HYDROMAID INTERNATIONAL INC, 10KSB40, 1999-03-31

HYDROMAID INTERNATIONAL INC
10KSB40, 1999-03-31
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For transition period from ______________ to ______________

Commission File Number 02-23729

HYDROMAID INTERNATIONAL, INC.
(Name of Small Business issuer in its charter)

NEVADA 87-0575933
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

12222 SOUTH 1000 EAST, SUITE 1
DRAPER, UTAH 84020
(Address of Principal Executive Office) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (801) 553-8790

--------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED:
------------------- ---------------------
NONE NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK -- $.001 PAR VALUE
(TITLE OF CLASS)

Check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----

Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
-----

Revenues of the registrant for the fiscal year ended December 31, 1997 were
$54,828.

<PAGE>

The aggregate market value of the Common Stock held by
non-affiliates of the registrant on December 1, 1998 was less than $100,000
based upon the average of the bid and asked prices of the Common Stock, as
reported by the National Quotation Bureau Incorporated.

The number of shares of the Common Stock of the registrant
outstanding as of December 1, 1998 was approximately 3,500,000.

Transitional Small Business Disclosure Format (check one):

Yes No X
----- -----

<PAGE>

PART I

All statements, other than statements of historical fact, included
in this Form 10-KSB, including without limitation the statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," are, or may be deemed to be, "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"). Such forward-looking statements involve
assumptions, known and unknown risks, uncertainties and other factors which
may cause the actual results, performance or achievements of HydroMaid
International, Inc. (the "Company") to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements contained in this Form 10-KSB. Such potential
risks and uncertainties include, without limitation, competitive pricing and
other pressures from other kitchen appliance manufacturers, economic
conditions generally and in the Company's primary markets, consumer spending
patterns, perceived quality and value of the Company's product, availability
of capital, cost of labor (foreign and domestic), cost of raw materials,
occupancy costs, and other risk factors detailed herein and in other of the
Company's filings with the Securities and Exchange Commission. The
forward-looking statements are made as of the date of this Form 10-KSB and
the Company assumes no obligation to update the forward-looking statements or
to update the reasons actual results could differ from those projected in
such forward-looking statements. Therefore, readers are cautioned not to
place undue reliance on these forward-looking statements.

ITEM 1. BUSINESS

BUSINESS DEVELOPMENT

ORGANIZATION. HydroMaid International, Inc. (the "Company"), was
organized under the laws of the State of Nevada on May 19, 1919, under the
name "Lincoln Divide Mining Company." Subsequently the Company changed it
name twice and later became "Cherokee Minerals and Oil, Inc." ("Cherokee") in
1980, before becoming HydroMaid International, Inc. on January 20, 1999.

MERGERS AND REORGANIZATIONS. On December 11, 1998, the Company
entered into an Agreement and Plan of Reorganization (the "Reorganization")
which resulted in the acquisition by the Company of no less than 80% of the
issued and outstanding shares of restricted Common Stock of Environmental
Systems & Solutions, Inc. ("ESSI"), a Nevada corporation. The Reorganization
qualified 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 of the Company's stockholders agreed to cancel approximately
2,555,000 of their common shares. Under the terms of the Reorganization, the
former stockholders of ESSI received four shares of the Company for each one
share of ESSI and in the aggregate acquired approximately 92% of the issued
and outstanding Common Stock of the Company. 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 24,000,000
post-Reorganization shares of the Company's issued and outstanding Common
Stock: Such shares are restricted under Federal law. (See the 8-K and the
8-K/A1-A5 Current Reports dated October 16, 1998, which have been previously
filed with the Securities and Exchange Commission and which are incorporated
herein by reference.)

BUSINESS

Before the Reorganization, Cherokee was engaged in seeking and
investigating potential assets, property or businesses to acquire, and had
had no material business operations for over five years. ESSI had been
engaged primarily in research and development for six years before the
Reorganization.

PRINCIPAL PRODUCT. The Company is engaged in the research and
development, manufacturing, marketing, sale, and distribution of a patented
product called the HydroMaid-TM-. The HydroMaid is the world's first and
only, totally water-powered garbage disposal.

<PAGE>

The HydroMaid is able to process foods that conventional electric
disposals cannot. The HydroMaid is environmentally safe, quiet, and has ninety
percent fewer parts than electric disposals. The HydroMaid uses common
household water pressure to oscillate five stainless steel blades.

The HydroMaid uses normal household water pressure from the cold
water line underneath the sink. Its multi-patented servomechanism harnesses
the household water pressure to push five stainless steel cutting blades 340
degrees. These blades oscillate and cut through waste which normally damages
or creates problems for traditional electric disposals such as chicken bones,
potato peels, avocado pits, walnut shells, and fibrous foods like celery. The
servomechanism is able to automatically shift into a harmless oscillating
motion if silverware is accidentally dropped into the unit which allows the
user to avoid damage to both silverware and the disposal.

The HydroMaid is an environmentally friendly product for a variety
of reasons. First, the cutting action of the HydroMaid produces such fine cut
waste that it easily flushes through the drainage system, promoting faster
decomposition as an aid to the environment. Second, because it uses no
electricity, the HydroMaid reduces the consumption of energy.

The Company plans to produce the HydroMaid in China, Mexico, and the
United States. The HydroMaid retails for $299 and discounts will be based on
volume.

MARKET SEGMENTS. The garbage disposal market consists of two main
segments, domestic and international. The domestic market purchased
approximately 4,800,000 garbage disposals in 1997. The domestic disposal
market is growing at approximately 2.6% annually. The international market is
virtually untapped by the conventional electric disposal. In 1997, there were
less than 244,000 disposers exported throughout the world. The Company
intends to distribute to both the domestic and international markets
beginning in 1999; although, no assurance of when significant sales in either
market can be provided.

MARKETING AND DISTRIBUTION STRATEGY. The Company intends to sell the
HydroMaid to retail outlets and plumbing wholesale houses which in turn will
sell directly to the end user. Due to the uniqueness of the HydroMaid, the
Company intends to also use non-traditional channels for distribution such as
home shopping shows and mail order. The marketing of the HydroMaid will focus
on the buying channels by which consumers purchase disposals.

DISTRIBUTION METHODS. The Company intends to initially focus on
three distribution methods.

RETAIL. The Company believes that retail customers will represent
the largest percentage of sales initially. Retail stores or outlets represent
customers that buy at wholesale prices and sell at retail prices. Large
retail outlets will be targeted by the Company to carry the HydroMaid.

PLUMBING WHOLESALE HOUSES. The Company anticipates that plumbing
wholesale houses ("Wholesalers") will constitute a large part of the
Company's total distribution. Wholesalers are customers that purchase product
at below wholesale and resell the product at wholesale prices. Wholesalers
will be contacted by the Company through Mass mailings containing sales and
promotional materials. These materials will contain information about the
product, the Company, and resources available to stores. An in-house sales
team will follow up on these mailers and address the concerns of the
customers. Additionally, an electronic data interchange system will be set up
both on computer and via telephone in the future. This system will allow the
customer to order directly from the Company.

The Company will also use independent sales representatives. These
representatives will be expected to sell to the plumbing houses and
independent stores the Company cannot reach directly.

DIRECT. The direct market consists of customers who buy directly
from the Company at retail prices. Direct response advertising and the
internet represent the two main direct channels the Company plans to enter.
The Company has performed limited direct response marketing and plans to
further test and refine its direct marketing approach.

<PAGE>

The Web site www.hydromaid.com provides detailed information on the
internet to interested consumers and allows them the opportunity to order
directly from the Company. The web site is currently being used and is
updated often to keep customers up to date with the most current information.

COMPETITIVE BUSINESS CONDITIONS. A recent study indicates that
approximately 94% of the disposal market is owned by two major companies,
In-Sink-Erator and Anaheim Manufacturing. As a result, the disposal market is
extremely competitive. Because the major companies are so entrenched in the
disposal market through the aid of massive product recognition, established
distribution channels, and powerful financial resources, it is extremely
difficult for other disposal manufacturers to successfully enter the market.

While the Company's management recognizes that it is difficult to
overcome competition and other market entry barriers, it believes that the
HydroMaid's unique technology will permit the Company to successfully
distinguish itself from the major industry players and capture measurable
market share.

SOURCES AND AVAILABILITY OF MATERIALS. The Company currently relies
on Metric Tool & Die ("Metric"), an Illinois corporation, for all raw
materials, assembly and manufacture of the HydroMaid. Metric has the capacity
to produce about 2,000 units per month.

In order to increase its production capabilities, reduce its
production costs, and mitigate the risks of relying on just one manufacturer,
the Company has entered into an agreement with MVP Industries ("MVP"), a
China corporation, for the manufacture and assembly of the HydroMaid. Like
Metric, MVP provides the Company with a finished product and therefor relies
upon its own sources for parts and materials required to assemble the
HydroMaid. The Company anticipates that MVP will be ready to produce
approximately 40,000 units in the near term. Two other Chinese companies have
been engaged to manufacture up to 70,000 cutter blades per month.

The Company understands that there is economic and political risk in
relying on just one or a few manufacturers and suppliers. To mitigate the
risk of losing all or part of its product supply, in the event that one of
its manufacturers ceases to produce units of the HydroMaid for whatever
reason, the Company is taking steps to diversify its sources and availability
for materials and the manufacturing of its product.

