<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K-A4
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act
October 16, 1998
Date of Report
(Date of Earliest Event Reported)
HydroMaid International, Inc.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(Exact Name of Registrant as Specified in its Charter)
Nevada 02-23729 87-0575933
(State or other juris- (Commission File No.) (IRS Employer
diction of incorporation) I.D. No.)
12222 South 1000 East, Suite #1
Draper, Utah 84020
(Address of Principal Executive Offices)
(801) 553-8790
Registrant's Telephone Number
<PAGE>
Item 1. Changes in Control of Registrant.
There have been the following changes to this Item, which was
contained in the 8-K-A3 Current Report of the Company dated October 16, 1998.
The Company's shareholders approved by majority vote on January 20,
1999, the change of the Company's name to HydroMaid International, Inc. The
Proxy Statement was previously filed with the SEC and is incorporated herein
by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
There have been the following changes to this Item, which was
contained in the 8-K-A3 Current Report of the Company dated October 16, 1998.
(a) Financial Statements of Business Acquired.
Audited financial statements for the years ended December 31, 1998,
December 31, 1997 and for the period from June 24, 1992 to
December 31, 1998.
(b) Exhibits. (See attached Financial Statements.)
All other portions of the previously filed 8-K-A3 Current Report
dated October 16, 1998 remain unchanged.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
HydroMaid International, Inc.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
Date: February 24, 1999 By: /s/ Culley W. Davis
---------------------------
Culley W. Davis
CEO and Chairman of the
Board of Directors
<PAGE>
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HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND
FOR THE PERIOD JUNE 24, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998
- ------------------------------------------------------------------------------
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................... 1
Balance Sheet ............................................................. 2
Statements of Operations .................................................. 3
Statements of Stockholders' Equity......................................... 4
Statements of Cash Flows .................................................. 5
Notes to Financial Statements.............................................. 6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
DRAPER, UTAH
We have audited the accompanying balance sheet of HydroMaid International, Inc.,
A Development Stage Company (formerly Cherokee Minerals and Oil, Inc.),
hereinafter referred to as "the Company", as of December 31, 1998 and the
related statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 1998 and 1997, and for the period June 24, 1992
(inception) through December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1998, and the results of its operations and its cash flows for the years ended
December 31, 1998 and 1997, and for the period June 24, 1992 (inception) through
December 31, 1998, in conformity with generally accepted accounting principles.
February 19, 1999
<PAGE>
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HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
ASSETS
<S> <C>
Current Assets
Cash $ 20,342
Accounts receivable 5,130
Inventory, net of valuation allowance of $180,000 479,580
Prepaid expenses 25,210
-----------
TOTAL CURRENT ASSETS 530,262
Property and equipment, net 500,259
Patents, net of accumulated amortization of $123,379 143,874
Deposit on tooling 80,000
Deferred tax asset, net of valuation allowance --
-----------
TOTAL ASSETS $ 1,254,395
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 390,049
Note payable, current portion 6,599
Advances from related party 51,467
-----------
TOTAL CURRENT LIABILITIES 448,115
Note payable 29,964
-----------
TOTAL LIABILITIES 478,079
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, par value .001 per share, 30,000,000 shares
authorized, 24,000,000 shares issued and outstanding 24,000
Additional paid-in capital 6,072,566
Accumulated deficit, including $4,598,529 during the development stage (5,118,413)
Deferred compensation - stock options (201,837)
-----------
TOTAL STOCKHOLDERS' EQUITY 776,316
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,254,395
-----------
-----------
</TABLE>
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PAGE 2
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
FOR THE PERIOD JUNE 24, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 24, 1992
(INCEPTION) THROUGH
1998 1997 DECEMBER 31, 1998
----------- ----------- -----------------
<S> <C> <C> <C>
Sales $ 54,828 $ -- $ 54,828
Cost of sales 53,045 -- 53,045
----------- ----------- -----------------
Gross profit 1,783 -- 1,783
Operating expenses 3,259,385 337,087 3,864,365
Research and development 647,139 87,852 735,947
----------- ----------- -----------------
Loss before income tax benefit (3,904,741) (424,939) (4,598,529)
Income tax benefit:
Current -- -- --
Deferred 1,450,000 160,000 1,710,000
Less valuation allowance (1,450,000) (160,000) (1,710,000)
----------- ----------- -----------------
Net (loss) $(3,904,741) $ (424,939) $ (4,598,529)
----------- ----------- -----------------
----------- ----------- -----------------
Basic loss per share
----------- ----------- -----------------
----------- ----------- -----------------
Diluted loss per share
----------- ----------- -----------------
----------- ----------- -----------------
</TABLE>
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PAGE 3
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL statements.
