stock are convertible,
at the option of the holder of the Series D Preferred Stock, into
shares of fully paid and non-assessable shares of common stock of
the Company. The shares of the Series D Preferred Stock may be
converted at any time. Each share of the Series D Preferred Stock
may be converted into one (1) share of common stock of the
Company.
ii. To convert shares of Series D Preferred Stock, the holder of
the shares must surrender the certificate or certificates
representing the shares to be converted, duly endorsed to the
Company or in blank, at the principal office of the Company, and
give written notice to the Company at that office that the holder
desires to convert the shares. The notice must set forth the
name, address and taxpayer identification number of the person or
persons to whom a certificate or certificates representing the
common stock of the Company are to be issued.
iii. Shares of the Series D Preferred Stock shall be deemed
to be converted at the close of business on the date of the
surrender to the Company of the properly endorsed certificate or
certificates representing the shares. The rights of the holders
of the Series D Preferred Stock surrendered shall cease at that
time, and the person or persons in whose name or names the
certificate or certificates for the common stock are to be issued
shall be treated for all
<PAGE> 5
purposes as having become record owners of the common stock of the
Company at that time. However, if certificates are surrendered on
a day in which the stock transfer books of the Company arc closed,
the surrender shall be deemed to have occurred on the next
succeeding day on which the stock transfer books are open.
iv. The Company shall at all times reserve and keep available
solely for the purpose of issuing upon conversion of the Series D
Preferred Stock the number of shares of common stock issuable upon
conversion of all outstanding Series D Preferred Stock.
v. At the time of conversion, the Company shall pay to the
holder of record of any share or shares of the Series D Preferred
Stock surrendered for conversion any accrued and unpaid dividends
on the stock.
vi. The issuance of certificates for shares of common stock
upon the conversion of the Series D Preferred Stock shall be made
without charge for any tax with respect to issuance. However, if
any certificate is to be issued, in a name or names other than
the name of names of the holder of record of the Series D
Preferred Stock converted, the person or persons requesting the
issuance shall pay to the Company the amount of any tax that may
be payable in connection with any transfer involved in the
issuance, or shall establish to the satisfaction of the Company
that the tax has been paid or is not due and payable.
vii. The Company shall not be required to issue any
fractional shares of common stock upon the conversion of the
Series D Preferred Stock. If more than one share of the Series D
Preferred Stock is surrendered for conversion at one time by the
same holder, the number of full shares of common stock that shall
be issued upon the conversion of the Series D Preferred Stock
shall be computed on the basis of the aggregate number of shares
of the Series D Preferred Stock surrendered. If any interest in a
fractional share of common stock would otherwise be deliverable
upon the conversion of the Series D Preferred Stock, the Company
shall make adjustment for that fractional share interest by
payment of an amount in cash equal to the same fraction of the
market value at that time of a full share of common stock of the
Company.
viii. If the Company subdivides or combines in a larger or smaller
number of shares its outstanding shares of common stock, then the
number of shares of common stock issuable upon the conversion of
the Series D Preferred Stock shall be proportionally increased in
the case of a subdivision and decreased in the case of a
combination, effective in either case at the close of business on
the date that the subdivision or combination becomes effective.
<PAGE> 6
ix. If the Company at any time pays to the holders of its common
stock a dividend in common stock, the number of shares of common
stock issuable upon the conversion of the Series D Preferred Stock
shall be proportionally increased, effective: at the close of
business on the record date for determination of the holders of
the common stock entitled to the dividend.
x. Except as provided below if the Company at anytime pays any
dividend or makes any distribution on its common stock in property
other than cash or in common stock of the Company, then provisions
shall be made as part of the terms of the dividend or distribution
so that the holders of the Series D Preferred Stock surrendered
for conversion after the record date for the determination of
holders of common stock entitled to the dividend or distribution
shall be entitled to receive the same proportionate share of
property that they would have been entitled to receive had the
Series D Preferred Stock been converted immediately prior to the
record date.