MAJOR CUSTOMERS. Because the Company is in the development stage it
has not made any significant sales or entered into any agreements with any
major customers. The Company is focused on entering into distribution
agreements with major appliance retail stores and plumbing wholesale houses.
Although no agreements have been entered into, the Company anticipates that
it will enter into sales agreements with just a few major customers which
subjects the Company to risk of losing significant sales if anything happens
to the working relationship with any one of its customers. The Company
intends to protect itself against such risks, to the fullest extent possible,
by entering sales and distribution agreements which contain favorable and
protective terms.

PATENTS AND TRADEMARKS. The Company holds five patents issued in the
United States and internationally and has four new patents pending in the
United States and internationally covering the HydroMaid. The Company also
holds a trademark on the HydroMaid name.

RESEARCH AND DEVELOPMENT. The Company spent approximately $87,852 in
1997 and $647,139 in 1998 for research and development. Research and
development costs have been substantial during the past two years as the
Company accelerated development to take the HydroMaid to market.

WARRANTY. The Company currently supports the HydroMaid with a ten
year warranty to the original consumer against any defects in workmanship or
material, provided that the product has not been subject to abuse or
alteration.

<PAGE>

YEAR 2000 MATTERS

The inability of computers, software, and other equipment utilizing
microprocessors to recognize and property process date fields containing a
two digit year reference such as "00" for the year 2000 is commonly referred
to as the Year 2000 issue. Any of the Company's computer programs that
utilize two digit years may recognize "00" as the year 1900 rather than the
year 2000. Such recognition problems could cause disruptions of operations,
including the inability to process transactions, send invoices, or engage in
similar essential business activities.

The Company has identified all significant applications that will
require modification to address the Year 2000 issue. Internal and external
resources are being used to make the required modifications and test Company
systems for the year 2000. The modifications process of all significant
applications is substantially complete, and the Company intends to complete
modifications and conduct testing by the end of 1998.

The Company is also communicating with third party vendors to
determine their compliance with the Year 2000 issue. The Company can provide
no assurance that the systems of third parties will be in compliance by the
turn of the century. The inability of the Company to complete modifications
and the failure of third party vendors to complete compliance with the Year
2000 issue, or both, could have a material adverse effect on the Company's
ability to perform essential business tasks which could have a material
adverse effect on the Company's business.

EMPLOYEES

As of December 31, 1998, the Company employed 13 employees,
including five salaried employees on a full-time basis who are considered
executive personnel, three salaried and four hourly full-time employees in
administrative, supervisory, and clerical positions, and one part-time
employee. None of the Company's employees are covered by a collective
bargaining agreement, the Company has never experienced a work stoppage, and
the Company considers its labor relations to be excellent.

ITEM 2. DESCRIPTION OF PROPERTY

The Company currently occupies approximately 8,100 square feet of
office and warehouse space located at 12222 South 1000 East, #1, Draper, Utah
84020. The lease provides for rent of $81,000 for the first year and
increases 3% per annum to the expiration of the lease on October 31, 2003.
The Company has an option to renew the lease until approximately September
2005.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings involving the
Company, and the Company is not aware of any threatened legal proceedings to
which the Company may be a party.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NAME CHANGE

During the first quarter of 1999, the Company held a Special Meeting
of Stockholders on Wednesday, January 20, 1999 at the Company's business
office in Draper, Utah. Stockholders were asked to vote on a change of the
Company's name from Cherokee Minerals and Oil, Inc. to HydroMaid
International, Inc. The stockholders approved the name change with 17,801,606
votes for the change, none against, and the balance not being voted. (See the
8-K and the 8-K/A1 Current Reports dated February 1, 1999, which have been
previously filed with the Securities and Exchange Commission and which are
incorporated herein by reference.)

<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

DESCRIPTION OF SECURITIES

The Company has one class of securities authorized, consisting of
30,000,000 shares of $0.001 par value common voting stock. The holders of the
Company's Common Stock are entitled to one vote per share on each matter
submitted to a vote at a meeting of stockholders. The shares of Common Stock
carry cumulative voting rights in the election of directors.

Stockholders of the Company have no pre-emptive rights to acquire
additional shares of Common Stock or other securities. The Common Stock is
not subject to redemption rights and carries no subscription or conversion
rights. In the event of liquidation of the Company, the shares of Common
Stock are entitled to share equally in corporate assets after satisfaction of
all liabilities. All shares of the Common Stock now outstanding are fully
paid and non-assessable.

There are outstanding options to purchase a total of 700,000
shares of Common Stock at the price of $.25 per share. The options are
subject the Company's 1997 Stock Option and Incentive Plan and vest in one
third increments on January 1, 2000, 2001, and 2002.

There is no provision in the Company's Articles of Incorporation, as
amended, or Bylaws, as amended, that would delay, defer, or prevent a change
in control of the Company.

COMMON STOCK PRICE ACTUAL AND ADJUSTED

The Company's stock began trading on October 12, 1998. The Company's
Common Stock was quoted on the OTC Bulletin Board under the symbol "CKMR"
through December 14, 1998, and under the symbol "HYII" thereafter. The symbol
was changed in conjunction with the Reorganization.

The following table sets forth, for the period from October 12, 1998
to March 24, 1999, the high and low bid quotations for the Common Stock for
the last two quarters during which the stock has been trading. The prices
represent quotations between dealers, without adjustment for retail markup,
mark down or commission, and do not necessarily represent actual transactions.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1st Quarter 1999 4.125 2.937
4th Quarter 1998 3.375 0.4375

</TABLE>

The Company has not paid any cash dividends on its Common Stock
since its incorporation and anticipates that, for the foreseeable future,
earnings, if any, will continue to be retained for use in its business. As of
December 31, 1998, the approximate number of record holders of the Company's
Common Stock was 305.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
report.

RESULTS OF OPERATIONS

After having no material operations for over five years, during
1998, the Company was successful in finding a suitable business to acquire.
In December 1998, the Company acquired all of the shares of Environmental
Systems and Solutions, Inc. ("ESSI") in a stock-for-stock transaction. As a
result of the Reorganization and the resulting consolidation of financial
statements, the operating results discussed in this report consist in all
material respects of ESSI's operations over the past few years.

<PAGE>

COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED
DECEMBER 31, 1997. During the year ended December 31, 1998, the Company
experienced its first sales which totaled $54,828. The associated cost of
sales totaled $53,045. Before 1998, the Company had been involved strictly in
research and development of the HydroMaid. The insignificant gross profit
margin resulted from the low volume of product being produced. The Company
anticipates its cost of sales will drop substantially with economies of scale
as production and sales increase during the upcoming years.

Selling, general, and administrative costs were $3,259,385 during
1998 compared to $337,087 for the comparable period in 1997, an increase of
$2,922,298. During 1998 as the Company transitioned from a research and
development company to a marketing and fulfillment operation, substantial
operating costs were incurred as the Company hired on management and
employees, moved into a larger office and warehousing facility, began
actively marketing the product domestically, and undertook a search for
foreign production capabilities and distribution channels. The increase in
selling, general, and administrative costs consisted primarily of salary and
related expenses of approximately $495,000, consulting and legal fees of
approximately $350,000, marketing and sales costs of approximately 450,000,
office expenses of approximately $255,000, allocated start-up, development,
and operational expenses associated with ESSI related entities which were
merged in with ESSI during 1998 of approximately $1,600,000, depreciation and
amortization expenses of approximately $95,000, and various other expenses of
approximately $15,000.

Research and development costs for 1998 totaled $647,139 as compared
to $87,852 for 1997, an increase of $559,287. As the Company prepared for
mass production, various parts and attachments needed modification to allow
for more effective operation of the product and cost effective production.
Tool and dyes needed to be constructed and packaging needed to be developed
and refined. The increase in research and development costs in 1998 is
attributed to these preparations for producting and marketing of the
HydroMaid.

The Company experienced a net loss of $3,904,741 during 1998
compared to a net loss of $424,939 for the comparable period in 1997, an
increase in losses of $3,479,802. The increase in losses resulted from the
Company increasing the pace of its development activity, actively performing
marketing research, building a management and operations infrastructure, and
introducing the product at trade shows and through direct marketing. During
1998, the Company began having production tools and dyes made and arranging
for domestic and foreign production of the HydroMaid. The costs of this
accelerated level of development activity were expensed as incurred in
accordance with generally accepted accounting principles.

The Company began building HydroMaid's in quantities for the first
time during 1998 in order to begin stocking inventory. The Company's
inventory increased substantially from $17,000 at December 31, 1997 to
$479,580 at December 31, 1998, as the Company prepared for material sales for
the first time.

Virtually all of the line item financial changes which occurred
during 1998 resulted from the Company's moves to finalize research and
development and to commence production and marketing. The Company intends to
continue to aggressively market the HydroMaid and generate sales and to move
forward with increased production capacity and inventory.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEARS FROM
INCEPTION TO THE YEAR ENDED DECEMBER 31, 1996. The Company experienced no
material sales prior to 1998.

Selling, general, and administrative costs were $337,087 during 1997
compared to $267,893 for the period from inception through 1997. From
inception through 1997, the Company was involved primarily in research and
development of the HydroMaid. Selling, general, and administrative costs
during 1997 consisted primarily of salary, office, administrative, and
preliminary marketing expenses.

Research and development costs for 1997 totaled $87,852. Before
1997, the Company had not expended any material amount on research and
development.