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
FOR THE PERIOD JUNE 24, 1992 (INCEPTION) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT DURING TOTAL
------------ PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE EQUITY
---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
AT INCEPTION ON JUNE 24, 1992 -- $ -- $ -- $ -- $ --
CHEROKEE MINERALS AND OIL, INC.:
Common stock activity from April 30, 1919 through
June 24, 1992 105,859 1,059 287,547 288,606
Common stock issued for services at $0.09/share 2,368,680 23,686 183,260 206,946
Net loss from April 30, 1919 through December 31, 1996 -- -- -- -- (519,884)
ENVIRONMENTAL SYSTEMS & SOLUTIONS, INC.:
Common stock issued for patents at $0.04/share 5,000,000 50,000 103,500 -- 153,500
Contributed capital -- -- 280,066 -- 280,066
Net loss for the period June 24, 1992 (inception)
through December 31, 1996 -- -- -- (268,849) (268,849)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 7,474,539 74,745 854,373 (268,849) 140,385
Environmental Systems and Solutions, Inc.
- contributed capital -- -- 548,251 -- 548,251
Environmental Systems & Solutions, Inc.
- net loss for the year ended December 31, 1997 -- -- -- (424,939) (424,939)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 7,474,539 74,745 1,402,624 (693,788) 263,697
CHEROKEE MINERALS AND OIL, INC.:
Common stock issued for cash 2,000,000 2,000 8,000 -- 10,000
Common stock issued in connection with Reorganization 22,080,000 22,080 -- -- 22,080
Common stock cancelled in connection with Reorganization (2,554,539) (2,555) -- -- (2,555)
Common stock par value change from $.01/share to
$.001/share -- (22,270) 22,270 -- --
ENVIRONMENTAL SYSTEMS & SOLUTIONS, INC.:
Common stock issued for cash at $0.01/share 200,000 2,000 -- -- 2,000
Common stock issued for cash at $8.00/share 151,625 1,516 1,211,484 -- 1,213,000
Common stock issued for cash at $8.00/share 178,375 1,784 1,425,216 -- 1,427,000
Common stock cancelled at $0.01 per/share (10,000) (100) -- -- (100)
Adjustment in connection with Reorganization (5,520,000) (55,200) -- -- (55,200)
Contributed capital -- -- 1,767,947 -- 1,767,947
Stock options -- -- 235,025 -- 235,025
Net loss for the year ended December 31, 1998 -- -- -- (3,904,741) (3,904,741)
Deferred compensation - stock options -- -- -- -- (201,837)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 24,000,000 $ 24,000 $ 6,072,566 $(4,598,529) $ 776,316
---------- ----------- ----------- ------------ -------------
---------- ----------- ----------- ------------ -------------
</TABLE>
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PAGE 4
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
FOR THE PERIOD JUNE 24, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 24, 1992
(INCEPTION) THROUGH
1998 1997 DECEMBER 31, 1998
----------- ----------- -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $(3,904,741) $ (424,939) $(4,598,529)
Adjustment to reconcile net (loss) to net cash
used by operating activities:
Depreciation and amortization 74,684 19,433 177,108
Stock options 33,188 -- 33,188
Expenses paid by related party -- 422,295 605,802
Changes in current assets and liabilities:
Accounts receivable (5,130) -- (5,130)
Prepaid expenses (25,210) -- (25,210)
Inventory (452,456) (17,000) (479,581)
Accounts payable and accrued expenses 377,572 -- 390,048
----------- ----------- -----------
NET CASH (USED) BY OPERATING ACTIVITIES (3,902,093) (211) (3,902,304)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (400,740) -- (400,740)
Acquisition of patents (56,348) -- (56,468)
Deposit on tooling (80,000) -- (80,000)
----------- ----------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES (537,088) -- (537,208)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on note payable (1,415) -- (1,415)
Advances from related party 51,467 -- 51,467
Proceeds from issuance of common stock 2,640,000 -- 2,640,000
Proceeds from contribution of paid-in capital 1,767,947 -- 1,769,802
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,457,999 -- 4,459,854
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 18,818 (211) 20,342
CASH AT BEGINNING OF PERIOD 1,524 1,735 --
----------- ----------- -----------
CASH AT END OF PERIOD $ 20,342 $ 1,524 $ 20,342
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non-cash transactions:
Acquisition of property, equipment, and patents $ 37,978 $ 125,956 $ 259,006
----------- ----------- -----------
----------- ----------- -----------
Issuance of common stock for patents and services $ -- $ -- $ 360,446
----------- ----------- -----------
----------- ----------- -----------
Disbursements by related party $ -- $ 548,251 $ 731,758
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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PAGE 5
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1: REORGANIZATION, BASIS OF ACCOUNTING AND FINANCIAL STATEMENT
PRESENTATION, NATURE OF BUSINESS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REORGANIZATION
As of December 10, 1998, Cherokee Minerals and Oil, Inc. ("Cherokee"), a
Nevada corporation was a dormant entity with no assets. After its inception
in 1919 and two name changes, Cherokee acquired and explored placer-mining
leases in the early 1980s. Cherokee has not had any significant operations
since approximately 1985; its revenues and expenses for 1998 and 1997 are not
significant. See "Basis of Accounting and Financial Statement Presentation"
below.