xi. These adjustments shall be made successively if more than one
of these events occurs. However, no adjustment in the conversion
ratio of the Series D Preferred Stock into common stock shall be
made by reason of:
(1) the payment of a cash dividend on the common stock or on any
other class of stock of the Company;
(2) the purchase, acquisition redemption, or retirement by the
Company of any shares of common stock or of any other class
of stock of the Company, except as provided above in
connection with a subdivision or combination of the
outstanding common stock of the Company;
(3) the issuance, other than as provided above, of any shares of
common stock, or of any securities of the Company convertible
into common stock or into other securities of the Company, or
of any rights, warrants or options to subscribe for or
purchase shares of common stock or other securities of the
Company, or of any other securities of the Company, provided
that if the Company offers any of its securities or any
rights, warrants or options to subscribe for or purchase any
of its securities to the holders of its common stock,
pursuant to any preemptive or preferential lights granted to
the holders of common stock by the certificate of
incorporation of the Company, or pursuant to any similar
rights granted by the board of directors of the Company, the
Company shall mail written notice of the offer to the holders
of the Series D Preferred Stock at least 20 days prior to the
record date for determination of the holders of common stock
entitled to receive the offer;
(4) the offer by the Company to redeem or acquire shares of its
common stock by paying or exchanging the stock of another
corporation or the carrying
<PAGE> 7
out of a transaction contemplated by an offer of this nature;
provided that the Company shall mail written notice of the
offer to the holders of Series D Preferred Stock at least 20
days prior to the expiration of the offer:
(5) the distribution of stock to holders of common stock of the
Company, if the issuer of the stock distributed is at the
time of the distribution engaged in a business that was
previously operated as a division or subsidiary by a
corporation acquired by the Company and that was distinct
from the principal business of the corporation acquired.
e. Voting Rights.
i. Except as required by the Texas Business Corporation Act, holders
of the Series D Preferred Stock shall have no voting rights.
ii. So long as any shares of Series D Preferred Stock are outstanding,
the Company shall not, without the affirmative consent of holders
representing a majority of the outstanding shares of Series D
Preferred Stock amend, alter or repeal any of the provisions of its
Amended Articles of incorporation which would in any way adversely
affect the rights of the holders of the Series D Preferred Stock.
f. Exclusion of Other Rights. Except as may be otherwise required by
applicable law, the shares of Series D Preferred Stock shall not have
any designations, preferences, limitations or relative rights
(including preemptive rights), other than those specifically set forth
in these resolutions (as the resolutions may be amended) and in the
Amended Articles of Incorporation,
g. Reorganization: Mergers. If at any time there shall be a capital
reorganization of the Company or in the case of the consolidation or
merger of the Company with or into any other person or entity (but not
in the case of any sale, conveyance or disposition of all or
substantially all of the assets of the Company to an unaffiliated
party in an arm's length transaction), the Company and the person or
entity formed by such consolidation or resulting from such capital
reorganization or merger, as the case may be, shall make appropriate
provision in the articles or certificate of incorporation or other
governing instruments of such person or entity such that the rights of
the holders of the Series D Preferred Stock after such capital
reorganization, consolidation or merger shall be as nearly equivalent
as may be practicable to such rights of such holder immediately prior
to that event and if the Company is not the surviving corporation or
entity, such surviving corporation or entity, shall issue an
appropriate number of replacement securities for the Series D
Preferred Stock in accordance such rights. If not otherwise required
by law, the Company shall give to the holders of record of the shares
of Series D Preferred Stock at least ten (10) days' prior written
notice of any capital reorganization,
<PAGE> 8
consolidation or merger or of any sale, conveyance or disposition of
all or substantially all of the assets of the Company.
h. Notices. Any notice to be given to the holders of shares of Series D
Preferred Stock shall be deemed given if sent by facsimile
transmission, telex or if deposited in the United States mail, postage
prepaid and addressed to each holder of record at his, her or its
address appearing on the books of the Company.
IN WITNESS WHEREOF, ZEROS USA, INC., has caused this Statement of
Designation to be duly executed this 17th day of February, 1998. ZEROS USA, Inc.
By:
----------------------
Steve Clark, President
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made effective as of
April 1, 1997 by and between ZEROS USA, Inc., ("the Employer"), of 507 North
Belt East, Suite 550, Houston, Texas, and James Winchester, ("the Employee"),
of 2317 Aaron Drive, Beebe, Arkansas 72012.
A. Employer is engaged in the business of developing and licensing
technology for authorized licensees to dispose of hazardous and
non-harzardous toxic wastes and convert it into energy. Employer
maintains its headquarter offices in Houston, Texas.
B. Employer desires to have the services of the Employee.
C. Employee is willing to be employed by Employer.
Therefore, the parties agree as follows:
1. EMPLOYMENT. Employee shall provide to Employer the services described on
the attached Exhibit A, which is made a part of this Agreement by this
reference.
2. BEST EFFORTS OF EMPLOYEE. Employee agrees to perform faithfully,
industriously, and to the best of Employee's ability, experience, and talents,
all of the duties that may be required by the express and implicit terms of
this Agreement, to the reasonable satisfaction of Employer. Such duties shall
be provided at such place(s) as the needs, business, or opportunities of the
Employer may require from time to time.