The Company experienced a net loss of $424,939 during 1997 compared
to a net loss of $268,849 for the period from inception through 1996. Losses
during 1997 and before resulted primarily from office

6
<PAGE>

and administrative expenses related to the initial acquisition of the patents
and the Company's capital raising activities.

PLAN OF OPERATION - LIQUIDITY AND CAPITAL RESOURCES

In December 1998, Cherokee acquired all of the shares of ESSI in a
stock-for-stock transaction. The Reorganization provided the Company with
ongoing operations and working capital.

The Company has operated from inception with approximately
$6,000,000 in invested capital. Cherokee from its incorporation in 1919
through the Reorganization raised $527,632 in investment proceeds to fund
operations. ESSI from its inception in 1992 through the Reorganization raised
$5,568,934 to fund the acquisition of the HydroMaid patents, perform research
and development, and conduct business operations.

During 1998, the Company, through ESSI before the Reorganization,
raised approximately $4,408,000 through private offerings of its stock. The
capital raised was used to fund operations. The Company anticipates needing
additional capital to fund operations during the upcoming year. The Company
intends to raise capital through a combination of offering its securities,
establishing operating lines of credit, and through the sale of product.

During 1998, the Company established an infrastructure to move from
a development stage company to a production and marketing stage company. The
Company anticipates continuing its aggressive marketing and production
efforts during 1999. With the business foundation established in 1998, the
Company does not anticipate any major plant or equipment purchases or
significant changes in the number of employees.

ITEM 7. FINANCIAL STATEMENTS

The financial statements listed in the accompanying Index to
Financial Statements are attached hereto and filed as a part of this Report
under Item 13.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT

In conjunction with the Reorganization of ESSI, the Company changed
auditors in January 1999. The Company's former accountants Jones, Jensen &
Co. were dismissed effective January 26, 1999, and Squar, Milner & Reehl,
LLC, was appointed as the Company's principal accountants. There were no
disagreements with the former accountant and are no disagreements with the
current Accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. The Company
filed an 8-K concerning the change of auditors on February 1, 1999 which is
incorporated by reference.

<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT

COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT

Section 16 (a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and persons who own more than 10% of a
registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors, and greater than 10% beneficial owners are
required by SEC regulation to furnish the Company with copies of all Section
16 (a) forms they file. The Company believes that all filing requirements
applicable to its officers, directors, and greater than 10% beneficial owners
were complied with.

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The names, ages and positions of the Company's Directors and
executive officers as of December 31, 1998 are listed below:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY FIRST ELECTED
<S> <C> <C> <C>
Culley W. Davis 43 CEO, Chairman, Director 1998
Ronald L. LaFord 52 President, Director 1998
Mark S. Brewer 41 Vice President, Director 1998
Paul A. Kujanpas 39 Vice President 1998
of Manufacturing
John W. Nagel 58 CFO, Director 1998
Bruce H. Haglund 47 Secretary, Director 1998

</TABLE>

CULLEY W. DAVIS, CHIEF EXECUTIVE OFFICER, CHAIRMAN OF THE BOARD,
DIRECTOR

Mr. Davis was the founder of ESSI and since its inception in 1992
has held various positions including, President, Secretary, Chief Financial
Officer, Treasurer, and Director. Mr. Davis currently holds the positions of
Chief Executive Officer and Chairman of the Board of the Company. Since 1992,
Mr. Davis has also served as Chief Executive Officer and Chairman of the
Board of Dancor, Inc., the developer of Vitroseal (trademark), a patented
coating technology for the metal coating market. From 1989 until 1992 Mr.
Davis was President and Chief Executive Officer of Lubrication Research,
Inc., a company engaged in the development and marketing of technology used
in the automobile industry. During the period of 1984 until 1990, Mr. Davis
founded and served as President of Vencor International, Inc., a developer of
form-fitted, reusable, cloth diapers for medical and non-medical
applications. From 1979 until 1984 Mr. Davis founded and operated Capital
Diamond Corporation, a diamond and jewelry wholesaling company.

In May 1996, Mr. Davis entered into a stipulation for judgment and
permanent injunction (the "Injunction") with the Department of Finance of the
State of Idaho (the "State") in connection with a complaint (the "Complaint")
filed by the State alleging that Mr. Davis violated provisions of the Idaho
Securities Act. In accordance with the Injunction, Mr. Davis paid a $50,000
fine to the state and was permanently enjoined from violating the Idaho
Securities Act, from offering or selling unregistered securities in Idaho,
and from transacting securities business in Idaho without applicable
securities licenses.

RONALD L. LAFORD, PRESIDENT, DIRECTOR

Mr. LaFord served as President and a member of the Board of
Directors of ESSI from September 1997 until the Reorganization and currently
serves in the same positions with the Company. From March 1994 until
September 1997, Mr. LaFord served as Director of National Marketing and
Advertising for Flying J Corporation, a Utah based company engaged in the
development and operation of truck stops and service stations. From 1986 to
1994, he served in various capacities for Citizens

<PAGE>

Utilities Company including, Director of Administration and Supply, Managing
Coordinator of Marketing and Sales and Coordinator of Vehicle Procurement and
Maintenance. From 1980 until 1985, Mr. LaFord was a Senior Manager for Union
Carbide Corporation. From 1974 until 1979, he was a Senior Consultant for
General Telephone and Electronics (GTE). Mr. LaFord received his A.A. degree
in Civil Engineering and B.A. degree in Marketing and Business Administration
from Central Washington University. He is a graduate of the General Telephone
and Electronics School of Management.

MARK S. BREWER, VICE PRESIDENT, DIRECTOR

Mr. Brewer served as Vice President and a member of the Board of
Directors of ESSI from September 1997 to the Reorganization and currently
serves in the same positions with the Company. He also serves as President of
Search International and Onkli Incorporated. Search International was founded
by Mr. Brewer in 1990 for the purpose of developing and marketing new
products. He founded Onkli Incorporated in 1991 for the purpose of creating
and packaging consumer houseware products. In 1979, Mr. Brewer joined
Advertising Professionals, a full service advertising agency which he
acquired in 1989 and operated until 1996.

PAUL A. KUJANPAA, VICE PRESIDENT OF MANUFACTURING

Mr. Kujanpaa served as Vice President of Manufacturing of ESSI from
July 1998 until the Reorganization and currently serves in the same positions
with the Company. From 1997 to 1998, he served as Senior Manager of Order
Fulfillment and Logistics for Haworth Inc. From 1994 until 1997, Mr. Kujanpaa
was a Management Consulting Manager for Grant Thornton LLP, the country's
seventh largest accounting and management consulting firm. During the period
of 1991 to 1993, he held the position of Senior Management Consultant for
Booz, Allen & Hamilton, an international management consulting firm ranked
among the top five in the world. From 1989 until 1991, Mr. Kujanpaa worked as
Management Consultant for A.T. Kearney Incorporated, an international
management consulting firm based in Chicago, Illinois. During the period of
1988 to 1989, Mr. Kujanpaa was a partner of and Engineer Consultant for Metz
and Associates Incorporated, a manufacturing engineering consulting firm
which was sold to A.T. Kearney Incorporated in 1989. From 1986 to 1988, he
held the position of Manufacturing Engineering Consultant for Ingersoll
Engineers Incorporated of Rockford, Illinois. Mr. Kujanpaa received his B.S.
in Manufacturing Engineering from Brigham Young University.

JOHN W. NAGEL, CHIEF FINANCIAL OFFICER, DIRECTOR

Mr. Nagel joined ESSI as Chief Financial Officer and a member of the
Board of Directors in September 1998 and served until the Reorganization and
currently serves in the same positions with the Company. From 1988 to August
1998, Mr. Nagel served as Director of Finance for WVUE Television of New
Orleans, Louisiana. During the period of 1983 to 1988, he was operator and
part owner of several franchised ice cream parlors. From 1980 to 1983, Mr.
Nagel held positions in administration and management for The Nautilus Group,
Inc., a poultry incubation equipment manufacturer and portable electronic
stage lighting system manufacturer. From 1968 to 1980, Mr. Nagel worked for
Arthur Anderson & Co. in numerous capacities relating to consulting for the
design and implementation of computer-based management information systems.
He served as an officer in the U.S. Navy Supply Corps from 1962 to 1966. Mr.
Nagel was awarded his M.B.A. degree from Harvard University and his B.S.
degree in accounting from Ohio State University.

BRUCE H. HAGLUND, SECRETARY, DIRECTOR

Bruce H. Haglund served as a Director and Secretary of ESSI from
September 1998 until the Reorganization and currently serves in the same
positions with the Company. Mr. Haglund is a principal in the law firm of
Gibson, Haglund & Johnson in Orange County, California where he has been
engaged in the private practice of law since 1980. He is member of the Board
of Directors of Santa Barbara Restaurant Group, Inc. and the Secretary of
Metalclad Corporation, a public company whose stock is traded on the NASDAQ
Small Cap Market. Mr. Haglund is also the Secretary and a member of the Board
of Directors of Aviation Distributors, Inc. and Renaissance Golf Products,
Inc., public companies whose stock is traded on the OTC:BB. He is a graduate
of the University of Utah College of Law.

<PAGE>

BOARD OF DIRECTORS

The Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing the overall performance of the Company.
However, in accordance with corporate governance principles, the Board is not
involved in day-to-day operating details. Members of the Board of Directors
are kept informed of the Company's business through discussions with the
Chairman and other officers, by reviewing analyses and reports sent to them,
and by participating in Board and committee meetings. All Directors attended
more than 75% of the Meetings held during their tenures as Directors.