On December 11, 1998, Cherokee entered into an Agreement and Plan of
Reorganization (the "Plan") structured to result in the acquisition by
Cherokee of at least 80% of the issued and outstanding shares of restricted
common stock of Environmental Systems & Solutions, Inc. ("ESSI"), a Nevada
corporation. Such transaction is hereinafter referred to as "the
Reorganization." The Reorganization is intended to qualify as a tax-free
reorganization under Section 368 (a) (1) (B) of the 1986 Internal Revenue
Code. Effective with the closing of the Reorganization, certain Cherokee
stockholders agreed to cancel approximately 2,555,000 of their common shares.
Under the terms of the Plan, the former stockholders of ESSI (1) received
four shares of Cherokee for each one share of ESSI and (2) will ultimately
acquire approximately 92% of the issued and outstanding common stock of
Cherokee, assuming that all ESSI stockholders execute the Plan. ESSI was
previously a privately held company, with no public market for its stock. As
of December 31, 1998, the former stockholders of ESSI owned about 91% of the
24 million post-Reorganization shares of Cherokee's issued and outstanding
common stock; such shares are restricted securities under Federal law. (See
Notes 5 and 6).
Cherokee's common stock trades on the OTC Bulletin Board of the National
Association of Securities Dealers.
BASIS OF ACCOUNTING AND FINANCIAL STATEMENT PRESENTATION
The financial statements of Cherokee for the years ended December 31, 1997
and 1996 were audited by another independent public accounting firm. Such
firm's January 15, 1998 report on Cherokee's 1997 financial statements
disclosed that there was then a question as to the entity's ability to
continue as a going concern, which is an assumption under generally accepted
accounting principles ("GAAP"). For reasons explained below, the accompanying
1997 financial statements (and the financial statements for the period from
inception to December 31, 1997) of Cherokee differ significantly from such
financial statements as previously issued.
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PAGE 6
<PAGE>
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HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1: (CONTINUED)
BASIS OF ACCOUNTING AND FINANCIAL STATEMENT PRESENTATION (CONTINUED)
The Reorganization is accounted for as a capital stock transaction (as
opposed to a "business combination," as that term is defined by GAAP) in the
accompanying financial statements. Accordingly, the Reorganization has been
reported as a recapitalization of ESSI, which is considered the acquirer for
accounting purposes (a "reverse acquisition"). Through its former
stockholders, ESSI is deemed the acquirer for accounting purposes because of
(a) its majority ownership of Cherokee, (b) its representation on Cherokee's
board of directors, and (c) executive management positions held by former
ESSI officers.
The accompanying pre-December 11, 1998 financial statement information of
Cherokee (the legal acquirer), which has been retroactively restated for the
equivalent number of common shares issued in the Reorganization, is
essentially that of ESSI. The historical stockholders' deficiency of ESSI and
Cherokee's accumulated deficit have been carried forward to the
post-acquisition period; no goodwill has been recorded. Reorganization
transaction costs such as legal fees have been expensed as incurred.
Because the accompanying balance sheet is subsequent to the Reorganization's
closing date, presentation of pro forma financial information as if the
Reorganization had occurred on January 1, 1997 is not required.
NATURE OF BUSINESS
In January of 1999, Cherokee changed its name to HydroMaid International, Inc.
(the "Company"). ESSI (hereinafter also referred to as the "Company"), which was
incorporated in 1992, is engaged in the development, manufacture, and sale of a
patented water-powered garbage disposal. Such disposal, known as the HYDRO-MAID,
is hereinafter referred to as "the Product." Technological improvements and
field-testing were completed in 1997, when the Company had its initial operating
activity. The Product was then introduced in early 1998; sales from inception to
December 31, 1998 have been nominal.