3. COMPENSATION OF EMPLOYEE. As compensation for the services provided by
Employee under this Agreement, Employer will pay Employee a salary of $8,000.00
per month. This amount shall be paid semi-monthly on the first day and the
fifteenth day of the month. Upon termination of this Agreement, payments under
this paragraph shall cease; provided, however, that the Employee shall be
entitled to payments for periods or partial periods that occurred prior to the
date of termination and for which the Employee has not yet been paid. Accrued
vacation will be in accordance with state law and the Employer's customary
procedures.
4. REIMBURSEMENT FOR EXPENSES IN ACCORDANCE WITH EMPLOYER POLICY. The
Employer will reimburse Employee for "out-of-pocket" expenses in accordance
with Employer policies in effect from time to time.
5. RECOMMENDATIONS FOR IMPROVING OPERATIONS. Employee shall provide Employer
with all information, suggestions and recommendations regarding Employer's
business, of which Employee has knowledge that will be of benefit to Employer.
6. CONFIDENTIALITY. Employee recognizes that Employer has and will have
information regarding the following:
- inventions
- machinery
- products
Initials:____
<PAGE> 2
- prices
- apparatus
- costs
- discounts
- future plans
- business affairs
- processes
- trade secrets
- technical matters
- customer lists
- product design
- copyrights
and other vital information (collectively, "Information") which are valuable,
special and unique assets of Employer. Employee agrees that the Employee will
not at any time or in any manner, either directly or indirectly, divulge,
disclose, or communicate in any manner any Information to any third party
without the prior written consent of the Employer. Employee will protect the
Information and treat it as strictly confidential. A violation by Employee of
this paragraph shall be a material violation of this Agreement and will justify
legal and/or equitable relief.
7. UNAUTHORIZED DISCLOSURE OF INFORMATION. If it appears that Employee has
disclosed (or has threatened to disclose) Information in violation of this
Agreement, Employer shall be entitled to an injunction to restrain Employee
from disclosing, in whole or in part, such Information, or from providing any
services to any party to whom such Information has been disclosed or may be
disclosed. Employer shall not be prohibited by this provision from pursuing
other remedies, including a claim for losses and damages.
8. CONFIDENTIALITY AFTER TERMINATION OF EMPLOYMENT. The confidentiality
provisions of this Agreement shall remain in full force and effect for a
period of two years after the termination of Employee's employment. During such
two years period, neither party shall make or permit the making of any public
announcement or statement of any kind that Employee was formerly employed by or
connected with Employer.
9. NON-COMPLETE AGREEMENT. Recognizing that the various items of Information
are special and unique assets of the company, Employee agrees and covenants
that for a period of two yeas following the termination of this Agreement,
whether such termination is voluntary or involuntary, Employee will not
directly or indirectly engage in any business competitive with Employer. This
covenant shall apply to the geographical area encompassing all of the
Continental United States. Directly or indirectly engaging in any competitive
business includes, but is not limited to,
(i) engaging in a business as owner, partner, or agent,
(ii) becoming an employee of any third party that is engaged in such
business,
(iii) becoming interested directly or indirectly in any such business,
or
(iv) soliciting any customer of Employer for the benefit of a third
party that is engaged in such business.
Initials:_____
<PAGE> 3
Employee agrees that this non-compete provision will not adversely affect the
Employee's livelihood.
10. EMPLOYEE'S INABILITY TO CONTRACT FOR EMPLOYER. Employee shall not have
the right to make any contracts or commitments for or on behalf of Employer
without first obtaining the express written consent of Employer.
11. VACATION. Employee shall be entitled to two weeks of paid vacation for
each year of employment beginning on the first day of Employee's employment.
Such vacation must be taken at a time mutually convenient to Employer and
Employee, and must be approved by Employer. Requests for vacation shall be
submitted to Employee's immediate supervisor sixty days in advance of the
requested date such vacation would commence.
12. SICK LEAVE/PERSONAL BUSINESS. After completion of six months of
employment, Employee shall be entitled to five day(s) paid time due to illness
or personal business, each year of employment beginning on the first date of
Employee's employment.
Sick leave may be accumulated from year to year up to a total of twenty days.
Unused sick leave benefits in excess of twenty days may be converted into cash
compensation at a rate of $22.50 per hour.
If Employee is unable to work for more that five days because of sickness or
total disability, and if Employee's unused sick leave is insufficient for such
period, Employee's unused vacation time in excess of twenty days shall be
applied to such absence.
All requests for sick days and personal days off shall be made by Employee in
accordance with Employer policies in effect from time to time.