COMPENSATION OF DIRECTORS

The Company's policy is not to pay cash compensation to directors
who are employees or consultants of the Company for their services as
directors, but reimburses reasonable out-of-pocket expenses of directors for
attendance at meetings.

LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Nevada law. Such limitation of
liability does not apply to liabilities arising under the federal securities
laws and does not affect the availability of equitable remedies such as
injunctive relief or rescission.

The Company's Bylaws provide that the Company shall indemnify its
directors and executive officers and may indemnify its other officers and
employees and other agents to the fullest extent permitted by law. The
Company believes that indemnification under its Bylaws covers at least
negligence and gross negligence on the part of indemnified parties. The
Company's Bylaws also permit it to secure insurance on behalf of any officer,
director, employee, or other reagent for any liability arising out of his or
her actions in such capacity, regardless of whether the Bylaws permit such
indemnification.

At present, there is no pending litigation or proceeding involving
any director, officer, employee, or agent of the Company where
indemnification will be required or permitted. The Company is not aware of
any threatened litigation or proceeding that might result in a claim for such
indemnification.

ITEM 10. EXECUTIVE COMPENSATION

The Company's compensation programs are designed to link executives'
compensation to the performance of the Company. The annual salary paid to
executives over the past two years reflect fixed amounts that are deemed
competitive for executives with comparable ability and experience in the
industry.

COMPENSATION OF OFFICERS

The following table sets forth the aggregate compensation paid by
the Company for services rendered during the periods indicated. Management of
the Company was completely replaced in conjunction with the Reorganization.

<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
- -------------------------------------------------------------- ----------------------------------
NAME AND OTHER AWARDS PAYOUTS ALL
PRINCIPAL YEAR SALARY BONUS ANNUAL -------------------- -----------
POSITION ($) ($) COMPEN- RESTRICTED OPTIONS/ LTIP OTHER (1)
SATION STOCK ($) SARS (#) PAYOUTS ($)
($)
- ----------------- ----- ------- ------ -------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Culley W. Davis 1998 95,000 - -0- -0- - - -
Chairman, CEO 1997 -0- - -0- -0- - - -
- --------------------------------------------------------------------------------------------------------------
Ronald L. LaFord 1998 88,000 - -0- -0- - - -
President 1997 18,750 - -0- -0- - - -
- --------------------------------------------------------------------------------------------------------------
Mark S. Brewer 1998 78,550 - -0- -0- - - -
Vice President 1997 72,685 - -0- -0- - - -
- --------------------------------------------------------------------------------------------------------------
Joe K. Johnson 1998 -0- - -0- -0- - - -
Former Pres. 1997 -0- - -0- -0- - - -
- --------------------------------------------------------------------------------------------------------------

</TABLE>

(1) The remuneration described in the table does not include the cost to the
Company of benefits furnished to the named executive officers, including
premiums for health insurance and other personal benefits provided to such
individual that are extended to all employees of the Company in connection
with their employment. The value of such benefits cannot be precisely
determined; however, the executive Officers named above did not receive
other compensation in excess of the lesser of $50,000 or 10% of such
Officers' cash compensation.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

To the knowledge of management and based upon a review of the stock
ledger maintained by the Registrant's transfer agent and registrar, the
following table sets forth the beneficial ownership of persons who own more
than five percent of the Registrant's Common Stock as of the date hereof, and
the share holdings of new management, to wit:

<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
OF BENEFICIAL OF
NAME TITLE OWNERSHIP(1)(2) CLASS (3)
<S> <C> <C> <C>
Culley W. Davis CEO and Chairman 7,000 *
Pinnacle Enterprises, Inc. (4) 3,013,424 14.18%
Ronald L. LaFord President -0- -0-
Mark S. Brewer Vice President 36,000 *
Paul A. Kujanpas Vice President -0- -0-
of Manufacturing
John W. Nagel CFO -0- -0-
Bruce H. Haglund, Esq. Secretary and Director 72,000 *
George Taylor Munroe (5) 2,448,000 11.7%
T-6G Limited (6) 1,152,000 5.4%

All directors and executive 3,128,424 14.7%
officers as a group
*LESS THAN ONE PERCENT.

</TABLE>

- -------------------
(1) Unless otherwise noted, the Company believes that all Shares are
beneficially owned and that all persons named in the table or family
members have sole voting and investment power with respect to all Shares
owned by them. Unless otherwise indicated, the address of each Stockholder
is 12222 South 1000 East, #1, Draper, Utah 84020.

(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date hereof upon the
exercise of warrants or options.

(3) Assumes 21,246,244 Shares outstanding plus, for each individual, any
securities that specific person has the right to acquire upon exercise of
presently exercisable stock options. Each beneficial owner's

<PAGE>

percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
which are exercisable within 60 days from the date hereof have been
exercised. An additional 2,753,756 issuable upon conversion by ESSI
stockholders who have not yet converted their stock is not included in
the percentage of class calculation. Inclusion of such shares would
reduce the ownership percentages shown.

(4) Culley W. Davis owns 100% of the issued and outstanding shares of Pinnacle
Enterprises, Inc.

(5) George Taylor Munroe directly owns 720,000 shares. He acts as a Trustee of
three trusts which own the other 1,728,000 shares indicated. Mr. Munroe's
address is 889 South Williams Street, Denver, Colorado 80209

(6) T-6G Limited's address is 767 South Dixie Drive, St. George, Utah 84770.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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
ESSI stock to investors at $8.00 per share. The stock sold by Mr. Davis was
personally owned by him or Pinnacle Enterprises, Inc., which he owns, 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 $8.00 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 owed to Mr. Davis is
reported as a current liability of the Company. This cash advance is
non-interest bearing.

The Company is indebted to Cully W. Daves, who financed the purchase
of a 1999 Ford truck used by the Company for product demonstrations at remote
locations. The note 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%.

John W. Nagel, the Company's CFO and a Director is the
brother-in-law of the Company's legal counsel Bruce H. Haglund who also
serves as a Director and is a stockholder.

Gibson, Haglund & Johnson, ESSI's attorneys, were paid approximately
$162,000 in legal fees during 1998. Bruce H. Haglund, a Director of the
Company, is a member of the law firm.

Pacific American Cultural Exchange, Inc., a Japanese corporation
intended to be formed to distribute the HydroMaid in Japan will be 50% owned
by the Company.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report on Form 10-KSB:

1. Financial Statements for the Years Ended December 31, 1998 and
1997 and for the Period June 24, 1992 (inception) through December 31, 1998:

Independent Auditors' Report
Balance Sheet
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements

2. Exhibits

The following exhibits are being filed with this Annual Report on Form
10-KSB and/or are incorporated by reference therein in accordance with the
designated footnote references:

10.1 1997 Stock Option and Incentive Plan inclusive of form
Incentive Stock Option Agreements and Non-Qualified
Stock Option Agreements.

10.2 Pacific American Cultural Exchange, Inc. Distribution
Agreement dated December 4, 1998.

27 Financial Data Schedule.

12
<PAGE>

(b) Reports on Form 8-K.

Changes in Control of Registrant filed on October 16, 1998 inclusive of
Amendments A1-A5.

Change of Auditors filed on February 1, 1999.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Draper, State of Utah, on the 30th
day of March 1999.

By: /s/Culley W. Davis
---------------------------
Culley W. Davis, Chief Executive Officer

In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE

/s/Culley W. Davis Chairman of the Board March 30, 1999
- ------------------------- Chief Executive Officer
Culley W. Davis (Principal Executive Officer)

/s/Ronald L. LaFord President, Director March 30, 1999
- ------------------------
Ronald L. LaFord

/s/Mark S. Brewer Vice, President, Director March 30, 1999
- ------------------------
Mark S. Brewer

/s/John W. Nagel Chief Financial Officer, Director March 30, 1999
- ------------------------
John W. Nagel

/s/Bruce H. Haglund Vice President, Director March 30, 1999
- ------------------------
Bruce H. Haglund

13
<PAGE>

- ------------------------------------------------------------------------------

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

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
Newport Beach, California Squar, Milner & Reehl, LLP

<PAGE>

- --------------------------------------------------------------------------------
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>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 $ (.19) $ (.02) $ (.22)
----------- ----------- -----------------
----------- ----------- -----------------

</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 6

<PAGE>

- --------------------------------------------------------------------------------

HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)

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.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 7

<PAGE>

- --------------------------------------------------------------------------------

HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)

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.

- -----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 8

<PAGE>

- --------------------------------------------------------------------------------

HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)

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.

- -----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 9

<PAGE>

- --------------------------------------------------------------------------------

HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)

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 16).

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.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PAGE 10

<PAGE>

- --------------------------------------------------------------------------------

HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)

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.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 11

<PAGE>

- --------------------------------------------------------------------------------

HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)

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)

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)

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)

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:

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)

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:

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
-------------
Balance at December 31, 1998 $ 1,707,985
-------------
-------------
</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)

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:

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:

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)

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)

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.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PAGE 19

<PAGE>

- --------------------------------------------------------------------------------

HYDROMAID INTERNATIONAL, INC.
(FORMERLY CHEROKEE MINERALS AND OIL, INC.)
(A DEVELOPMENT STAGE COMPANY)

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. 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.