The Company operates from a leased facility of approximately 8,100 square feet
near Salt Lake City, Utah. Its domestic manufacturing and assembly plant is in
Illinois. Certain components and production tooling are being manufactured in
China, along with some assembly operations. (See Note 9).
Management plans to (a) capitalize on New York City's 1997 lift of a
long-standing ban on residential in-sink garbage disposals, (b) enter European,
Asian, and South American markets, and (c) penetrate the U.S. home building
market.
Total assets outside the United States (deposits on tooling in China) were
$80,000 at December 31, 1998; foreign operations were not significant in 1998 or
1997.
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PAGE 7
<PAGE>
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HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1: (CONTINUED)
INTRODUCTION TO THE SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies of the Company presented below
is designed to assist in understanding the Company's financial statements.
Such financial statements and accompanying notes are the representations of
Company management, who is responsible for their integrity and objectivity.
These accounting policies conform to GAAP in all material respects, and have
been consistently applied in preparing the accompanying financial statements.
REVENUE RECOGNITION
When revenues first become significant, management intends to adopt
appropriate revenue recognition accounting policies in material conformity
with GAAP.
INVENTORIES
Raw materials and finished goods are stated at the lower of cost (first-in,
first-out) or estimated market value. Management periodically reviews
inventory and outstanding purchase commitments to identify any significant
obsolete and slow-moving items, and adjusts the financial statements
accordingly.
RESEARCH AND DEVELOPMENT COSTS ("R & D COSTS")
R & D costs are charged to expense when incurred. Such costs include
pre-production prototype tools and dies (principally located in Illinois),
modifications of the Product's original design, and engineering activities
intended to advance the Product's technology to the point of commercial
production.
PATENTS
In 1992, the Company acquired trademarks and several patents on the Product.
The Company capitalizes the cost of patents and related expenses and
amortizes them over the shorter of the remaining legal life or their
estimated economic life. Amortization expense for the years ended December
31, 1998 and 1997 was $17,206 and $19,433, respectively.
PROPERTY AND EQUIPMENT
GENERAL
Repairs, maintenance, and similar costs that do not significantly improve or
extend the useful lives of the assets are expensed as incurred. When an asset
is sold or retired, the cost and accumulated depreciation or amortization are
removed from the accounts and any gain or loss is included in current
operations.
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PAGE 8
<PAGE>
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HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1: (CONTINUED)
PRODUCTION TOOLING
Completed tooling used or to be used in commercial production is carried at cost
less depreciation, which is based on a five-year life using the straight-line
method. The cost of special-purpose property and equipment (such as tools, dies
and molds) constructed by a related-party vendor includes design/production
labor and an allocation of estimated overhead.
OTHER PROPERTY AND EQUIPMENT
Equipment, fixtures, and leasehold improvements are stated at cost less
accumulated depreciation or amortization. Leasehold improvements are amortized
over the shorter of the remaining lease term or their estimated economic life.
Equipment and fixtures are depreciated on a straight-line basis over estimated
useful lives of five years.
INCOME TAXES
Using the liability method required by Statement of Financial Accounting
Standards (SFAS) No. 109, the estimated tax effects of temporary differences
between financial and income tax reporting are recorded in the period in which
the events occur. Such differences between the financial and tax bases of assets
and liabilities result in future tax deductions or taxable income. (See Note
10).
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all
interest-bearing deposits with an original maturity of three months or less as
cash equivalents.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial statements in
accordance with GAAP. Such estimates and assumptions affect the reported amounts
of certain assets and liabilities, disclosures relating to any contingent assets
and liabilities, as well as reported revenues and certain expenses. Actual
results could vary from the estimates used to prepare the accompanying financial
statements.
WARRANTY COSTS AND RELATED MATTERS
The Company provides an unconditional ten-year warranty of the Product's
workmanship and materials. Estimated warranty expense is recorded in the year of
sale based on historical experience and management's review of Product quality
as compared to the current state of the technology.
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PAGE 9
<PAGE>
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HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1: (CONTINUED)
STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS
For employee compensatory stock option plans, which will eventually vest,
compensation expense is recognized during the periods in which related employee
services are rendered. Such expense is generally measured by determining the
excess, if any, of the grant-date estimated fair market value (FMV) of the
underlying stock over the amount to be paid by the employee in conformity with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees."
Compensatory stock options and similar equity instruments issued to
non-employees in exchange for goods or services are accounted for based on the
estimated fair value of (1) the goods or services received or (2) the equity
instrument issued, whichever is more reliably measurable. This accounting policy
is in conformity with SFAS No. 123, "Accounting for Stock-Based Compensation."