13. HOLIDAYS. Employee shall be entitled to the following holidays with pay
during each calendar year:
- New Year's Day
- Memorial Day
- Independence Day
- Labor Day
- Thanksgiving Day
- Christmas Day
14. OTHER BENEFITS. Employee shall be entitled to insurance benefits, in
accordance with the Employer's applicable insurance contract(s) and policies,
and applicable state law.
These benefits shall include:
- health insurance
- disability insurance
- life insurance
Initials:
-----
<PAGE> 4
as such benefits are provided in accordance with Employer policies in effect
from time to time. Employee shall be able to participate in Employer's pension
plan in accordance with the plan's terms and requirements of law.
Employer shall also transfer to Employee 100,000 shares of ZEROS USA, Inc.,
common stock after the completion of one year of employment.
15. TERM/TERMINATION. Employee's employment under this Agreement shall be for
five years, beginning on April 1, 1997. This Agreement may be terminated by
either party upon sixty days written notice. If Employer shall so terminate
this Agreement, Employee shall be entitled to compensation for two months,
unless the Employee is in violation of this Agreement. If Employee is in
violation of this Agreement, Employer may terminate employment without notice
and with compensation to Employee only to the date of such termination. The
compensation paid under this Agreement shall be the Employee's exclusive remedy.
16. TERMINATION FOR DISABILITY. Employer shall have the option to terminate
this Agreement, if Employee becomes permanently disabled and is no longer able
to perform the essential functions of the position with reasonable
accommodation. Employer shall exercise this option by giving thirty days'
written notice to Employee.
17. COMPLIANCE WITH EMPLOYER'S RULES. Employee agrees to comply with all of
the rules and regulations of Employer.
18. RETURN OF PROPERTY. Upon termination of this Agreement, the Employee shall
deliver all property (including keys, records, notes data, memoranda, models,
and equipment) that is in the Employee's possession or under the Employee's
control which is Employer's property or related to Employer's business. Such
obligation shall be governed by any separate confidentiality or proprietary
rights agreement signed by the Employee.
19. NOTICES. All notices required or permitted under this Agreement shall be
in writing and shall be deemed delivered when delivered in person or deposited
in the United States mail, postage paid, addressed as follows:
Employer:
ZEROS USA, Inc.
Steve Clark, President
550 North Belt East
Suite 550
Houston, Texas 77060
Employee:
James Winchester
2317 Aaron Drive
Beebe, Arkansas 72012
Initials:
----
<PAGE> 5
Such addresses may be changed from time to time by either party by providing
written notice in the manner set forth above.
20. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties and there are no other promises or conditions in any other agreement
whether oral or written. This Agreement supersedes any prior written or oral
agreements between the parties.
21. AMENDMENT. This Agreement may be modified or amended, if the amendment is
made in writing and is signed by both parties.
22. SEVERABILITY. If any provisions of this Agreement shall be held to be
invalid or unenforceable for any reason, the remaining provisions shall
continue to be valid and enforceable. If a court finds that any provision of
this Agreement is invalid or unenforceable, but that by limiting such provision
it would become valid or enforceable, then such provision shall be deemed to be
written, construed, and enforced as so limited.
23. WAIVER OF CONTRACTUAL RIGHT. The failure of either party to enforce any
provision of this Agreement shall not be construed as a waiver or limitation of
that party's right to subsequently enforce and compel strict compliance with
every provision of this Agreement.
24. APPLICABLE LAW. This Agreement shall be governed by the laws of the State
of Texas.
Employer:
ZEROS USA, Inc.
By:
-------------------------------------
Steve Clark, President
AGREED TO AND ACCEPTED
Employee:
By:
-------------------------------------
James Winchester
Initials:
------
<PAGE> 6
JESSE BLANCO
GENERAL COUNSEL
ZEROS USA, INC.
507 NORTH BELT EAST, SUITE 550
HOUSTON, TEXAS 77060
TELEPHONE (281) 448-6070
December 19, 1997
Mr. James Winchester
2317 Aaron Drive
Beebe, Arkansas 72012
RE: Employment Agreement
Dear Mr. Winchester:
Mr. Steve Clark, as President of ZEROS USA, Inc., is pleased to extend to
you an offer to renew and extend your employment agreement for a period of five
years beyond the original one-year term. All terms and conditions are to
continue and remain in effect. You are requested to indicate your accepting
this extension of the employment agreement by signing below and returning this
letter at your earliest convenience in the envelope provided.
Your kind attention to these matters is appreciated.
Please do not hesitate to call me if you should have any questions.
Very truly yours,
Jesse Blanco
Accepted:
- ------------------------------
James Winchester
Date:
-------------------------
Enclosure