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 $(3,904,741) 20,036,000 $(424,939) 20,000,000

Contingently issuable shares -- 8,333 -- --
----------- ------------- ----------- -------------
Loss attributable to
common stockholders-
basic loss per share $(3,904,741) 20,044,333 $(.19) $(424,939) 20,000,000 $(.02)
----------- ------------- ------ ----------- ------------- ------
----------- ------------- ------ ----------- ------------- ------
</TABLE>

JUNE 24, 1992 (INCEPTION)
THROUGH DECEMBER 31, 1998
-------------------------

LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>

Net loss per financial statements $(4,598,529) 20,667,404

Contingently issuable shares -- 8,333
----------- ----------
Loss attributable to
common stockholders-
basic loss per share $(4,598,529) 20,675,737 $(.22)
----------- ---------- ------
----------- ---------- ------

</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PAGE 20

<PAGE>

ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.

1997 STOCK OPTION AND INCENTIVE PLAN

<PAGE>

ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.

1997 STOCK OPTION AND INCENTIVE PLAN

<TABLE>
<CAPTION>
PAGE
<S> <C>
I. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1

III. EFFECTIVE DATE. . . . . . . . . . . . . . . . . . . . . . . . . 3

IV. ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . . 3

V. PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . 4

5.1 Eligibility . . . . . . . . . . . . . . . . . . . . . . . 4
5.2 Ten Percent Stockholders. . . . . . . . . . . . . . . . . 4
5.3 Stock Ownership . . . . . . . . . . . . . . . . . . . . . 4
5.4 Outstanding Stock . . . . . . . . . . . . . . . . . . . . 4

VI. STOCK SUBJECT TO THE PLAN . . . . . . . . . . . . . . . . . . . 5

VII. OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

7.1 Stock Option Agreements . . . . . . . . . . . . . . . . . 5
7.2 Number of Shares. . . . . . . . . . . . . . . . . . . . . 5
7.3 Exercise Price. . . . . . . . . . . . . . . . . . . . . . 5
7.4 Medium and Time of Payment. . . . . . . . . . . . . . . . 5
7.5 Term and Transferability of Options . . . . . . . . . . . 5
7.6 Modification, Extension, and Renewal of Options . . . . . 6
7.7 Limitation on Grant of Incentive Stock Options. . . . . . 6
7.8 Other Provisions. . . . . . . . . . . . . . . . . . . . . 6

XIII. RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS,
AND BENEFICIARIES . . . . . . . . . . . . . . . . . . . . . . . 6

8.1 Employee Status . . . . . . . . . . . . . . . . . . . . . 6
8.2 No Employment Contract. . . . . . . . . . . . . . . . . . 6
8.3 No Transferability. . . . . . . . . . . . . . . . . . . . 6
8.4 Plan Not Funded . . . . . . . . . . . . . . . . . . . . . 7
8.5 Adjustments upon Recapitalizations and Corporate Changes. 7
8.6 Termination of Employment . . . . . . . . . . . . . . . . 7
8.7 Death of Participant. . . . . . . . . . . . . . . . . . . 7
8.8 Disability of Participant . . . . . . . . . . . . . . . . 8
8.9 Retirement of Participant . . . . . . . . . . . . . . . . 8
8.10 Rights as a Stockholder . . . . . . . . . . . . . . . . . 8
8.11 Deferral of Payments. . . . . . . . . . . . . . . . . . . 8
8.12 Acceleration of Awards. . . . . . . . . . . . . . . . . . 8

</TABLE>

<PAGE>

IX. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 8

9.1 Termination, Suspension, and Amendment. . . . . . . . . . 8
9.2 No Fractional Shares. . . . . . . . . . . . . . . . . . . 9
9.3 Tax Withholding . . . . . . . . . . . . . . . . . . . . . 9
9.4 Restrictions of Elections Made by Participants. . . . . . 9
9.5 Limitations on the Corporation's Obligations. . . . . . . 9
9.6 Compliance with Laws. . . . . . . . . . . . . . . . . . . 9
9.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . 10
9.8 Securities Law Requirements . . . . . . . . . . . . . . . 10
9.9 Execution . . . . . . . . . . . . . . . . . . . . . . . . 11

</TABLE>

<PAGE>

ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.

1997 STOCK OPTION AND INCENTIVE PLAN

I. PURPOSE

The 1997 Stock Option and Incentive Plan is intended to provide
incentive to key employees and directors of, and key consultants, vendors,
customers, and others expected to provide significant services to, the
Corporation, to encourage proprietary interest in the Corporation, to
encourage such key employees to remain in the employ of the Corporation and
its Subsidiaries, to attract new employees with outstanding qualifications,
and to afford additional incentive to consultants, vendors, customers, and
others to increase their efforts in providing significant services to the
Corporation.

II. DEFINITIONS.

2.1 "Award" shall mean an Option, which may be designated an
Incentive Stock Option or a Nonstatutory Stock Option, in each case as
granted pursuant to the Plan.

2.2 "Award Agreement" shall mean any written agreement, contract,
or other instrument or document evidencing an Award.

2.3 "Beneficiary" shall mean the person, persons, trust, or trusts
entitled by will or the laws of descent and distribution to receive the
benefits specified under the Plan in the event of a Participant's death.

2.4 "Board" shall mean the Board of Directors of the Corporation.

2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended.

2.6 "Committee" shall mean the committee, if any, appointed by the
Board in accordance with Section 4 of the Plan, or the Board if no Committee
has been appointed.

2.7 "Common Stock" shall mean the Common Stock, $.001 par value,
of the Corporation.

2.8 "Corporation" shall mean Environmental Systems and Solutions,
Inc., a Nevada corporation, and its Subsidiaries.

2.9 "Disability" shall mean the condition of a Participant who is
unable to perform his or her substantial and material job duties due to
injury or sickness or such other condition as the Board or Committee may
determine in its sole discretion and/or engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months.

2.10 "Effective Date" shall mean June 1, 1997, a date after the Plan
was adopted by the stockholders of the Company and enacted by the Board.

2.11 "Eligible Employee" shall mean an individual who is employed
(within the meaning of Code Section 3401 and the regulations thereunder) by
the Corporation. Additionally for purposes of this Plan, a Participant who
is a director or a consultant, vendor, customer, or other provider of
significant services to the Corporation or a Subsidiary shall be deemed to be
an Eligible Employee, and service as a director, consultant, vendor,
customer, or other provider of significant services to the

1
<PAGE>

Corporation or a Subsidiary shall be deemed to be employment, except that no
Incentive Stock Option may be granted to a non-employee director or
non-employee consultant, vendor, customer, or other provider of significant
services to the Corporation or a Subsidiary.

2.12 "Event" shall mean any of the following:

(a) Any person or entity (or group of affiliated persons or
entities) acquires in one or more transactions, whether before or after the
effective date of the Plan, ownership of more than 50% of the outstanding
shares of stock entitled to vote in the election of directors of the
Corporation; or

(b) The dissolution or liquidation of the Corporation or a
reorganization, merger, or consolidation of the Corporation with one or more
entities, as a result of which the Corporation is not the surviving entity,
or a sale of all or substantially all of the assets of the Corporation as an
entirety to another entity.

For purposes of this definition, ownership does not include ownership
(i) by a person owning such shares merely of record (such as a member of a
securities exchange, a nominee, or a securities depository system), (ii) by a
person as a bona fide pledgee of shares prior to a default and determination
to exercise powers as an owner of the shares, (iii) by a person who is not
required to file statements on Schedule 13D by virtue of Rule 13d-1(b, or
(iv) by a person who owns or holds shares as an underwriter acquired in
connection with an underwritten offering pending and for purposes of resale.

2.13 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.

2.14 "Exercise Price" shall mean the price per Share of Common
Stock, determined by the Board or the Committee, at which an Award may be
exercised.

2.15 "Fair Market Value" shall mean the value of one Share of
Common Stock, determined as follows:

(a) If the Shares are traded on an exchange, the price at
which Shares traded at the close of business on the date of valuation; or

(b) If the Shares are traded over-the-counter on the OTC
System, the closing price if one is available, or the mean between the bid
and asked prices on such System at the close of business on the date of
valuation; or

(c) If neither (i) nor (ii) above applies, the fair market
value as determined by the Board or the Committee in good faith. Such
determination shall be conclusive and binding on all persons.

2.16 "Incentive Stock Option" shall mean an option described in
Section 422A(b) of the Code.

2.17 "Nonstatutory Stock Option" shall mean an option not described
in Section 422(b), 422A(b), 423(b) or 424(b) of the Code.

2.18 "Option" shall mean either an Incentive Stock Option or a
Nonstatutory Stock Option granted pursuant to the Plan.

2.19 "Participant" shall mean Eligible Employee who has received an
Award under the Plan.

<PAGE>

2.20 "Plan" shall mean the Environmental Systems and Solutions, Inc.
1997 Stock Option and Incentive Plan, as it may be amended from time to time.

2.21 "Purchase Price" shall mean the Exercise Price times the number
of Shares with respect to which an Award is exercised.

2.22 "Restricted Stock Awards" shall mean any Award of shares of
Common Stock that may be subject to certain restrictions and to a risk of
forfeiture.

2.23 "Retirement" shall mean the voluntary termination of employment
by an Employee upon the attainment of age 65 and the completion of not less
than 20 years of service with the Corporation or a Subsidiary.

2.24 "Rule 16b" shall mean Rule 16b of the Securities and Exchange
Act of 1934.