Because the options discussed in the preceding paragraph were granted before the
Company became a publicly held entity, GAAP allows use of the "minimum value
method" to measure the expense associated with such equity instruments. Under
this method, minimum value is the grant-date estimated FMV of the stock less the
present value of the exercise price based on a risk-free rate of return over the
contractual life of the option. The ten year risk - free rate of return in
mid-1997, which approximated 5.5%, was used to compute present value. Such
method ignores the expected volatility of the underlying stock that may provide
much of an option's fair value. The Company has not declared any cash dividends
since inception; hence, expected dividends have not been considered in the fair
value computation (See Notes 6 and 7).
LOSS PER COMMON SHARE
Loss per common and common equivalent share is based on the weighted average
number of common shares and common share equivalents (as retroactively adjusted
for the effect of the Reorganization) outstanding during the year in accordance
with SFAS No. 128. (See Note 15).
ELEMENTS OF OTHER COMPREHENSIVE INCOME
For the years ended December 31, 1998 and 1997, the Company did not have any
elements of other comprehensive income as defined by SFAS No. 130, "Reporting
Comprehensive Income." Therefore, no statement of comprehensive income has been
presented.
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PAGE 10
<PAGE>
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HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 2: RELATED PARTY TRANSACTIONS AND RELATIONSHIPS
The names and relationships of known related parties referred to in these notes
are set forth below (Company stock beneficial ownership percentages, which are
as of December 31, 1998, are rounded):
- - Culley W. Davis: founder, CEO, and chairman of the Board of Directors;
direct and beneficial 13% stockholder, including his ownership through
Pinnacle Enterprises, Inc. (PEI), which is wholly owned by Culley W. Davis;
and owner of Company stock options (See Note 6).
- - Bruce H. Haglund, Esq.: legal counsel to ESSI, an officer and director of
the Company, the brother-in-law of the Company's CFO, owner of Company
stock options (See Note 6), and a stockholder of the Company.
- - Leonard W. Burningham, Esq.: legal counsel to Cherokee, and a stockholder
of the Company.
- - Pacific American Cultural Exchange, Inc. ("PACE"): a Japanese corporation
which will be 50% owned by the Company (see Note 11), and the licensee of
certain rights to manufacture and market the Product in Asia.
- - Hideyuki Nakamura: 50% interest in PACE, and owner of the right to acquire
100,000 shares of the Company's common stock in exchange for a 50% equity
interest in PACE.
- - Don Sullivan, sole owner of Metric Tool & Die, an Illinois corporation
("MTD"): a stockholder of the Company, with the right to acquire an
additional 50,000 shares of the Company's common stock under certain
conditions (see Note 11). MTD is the Company's domestic subcontractor for
manufacturing and assembly.
Other related party transactions are discussed elsewhere in these notes to the
financial statements.
NOTE 3: CONCENTRATION OF CREDIT RISK
Financial instruments which may subject the Company to credit risk principally
consist of uninsured cash-in-bank balances. At various times during the year,
the Company's bank balance may exceed the FDIC-insured amount. As of December
31, 1998, the Company bank balance reported by its principal financial
institution was less than such amount.
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PAGE 11
<PAGE>
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HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Production tooling $ 129,385
Other machinery and equipment 122,206
Computer hardware and software 19,994
Furniture and fixtures 54,439
Vehicles 98,990
Leasehold improvements 109,329
Demonstration equipment 21,500
-------------
555,841
Accumulated depreciation and amortization $ (55,584)
-------------
Book value $ 500,259
-------------
-------------
</TABLE>
Depreciation and amortization expense (excluding patents) was $55,584 in 1998;
there was no such expense in 1997.
NOTE 5: COMMON STOCK
At December 31, 1998, there were 24 million common shares issued and outstanding
with a par value of $ 0.001 per share; 30 million shares have been authorized.
The number of shares has been adjusted as described in Note 1.
There are certain restrictions on the sale or other transfer of the Company's
common stock issued under the Plan. Such stock, generally referred to as "Rule
144 stock," was not registered under the Securities Act of 1933, as amended (the
Act), in reliance upon an exemption from its requirements. Each exchanging
shareholder agreed to (1) acquire such stock for his own account and (2) hold
the stock for investment purposes only. In addition, the stock certificates are
required to contain a legend (a) documenting these restrictions and (b)
requiring a legal opinion that any proposed sale is exempt from registration
under the Act.