2.25 "Share" shall mean one share of Common Stock, adjusted in
accordance with Section 8.5 of the Plan (if applicable).

2.26 "Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.

2.27 "Stock Appreciation Right" shall mean the right granted to a
Participant to be paid an amount measured by the appreciation in the Fair
Market Value of the Common Stock from the date of grant to the date of
exercise of the right, with payment to be made in cash, Common Stock, or
property as specified in the Award or determined by the Committee.

2.28 "Stock Option Agreements" shall mean an Award Agreement
granting Options under the Plan.

2.29 "Stock Purchase Agreement" shall mean an agreement to exercise
Options under the Plan.

2.30 "Subsidiary" shall mean any corporation at least 50% of the
total combined voting power of which is owned by the Corporation or by
another Subsidiary.

2.31 "Tax Date" shall have the meaning set forth in Section 9.3
hereof.

III. EFFECTIVE DATE

The Effective Date of the Plan is June 1, 1997.

IV. ADMINISTRATION

The Plan shall be administered by the Board in compliance with Rule
16b-3, or by a Committee appointed by the Board, which Committee shall be
constituted to permit the Plan to comply with Rule 16b-3, and which shall
consist of not less than two members. The Board shall appoint one of the
members of the Committee, if there be one, as Chairman of the Committee. If
a Committee has been appointed, the Committee shall hold meetings at such
times and places as it may determine. Acts of a majority of the Committee at
which a quorum is present, or acts reduced to or approved in writing by a
majority of the members of the Committee, shall be the valid acts of the
Committee. The Board, or the Committee if there be one, shall from time to
time at its discretion select the Eligible Employees and consultants who are
to be granted Awards, determine the number of Shares to be applicable to such
Award, and designate any Options as Incentive Stock Options or Nonstatutory
Stock Options, except

<PAGE>

that no Incentive Stock Option may be granted to a non-employee director or a
non-employee consultant. A member of the Board or a Committee member shall
in no event participate in any determination relating to Awards held by or to
be granted to such Board or Committee member; however, a member of the Board
or a Committee member shall be entitled to receive Awards approved by the
stockholders in accordance with the provisions of Rule 16b-3. The
interpretation and construction by the Board, or by the Committee if there be
one, of any provision of the Plan or of any Award granted thereunder shall be
final. No member of the Board or of the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Award granted thereunder. In addition to any right of indemnification
provided by the Articles of Incorporation or Bylaws of the Corporation, such
person shall be indemnified and held harmless by the Corporation from any
loss, cost, liability or expense that may be imposed upon or reasonably
incurred by him in connection with any claim, suit, action or proceeding to
which he may be a party by reason of any action or omission under the Plan.

V. PARTICIPATION

5.1 Eligibility. Subject to the terms and conditions of Section
5.2 below, the Participants shall be such persons as the stockholders may
approve or as the Committee may select from among the following classes of
persons: (i) Eligible Employees of the Corporation or of a Subsidiary (who
may be officers, whether or not they are directors); and (ii) consultants,
vendors, customers, and others expected to provide significant services to
the Corporation or a Subsidiary.

For purposes of this Plan, a Participant who is a director or a
consultant, vendor, customer, or other provider of significant services to
the Corporation or a Subsidiary shall be deemed to be an Eligible Employee,
and service as a director, consultant, vendor, customer, or other provider of
significant services to the Corporation or a Subsidiary shall be deemed to be
employment, except that no Incentive Stock Option may be granted to a
non-employee director or non-employee consultant, vendor, customer, or other
provider of significant services to the Corporation or a Subsidiary, and
except that no Nonstatutory Stock Option may be granted to a non-employee
director or non-employee consultant, vendor, customer, or other provider of
significant services to the Corporation or a Subsidiary other than upon a
vote of a majority of disinterested directors finding that the value of the
services rendered or to be rendered to the Corporation or a Subsidiary by
such non-employee director or non-employee consultant, vendor, customer, or
other provider of services is at least equal to the value of the Awards
granted.

5.2 Ten-Percent Stockholders. An Eligible Employee who owns more
than 10% of the total combined voting power of all classes of outstanding
stock of the Corporation, its parent or any of its Subsidiaries shall not be
eligible to receive an Award for an Incentive Stock Option unless (i) the
Exercise Price of the Shares subject to such Award is at least 110% of the
Fair Market Value of such Shares on the date of grant; and (ii) such Award by
its terms is not exercisable after the expiration of five years from the date
of grant.

5.3 Stock Ownership. For purposes of Section 5.2 above, in
determining stock ownership an Eligible Employee shall be considered as
owning the stock owned, directly or indirectly, by or for his brothers,
sisters, spouses, ancestors, and lineal descendants. Stock owned, directly
or indirectly, by or for a corporation, partnership, estate, or trust shall
be considered as being owned proportionately by or for its stockholders,
partners, or beneficiaries. Stock with respect to which such Eligible
Employee holds an Award shall not be counted.

5.4 Outstanding Stock. For purposes of Section 5.2 above,
"outstanding stock" shall include all stock actually issued and outstanding
immediately after the grant of the Award to the Participant. "Outstanding
stock" shall not include shares authorized for issue under outstanding
Options or Purchase Rights held by the Participant or by any other person.

<PAGE>

VI. STOCK SUBJECT TO THE PLAN

The stock subject to Awards granted under the Plan shall be Shares of
the Corporation's authorized but unissued or reacquired Common Stock. The
aggregate number of Shares which may be issued as Awards or upon exercise of
Awards under the Plan shall not exceed 1,800,000 shares. The number of
Shares subject to unexercised Options plus the number of Shares previously
issued under the Plan shall not at any time exceed the number of Shares
available for issuance under the Plan. In the event that any unexercised
Option, or any portion thereof, for any reason expires or is terminated, the
unexercised or unvested Shares allocable to such Option may again be made
subject to any Award. Any Shares withheld by the Corporation pursuant to
Section 9.3 shall not be deemed to be issued. The number of withheld Shares
shall be deducted from the applicable Award and shall not entitle the
Participant to receive additional Shares. The limitations established by
this Article VI shall be subject to adjustment in the manner provided in
Section 8.5 hereof upon the occurrence of an event specified therein.

VII. OPTIONS

7.1 Stock Option Agreements. Options shall be evidenced by written
Stock Option Agreements in such form as the Committee shall from time to time
determine. Such agreements shall comply with and be subject to the terms and
conditions set forth below.

7.2 Type and Number of Shares. Each Option shall state the type of
Award and the number of Shares to which it pertains and shall provide for the
adjustment thereof in accordance with the provisions of Section 8.5 hereof.

7.3 Exercise Price. Each Option shall state the Exercise Price
thereof. The Exercise Price in the case of any Incentive Stock Option shall
not be less than the Fair Market Value on the date of grant and, in the case
of any Option granted to an Optionee described in Section 5.2 hereof, shall
not be less than 110% of the Fair Market Value on the date of grant. The
Exercise Price in the case of any Nonstatutory Stock Option shall not be less
than 85% of the Fair Market Value on the date of grant.

7.4 Medium and Time of Payment. The Purchase Price shall be
payable in full in United States dollars upon the exercise of the Option;
provided, however, that if the applicable Stock Option Agreement so provides
the Purchase Price may be paid (i) by the surrender of Shares in good form
for transfer, owned by the Participant and having a Fair Market Value on the
date of exercise equal to the Purchase Price, or in any combination of cash
and Shares, as long as the sum of the cash so paid and the Fair Market Value
of the Shares so surrendered equal the Purchase Price, (ii) by cancellation
of indebtedness owed by the Corporation to the Participant, (iii) with a full
recourse promissory note executed by the Participant, or (iv) any combination
of the foregoing. The interest rate and other terms and conditions of such
note shall be determined by the Committee. The Committee may require that
the Participant pledge his or her Shares to the Corporation for the purpose
of securing the payment of such note. In no event shall the stock
certificate(s) representing such Shares be released to the Participant until
such note is paid in full.

7.5 Term and Nontransferability of Options. Each Option shall
state the time or times which all or part thereof becomes exercisable. No
Option shall be exercisable after the expiration of 10 years from the date it
was granted, and no Option granted to a Participant described in Section 5.2
hereof shall be exercisable after the expiration of five years from the date
it was granted. During the lifetime of the Participant, the Option shall be
exercisable only by the Participant and shall not be assignable or
transferable. In the event of the Participant's death, the Option shall not
be transferable by the Participant other than by will or the laws of descent
and distribution.

<PAGE>

7.6 Modification, Extension, and Renewal of Option. Within the
limitations of the Plan, the Committee may modify, extend, or renew
outstanding Options or accept the cancellation of outstanding Options (to the
extent not previously exercised) for the granting of new Options in
substitution therefor. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Participant, alter or impair any
rights or obligations under any Option previously granted.

7.7 Limitation on Grant of Incentive Stock Options. In the case of
Incentive Stock Options granted hereunder, the aggregate Fair Market Value
(determined as of the date of the grant thereof) of the Shares with respect
to which Incentive Stock Options become exercisable by any Participant for
the first time during any calendar year (under this Plan and all other Plans
maintained by the Corporation, its parent, or its Subsidiaries) shall not
exceed $100,000. The Board or Committee may, however, with the Participant's
consent authorize an amendment to the Incentive Stock Option which renders it
a Nonstatutory Stock Option.