NOTE 6: STOCK OPTIONS
A. EMPLOYEE INCENTIVE STOCK OPTIONS
Options to acquire 700,000 post-Reorganization common shares with an exercise
price of $0.25/share were outstanding at December 31, 1998 under the plan
described below. As of that date, Culley Davis owned options to acquire 100,000
shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 12
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 6: STOCK OPTIONS (CONTINUED)
Effective June 1, 1997, the Company adopted a stock option and incentive plan
intended to qualify under Section 422A of the Internal Revenue Code. A maximum
of 2 million shares (as adjusted for the Reorganization) are issuable under the
plan, which has a life of ten years. Employee options to purchase common stock
for $0.25/share ($1/share on the grant dates, represented as not less than the
estimated pre-Reorganization fair market value of ESSI common stock) are
exercisable in equal annual installments beginning in January of 2000. For
employees who are more-than-10% stockholders, such options are required to have
a minimum exercise price of 110% of the grant-date estimated fair market value
(FMV) and expire five years after issuance. Options granted to other employees
have a ten-year term. The pre-March 18, 1998 options of other employees have an
exercise price equal to or greater than the grant-date estimated FMV.
The employee's rights under the plan are contingent upon (a) continued
employment with the Company for at least six months after the grant date and (b)
providing a representation that option shares are acquired for investment only,
and not for sale. In addition, the employee agrees to not dispose of shares
acquired from exercising stock options within two years of the grant date or
within one year after the exercise date.
A summary of stock option activity, including the options described in section B
of this note, during the two years ended December 31, 1998 is presented below.
<TABLE>
<CAPTION>
POST-MERGER SHARES
YEAR ENDED DECEMBER 31
1998 1997
---- ----
<S> <C> <C>
Outstanding at January 1 567,500 None
Granted 132,500 567,500
Exercised - -
Expired - -
Cancelled - -
Forfeited - -
---------- ----------
Outstanding at December 31 700,000 567,500
---------- ----------
---------- ----------
Exercisable at December 31 None None
</TABLE>
The weighted average grant-date fair value of nonstatutory stock options granted
(a) in 1998 approximated $7.00/share and (b) in 1997 was equal to or less than
the $1 exercise price. The weighted average fair value of nonstatutory stock
options granted in 1998 when the grant-date market price differed from the
exercise price was $8/share. The weighted average remaining contractual life of
stock options outstanding at December 31, 1998 approximated 9 years.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 13
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 6: STOCK OPTIONS (CONTINUED)
B. NONSTATUTORY STOCK OPTIONS
Of the options outstanding at December 31, 1998, Bruce Haglund owns options to
acquire 100,000 shares. Two attorneys who are employed by Bruce Haglund own
options to purchase a total of 20,000 shares. These equity instruments are
nonstatutory stock options, expire after ten years, and are required to have an
exercise price of not less than 85% of the grant-date estimated FMV. Such
options are exercisable as described in section A of this note. Incentive stock
options may not be granted to non-employees.
Any grant of nonstatutory stock options must be approved by a majority of
disinterested directors of the Company. For accounting purposes, the vesting of
such options is not contingent upon the optionee providing any future services.
C. SIMILAR EQUITY INSTRUMENTS
Under the plan, the Company may also grant stock appreciation rights (SARs) and
restricted stock awards; as of December 31, 1998, no such equity instruments had
been granted.
D. OTHER MATTERS
The plan contains a "poison-pill" clause that is triggered by certain defined
events. Such events include (1) the acquisition of a majority of the Company's
outstanding common stock, (2) a reorganization/merger/consolidation where the
Company is not the surviving entity, and (3) the sale of all or substantially
all of the Company's assets as an entirety. If such an event occurs, all
outstanding options and SARs immediately become exercisable or fully vest and
restricted stock vests free of any restrictions.
NOTE 7: STOCK-BASED COMPENSATION AND OTHER EXPENSE
As discussed in Note 1, compensatory stock options and similar equity
instruments issued to non-employees are accounted for using the fair value
method of SFAS No. 123. The related expense (principally professional fees)
approximated $ 21,000 in 1998 and none in 1997.
Incentive stock options granted to employees are accounted for using the
intrinsic value method of APB No. 25. The estimated compensation expense
approximated $13,000 in 1998 and none in 1997. If the fair value method of
accounting had been applied to such options, the reported 1998 net loss would
have increased by approximately $ 60,000 (less than $.003 per share).
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 14
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 8: NOTE PAYABLE
The Company is indebted to Culley Davis, who financed the purchase of a 1999
Ford truck used by the Company for product demonstrations at remote locations.
The note (original amount: $37,978) is payable in monthly installments of $770
including principal and interest, is secured by the truck, and bears interest at
a fixed rate of 7.9%.
The principal of this note matures as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
------------- -------------
<S> <C>
1999 $ 6,599
2000 7,140
2001 7,725
2002 8,358
2003 6,831
-------------
$ 36,653
-------------
-------------
</TABLE>
NOTE 9: ECONOMIC DEPENDENCY AND POLITICAL RISK OF FOREIGN VENDORS
The Company's production plans call for virtually all product assembly (about
40,000 units/month - unaudited) and cutting blade manufacturing to take place in
China in the near term. The product assembly has been contracted to one company
- - MVP Enterprises. Two other Chinese companies have been engaged to manufacture
a total of about 70,000 blades/month (unaudited). In addition to the political
risk in China, there is also an element of economic dependency inherent in these
relationships.
In the future, the Company may contract with other offshore entities for blade
manufacturing and product assembly. There could be political risk associated
with dependence on vendors in those foreign countries.
The Company intends that all design/engineering of tools and dies, research and
development activities, and domestic product assembly (about 2,000 units/month -
unaudited) will be accomplished by MTD. In this instance, there is economic
dependence on Don Sullivan's personal expertise and his continuing availability
to the Company.
NOTE 10: INCOME TAXES
As a result of the Reorganization, Cherokee's tax net operating loss (NOL)
carryforward was eliminated by operation of tax law.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 15
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 10: INCOME TAXES (CONTINUED)
For the period from inception to December 31, 1998, the Company is considered a
start-up entity for federal and state income tax purposes. All expenses are
capitalized for tax purposes and expensed for financial reporting purposes; this
difference is the only significant temporary difference as of December 31, 1998
and 1997. As a result, the Company's tax NOL carryforward is zero at December
31, 1998 and 1997.
The Company's accounting NOL carryforward approximates $4,580,000 at December
31, 1998. The related deferred tax asset approximated $1,450,000 and $160,000 at
December 31, 1998 and 1997, respectively. Because the Company is a development
stage enterprise and there is no reasonable assurance that such asset will be
realized in future years, the Company has recorded a 100% valuation allowance
against this deferred tax asset.
A summary of the activity in the valuation allowance for the deferred tax asset
during the two years ended December 31, 1998 is presented below:
<TABLE>
<CAPTION>
AMOUNT
--------------
<S> <C>
Balance at January 1, 1997 $ 100,640
Adjustment for 1997 deferred tax asset 158,502
-------------
Balance at December 31, 1997 259,142
1998 adjustments:
Deferred tax asset 1,448,843
Certain direct credits to stockholders' equity
related to stock option accounting 87,664
-------------
Balance at December 31, 1998 $ 1,795,649
-------------
-------------
</TABLE>
In 1998, an additional income tax benefit (and an equal amount of valuation
allowance) of approximately $88,000 has been allocated to items credited
directly to stockholders' equity. Approximately $235,000 relating to stock
option accounting (see Note 6) was credited to additional paid-in capital.
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
PAGE 16
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 11: COMMITMENTS AND CONTINGENT LIABILITIES
A. LEASE COMMITMENT
The Company conducts its domestic operations from a facility leased for a
five-year period ending October 31, 2003 with an option to renew until
approximately September 2005. Annual rent is $81,000 for the twelve-month period
ending October 15, 1999; such rent increases 3% per annum thereafter. The
Company is also responsible for insurance, utilities, property taxes and common
area maintenance costs, which will total approximately $16,000 for the year
ended December 31, 1999. Such costs are subject to increase thereafter based on
the lessor's actual expenses.
The following is a schedule of the approximate future minimum rental payments
(including related costs, based on 1999 amounts) required by the above operating
lease:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
------------ ----------------
<S> <C>
1999 $ 97,500
2000 100,000
2001 102,500
2002 105,000
2003 89,500
Thereafter -
-------------
$ 494,500
-------------
-------------
</TABLE>
B. COMMITMENTS TO ISSUE COMMON STOCK AND OTHER MATTERS
On January 12, 1999, the Company executed a contract to (a) memorialize the
ongoing manufacturing and consulting arrangement with MTD and Don Sullivan
(DS) and (b) purchase at least 19,000 finished product units from MTD in
calendar 1999 at a fixed price. One provision of such contract requires the
Company to enter into an agreement whereby 50,000 shares of its common stock
will be issued to DS, contingent upon (1) his continued employment by MTD and
(2) MTD maintaining its existing business relationship with the Company.