7.8 Other Provisions. The Stock Option Agreements authorized under
the Plan may contain such other provisions not inconsistent with the terms of
the Plan (including, without limitation, restrictions upon the exercise of
the Option) as the Committee shall deem advisable.

XIII. RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS, AND BENEFICIARIES

8.1 Employee Status. Status as an Eligible Employee shall not be
construed as a commitment that any Award will be made under the Plan to an
Eligible Employee or to Eligible Employees generally.

8.2 No Employment Contract. Nothing contained in the Plan (or in
the Award Agreements or in any other documents related to the Plan or to
Awards) shall confer upon any Eligible Employee or any Participant any right
to continue in the employ of the Corporation or constitute any contract or
agreement of employment, or interfere in any way with the right of the
Corporation to reduce such person's compensation or to terminate the
employment of such Eligible Employee or Participant, with or without cause,
but nothing contained in the Plan or any document related thereto shall
affect any other contractual right of any Eligible Employee or Participant.
Nothing contained in the Plan (or in the Award Agreements or in any other
documents related to the Plan or the Awards) shall confer upon any director
of the Corporation any right to continue as a director of the Corporation.

8.3 No Transferability. Awards may be exercised only by, and
amounts payable or shares issuable pursuant to an Award shall be paid only to
or registered only in the name of, the Participant or, in the event of the
Participant's death, to the Participant's Beneficiary or, in the event of the
Participant's Disability, to the Participant's Personal Representative or, if
there is none, to the Participant. Other than by will or the laws of descent
and distribution, no right or benefit under the Plan or any Award, including,
without limitation, any Option or share of Restricted Stock that has not
vested, shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, or charge and any such attempted
action shall be void and no such right or benefit shall be, in any manner,
liable for, or subject to, debts, contract, liabilities, engagements, or
torts of any Eligible Employee, Participant, or Beneficiary, in any case
except as may otherwise be expressly required by applicable law. The Board
or the Committee shall disregard any attempt at transfer, assignment, or
other alienation prohibited by the preceding sentence and shall pay or
deliver such cash or shares of Common Stock in accordance with the provisions
of the Plan. Notwithstanding the foregoing, the Board or the Committee may
authorize exercise by or transfers or payments to a third party in a specific
case or more generally; provided, however, with respect to any option or
similar right (including any Stock Appreciation Right), such discretion may
only be exercised to the extent that applicable rules under Section 16 of the
Exchange Act would so permit without disqualifying the Plan from certain
benefits thereunder.

<PAGE>

8.4 Plan Not Funded. No Participant, Beneficiary, or other person
shall have any right, title, or interest in any fund or in any specific asset
(including shares of Common Stock) of the Corporation by reason of any Award
granted hereunder. There shall be no funding of any benefits which may
become payable hereunder. Neither the provisions of the Plan (or of any
documents related hereto), nor the creation or adoption of the Plan, nor any
action taken pursuant to the provisions of the Plan shall create, or be
construed to create, a trust of any kind or a fiduciary relationship between
the Corporation and any Participant, Beneficiary, or other person. To the
extent that a Participant, a Beneficiary, or other person acquires a right to
receive an Award hereunder, such right shall be no greater than the right of
any unsecured general creditor of the Corporation. Awards payable under the
Plan shall be paid in shares of Common Stock or from the general assets of
the Corporation, and no special or separate fund or deposit shall be
established and no segregation of assets or shares shall be made to assure
payment of such Awards.

8.5 Adjustment Upon Recapitalizations and Corporate Changes. If
the outstanding shares of Common Stock are changed into or exchanged for
cash or a different number or kind of shares or securities of the
Corporation, or if the outstanding shares of the Common Stock are increased,
decreased, exchanged for, or otherwise changed, or if additional shares or
new or different shares or securities are distributed with respect to the
outstanding shares of the Common Stock, through a reorganization or merger in
which the Corporation is the surviving entity or through a combination,
consolidation, recapitalization, reclassification, stock split, stock
dividend, reverse stock split, stock consolidation, or other capital change
or adjustment, an appropriate adjustment shall be made in the number and kind
of shares of other consideration that is subject to or may be delivered under
the Plan and pursuant to outstanding Awards. A corresponding adjustment to
the consideration payable with respect to Awards granted prior to any such
change and to the price, if any, to be paid in connection with Restricted
Stock Awards shall also be made as appropriate. Corresponding adjustments
shall be made with respect to Stock Appreciation Rights related to Options to
which they are related. In addition, the Board or the Committee may grant
such additional rights in the foregoing circumstances as the Board or the
Committee deems to be in the best interest of any Participant and the
Corporation in order to preserve for the Participant the benefits of an Award.

8.6 Termination of Employment, Except by Death, Disability, or
Retirement. If a Participant ceases to be an Employee for any reason other
than his or her death, Disability or Retirement, such Participant shall have
the right, subject to the restrictions of Section 8.3 above, to exercise any
Award at any time within three months after termination of employment, but
only to the extent that, at the date of termination of employment, the
Participant's right to exercise such Award had accrued pursuant to the terms
of the applicable agreement and had not previously been exercised; provided,
however, that if the Participant was terminated for cause (as defined in the
applicable agreement), any Award not exercised in full prior to such
termination shall be canceled. For this purpose, the employment relationship
shall be treated as continuing intact while the Participant is on military
leave, sick leave, or other bona fide leave of absence (to be determined in
the sole discretion of the Board or the Committee). The foregoing
notwithstanding, in the case of an Incentive Stock Option, employment shall
not be deemed to continue beyond the 90th day after the Participant's
reemployment rights are guaranteed by statute or by contract.

8.7 Death of Participant. If a Participant dies while an Employee,
or after ceasing to be an Employee but during the period while he or she
could have exercised the Award under this Section 8.7, and has not fully
exercised the Award, then the Award may be exercised in full at any time
within 12 months after the Participant's death (but not later than the date
of termination fixed in the applicable agreement), by the executors or
administrators of his or her estate or by any person or persons who have
acquired the Award directly from the Participant by bequest or inheritance,
but only to the extent that, at the date of death, the Participant's right to
exercise such Award had accrued and had not been forfeited pursuant to the
terms of the applicable agreement and had not previously been exercised.

<PAGE>

8.8 Disability of Participant. If a Participant ceases to be an
Employee by reason of Disability, such Participant shall have the right to
exercise the Award at any time within 12 months after termination of
employment (but not later than the termination date fixed in the applicable
Agreement), but only to the extent that, at the date of termination of
employment, the Participant's right to exercise such Award had accrued
pursuant to the terms of the applicable Award Agreement and had not
previously been exercised.

8.9 Retirement of Participant. If a Participant ceases to be an
Employee by reason of Retirement, such Participant shall have the right to
exercise the Award at any time within three months after termination of
employment (but not later than the termination date fixed in the applicable
Award Agreement), but only to the extent that, at the date of termination of
employment, the Participant's right to exercise such Award had accrued
pursuant to the terms of the applicable Award Agreement and had not
previously been exercised.

8.10 Rights as a Stockholder. A Participant, or a transferee of a
Participant, shall have no rights as a stockholder with respect to any Shares
covered by his or her Award until the date of the issuance of a stock
certificate for such Shares. No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities, or other property),
distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as provided in Section 8.5 hereof.

8.11 Deferral of Payments. The Board or the Committee may approve
the deferral of any payments that may become due under the Plan. Such
deferrals shall be subject to any conditions, restrictions, or requirements
as the Board or the Committee may determine.

8.12 Acceleration of Awards. Immediately prior to the occurrence of
an Event, (i) each Option and Stock Appreciation Right under the Plan shall
become exercisable in full; (ii) Restricted Stock delivered under the Plan
shall immediately vest free of restrictions; and (iii) each other Award
outstanding under the Plan shall be fully vested or exercisable, unless,
prior to the Event, the Board or the Committee otherwise determines that
there shall be no such acceleration or vesting of an Award or otherwise
determines those Awards which shall be accelerated or vested and to the
extent to which they shall be accelerated or vested, or that an Award shall
terminate, or unless in connection with such Event the Board provides (A) for
the assumption of such Awards theretofore granted; or (B) for the
substitution for such Awards of new awards covering securities or obligations
(or any combination thereof) of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to number and kind of
shares and prices; or (C) for the payment of the fair market value of the
then outstanding Awards. In addition, the Board or the Committee may grant
such additional rights in the foregoing circumstances as the Board or the
Committee deems to be in the best interest of the Participant and the
Corporation in order to preserve for the Participant the benefits of an
Award. For purposes of this Section 8.12 only, Board shall mean the Board of
Directors of the Corporation as constituted immediately prior to the Event.
In addition, the Board may in its sole discretion accelerate the
exercisability or vesting of any or all Awards outstanding under the Plan in
circumstances under which the Board or the Committee determines such
acceleration appropriate.

IX. MISCELLANEOUS

9.1 Termination, Suspension, and Amendment. The Board or the
Committee may, at any time, suspend, amend, modify, or terminate the Plan (or
any part thereof) and may, with the consent of a Participant, authorize such
modifications of the terms and conditions of such Participant's Award as it
shall deem advisable; provided that, except as permitted under the provisions
of Section 8.5 hereof, no amendment or modification of the Plan may be
adopted without approval by a majority of the shares of the Common Stock
represented (in person or by proxy) at a meeting of stockholders at which a
quorum is present and entitled to vote thereat, if such amendment or
modification would:

<PAGE>

(i) materially increase the benefits accruing to
Participants under the Plan within the meaning of Rule 16b-3 under the
Exchange Act or any successor provision;

(ii) materially increase the aggregate number of
shares which may be delivered pursuant to Awards granted under the Plan; or

(iii) materially modify the requirements of eligibility
for participation in the Plan.