Although a definitive agreement regarding the stock issuance had not been
consummated as of February 19, 1999, the Company and DS have agreed in principle
that, if the above-noted conditions are not satisfied, the rights to such common
stock will be forfeited as follows:
<TABLE>
<CAPTION>
FORFEITURE NUMBER OF
DATE SHARES
----------- ---------
<S> <C>
12/31/1999 30,000
12/31/2000 20,000
12/31/2001 10,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PAGE 17
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 11: COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
On December 4, 1998, the Company and PACE entered into a master agreement which
includes the following provisions:
- - The Company granted the rights to manufacture and market the Product in
Asia to PACE. Such rights become exclusive if certain sales quotas are met.
- - The Company will receive a royalty of $50/unit, up to a maximum of $5
million. Such maximum shall be reduced to the extent PACE establishes a
credit facility for the manufacture/purchase of units in the defined
territory.
- - Hideyuki Nakamura, PACE's sole owner, agreed to provide $200,000 of working
capital to PACE for operating expenses.
- - Hideyuki Nakamura agreed to assign 50% of the issued and outstanding
capital stock of PACE to the Company, which in turn agreed to issue 100,000
post-merger shares of the Company's common stock to Hideyuki Nakamura.
- - The Company's executive management personnel will hold key officer
positions with PACE.
PACE and the Company have also agreed to enter into one or more definitive
agreements to accomplish certain of the above matters. As of February 19, 1999,
such agreements had not been executed. At December 31, 1998, the Company did not
have an investment in PACE and, accordingly, the accompanying statements of
operations do not include any equity in PACE's earnings or loss.
NOTE 12: GOING CONCERN/LIQUIDITY CONSIDERATIONS
As discussed in Note 1, the Company is a development stage enterprise developing
the HYDRO-MAID water-powered garbage disposal. Introductory sales have been
nominal and management projects that the Company will require significant
additional capital in order to lower manufacturing costs, reduce the selling
price to competitive levels, and provide marketing and distribution. Although
the Company issued common stock for $1.2 million in cash during January, 1999,
management projects that significant additional capital will be needed.
Accordingly, there is uncertainty about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PAGE 18
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 13: ADVANCES FROM RELATED PARTY
In 1998, Culley W. Davis made unsecured advances to the Company totaling
$1,478,467, which included $1,427,000 of proceeds from sales of his Company
stock to investors at $8 per share. The stock sold by Culley W. Davis was
personally owned by him or PEI and the proceeds were advanced to the Company
according to an agreement between the parties. During December 1998, the
Company issued 178,375 shares of common stock to Culley W. Davis valued at $8
per share as reimbursement stock for his personal shares sold. The stock sale
proceeds received by the Company have been reported as an original stock
issuance in the accompanying financial statements.
The remaining balance of $51,467 represents advances to the Company by
Culley W. Davis and PEI. These advances are non-interest bearing and have
been reported as a current liability in the accompanying balance sheet.
NOTE 14: DISBURSEMENTS BY RELATED PARTY
Prior to 1998, the Company had insignificant cash transactions. PEI disbursed
substantially all cash for the Company's activities involving operations,
investment and financing, including $548,251 for the year ended December 31,
1997. Such disbursements are included in additional paid-in capital in the
accompanying financial statements. For the year ended December 31, 1998, such
disbursements by PEI were not signigicant.
NOTE 15: YEAR 2000 (UNAUDITED)
Many computerized systems use only two digits to record the year in date fields
and such systems may not be able to accurately process dates ending in the year
2000 and thereafter. The effects of this problem will vary from system to system
and may adversely affect a company's operations as well as its ability to
prepare financial statements. Management has adopted a plan to review its
internal computer systems to determine the effects, if any, of the year 2000
problem. The effect of external year 2000 problems, if any, cannot be
determined.
NOTE 16: LOSS PER SHARE (SEE PAGE 20)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PAGE 19
<PAGE>
- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 16: LOSS PER SHARE
Basic loss per share is computed by dividing loss attributable to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted loss per share reflects per share amounts that
would have resulted if certain dilutive potential common stock had been
issued. The weighted average number of common shares outstanding set forth
below have been retroactively adjusted as if the Reorganization had occurred
on June 24,1992. The following reconciles amounts reported in the
accompanying financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
----------------------------- -----------------------------
LOSS SHARES PER-SHARE LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net loss per financial statements
Contingently issuable shares
Loss attributable to
common stockholders-
basic loss per share
Effect of other dilutive securities:
Options
Loss attributable to
common stockholders-
diluted loss per share
</TABLE>
<TABLE>
<CAPTION>
JUNE 24, 1992 (INCEPTION)
THROUGH DECEMBER 31, 1998
-------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Net loss per financial statements
Contingently issuable shares
Loss attributable to
common stockholders-
basic loss per share
Effect of other dilutive securities:
Options
Loss attributable to
common stockholders-
diluted loss per share
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 20