Neither adoption of the Plan nor the provisions hereof shall limit the
authority of the Board to adopt other Plans or to authorize other payments of
compensation and benefits under applicable law. No Awards under the Plan may
be granted or amended during any suspension of the Plan or after its
termination. The amendment, suspension, or termination of the Plan shall
not, without the consent of the Participant, alter or impair any rights or
obligations pertaining to any Awards granted under the Plan prior to such
amendment, suspension, or termination.

9.2 No Fractional Shares. No Award or installment thereof shall be
exercisable except in respect of whole shares, and fractional share interests
shall be disregarded.

9.3 Tax Withholding. As required by law, federal, state, or local
taxes that are subject to the withholding of tax at the source shall be
withheld by the Corporation as necessary to satisfy such requirements. The
Corporation is entitled to require deduction from other compensation payable
to each Participant or, in the alternative: (i) the Corporation may require
the Participant to advance such sums; or (ii) if a Participant elects, the
Corporation may withhold (or require the return of) Shares having the Fair
Market Value equal to the sums required to be withheld. If the Participant
elects to advance such sums directly, written notice of that election shall
be delivered prior to such exercise and, whether pursuant to such election or
pursuant to a requirement imposed by the Corporation, payment in cash or by
check of such sums for taxes shall be delivered within 10 days after the
exercise date. If the Participant elects to have the Corporation withhold
Shares (or be entitled to the return of Shares) having a Fair Market Value
equal to the sums required to be withheld, the value of the Shares to be
withheld (or returned) will be equal to the Fair Market Value on the date the
amount of tax to be withheld (or subject to return) is to be determined (the
"Tax Date").

9.4 Restrictions on Elections Made by Participants. Elections by
Participants to have Shares withheld (or subject to return) for this purpose
will be subject to the following restrictions: (i) the election must be made
prior to the Tax Date; (ii) the election must be irrevocable; (iii) the
election will be subject to the Board's disapproval; and (iv) if the
Participant is an "officer" within the meaning of Section 16 of the Exchange
Act, the election shall be subject to such additional restrictions as the
Board or the Committee may impose in an effort to secure the benefits of any
regulations thereunder.

9.5 Limitations on the Corporation's Obligations. The Corporation
shall not be obligated to issue shares and/or distribute cash to the
Participant upon any Award exercise until such payment has been received or
Shares have been withheld, unless withholding (or offset against a cash
payment) as of or prior to the exercise date is sufficient to cover all such
sums due or which may be due with respect to such exercise. In addition, the
Board or the Committee may grant to a Participant a cash bonus in any amount
required by federal, state, or local tax law to be withheld with respect to
an Award.

9.6 Compliance with Laws. The Plan, the granting of Awards under
the Plan, the Stock Option Agreements, and Stock Purchase Agreements and the
delivery of Options, Shares, and Awards (and/or the payment of money or
Common Stock) pursuant thereto and the extension of any loans hereunder are
subject to such additional requirements as the Board or the Committee may
impose to

<PAGE>

assure or facilitate compliance with all applicable federal and state laws,
rules and regulations (including, without limitation, securities laws and
margin requirements) and to such approvals by any regulatory or governmental
agency which may be necessary or advisable in connection therewith. In
connection with the administration of the Plan or the grant of any Award, the
Board or the Committee may impose such further limitations or conditions as
in its opinion may be required or advisable to satisfy, or secure the
benefits of, applicable regulatory requirements (including those rules
promulgated under Section 16 of the Exchange Act or those rules that
facilitate exemption from or compliance with the Securities Act or the
Exchange Act), the requirements of any stock exchange upon which such shares
or shares of the same class are then listed, and any blue sky or other
securities laws applicable to such shares.

9.7 Governing Laws. The Plan and all Awards granted under the Plan
and the documents evidencing Awards shall be governed by, and construed in
accordance with, the laws of the State of Utah as the Corporation's
principle place of business.

9.8 Securities Law Requirements.

(a) Legality of Issuance. The issuance of any Shares upon
the exercise of any Option and the grant of any Option shall be contingent
upon the following:

(i) the Corporation and the Participant shall have
taken all actions required to register the Shares under the Securities Act of
1933, as amended (the "Securities Act"), and to qualify the Option and the
Shares under any and all applicable state securities or "blue sky" laws or
regulations, or to perfect an exemption from the respective registration and
qualification requirements thereof;

(ii) any applicable listing requirement of any stock
exchange on which the Common Stock is listed shall have been satisfied; and

(iii) any other applicable provision of state or
Federal law shall have been satisfied.

(b) Restrictions on Transfer. Regardless of whether the
offering and sale of Shares under the Plan has been registered under the
Securities Act or has been registered or qualified under the securities laws
of any state, the Corporation may impose restrictions on the sale, pledge, or
other transfer of such Shares (including the placement of appropriate legends
on stock certificates) if, in the judgment of the Corporation and its
counsel, such restrictions are necessary or desirable in order to achieve
compliance with the provisions of the Securities Act, the securities laws of
any state, or any other law. In the event that the sale of Shares under the
Plan is not registered under the Securities Act but an exemption is available
which required an investment representation or other representation, each
Participant shall be required to represent that such Shares are being
acquired for investment, and not with a view to the sale or distribution
thereof, and to make such other representations as are deemed necessary or
appropriate by the Corporation and its counsel. Any determination by the
Corporation and its counsel in connection with any of the matters set forth
in this Section 9.8(b) shall be conclusive and binding on all persons. Stock
certificates evidencing Shares acquired under the Plan pursuant to an
unregistered transaction shall bear the following restrictive legend and such
other restrictive legends as are required or deemed advisable under the
provisions of any applicable law:

THESE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED (THE
"ACT"), OR APPLICABLE STATE SECURITIES LAWS AND HAVE BEEN ISSUED
IN RELIANCE UPON EXEMPTIONS FROM SUCH REGISTRATION REQUIREMENTS.
THESE SHARES OR ANY INTEREST HEREIN MAY NOT, BE OFFERED, SOLD OR
TRANSFERRED UNLESS REGISTERED UNDER THE ACT AND APPLICABLE

<PAGE>

STATE SECURITIES LAWS OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE.

(c) Registration or Qualification of Securities. The
Corporation may, but shall not be obligated to register or qualify the
issuance of Awards and/or the sale of Shares under the Securities Act or any
other applicable law. The Corporation shall not be obligated to take any
affirmative action in order to cause the issuance of Awards or the sale of
Shares under the Plan to comply with any law.

(d) Exchange of Certificates. If, in the opinion of the
Corporation and its counsel, any legend placed on a stock certificate
representing shares issued under the Plan is no longer required, the holder
of such certificate shall be entitled to exchange such certificate for a
certificate representing the same number of Shares but lacking such legend.

9.9 Execution. To record the adoption of the Plan in the form set
forth above by the Board effective as of June 1, 1997, the Corporation has
caused this Plan to be executed in the name and on behalf of the Corporation
where provided below by an officer of the Corporation thereunto duly
authorized.

ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.

By: /s/ Culley W. Davis
---------------------------
Culley W. Davis, President

ATTEST:

/s/ Mark S. Brewer
- -----------------------------
Mark S. Brewer, Secretary

(SEAL)

<PAGE>

INCENTIVE STOCK OPTION AGREEMENT

PURSUANT TO THE

1997 STOCK OPTION AND INCENTIVE PLAN
OF
ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.

THIS INCENTIVE STOCK OPTION AGREEMENT (the "Agreement"), is made as of
__________________ (the "Effective Date") by and between ENVIRONMENTAL SYSTEMS
AND SOLUTIONS, INC., a Utah corporation, (the "COMPANY") and
______________________ (the "OPTIONEE"), pursuant to the COMPANY's 1997 Stock
Option and Incentive Plan (the "Plan").

The Board of Directors of the COMPANY has adopted the Plan as of June
1, 1997 to which this Agreement and the option granted hereunder ("Option")
are subject, and the Board of Directors of the COMPANY has determined that it
is to the advantage and in the best interest of the COMPANY and its
stockholders to grant the Option provided for herein to OPTIONEE as an
inducement to remain in the employ of the COMPANY, and as an incentive for
increased effort during such service.

1. GRANT OF OPTION. The Company grants to OPTIONEE the right and
option to purchase from the COMPANY, on the terms and conditions hereinafter
set forth, all or any part of an aggregate of ________________ shares of the
authorized $.001 par value Common Stock of the COMPANY, at the purchase
price of $1.00 per share (being not less than the fair market value per share
of said stock on the date hereof) as OPTIONEE may from time to time elect,
exercisable on or after the Effective Date hereof for a period of 10 years
(the latter date hereinafter referred to as the "Terminal Date"), all in
accordance with the schedule attached hereto and marked Exhibit "A." No
partial exercise of such Option may be for less than 250 full shares, unless
the number purchased is the total number at the time purchasable under the
Option. In no event shall the COMPANY be required to transfer fractional
shares to OPTIONEE. This Agreement and the Option granted hereunder are
subject to the Plan, a copy of which is attached hereto and incorporated
herein by reference as Exhibit "B."

2. METHOD OF EXERCISE. The Option granted hereunder shall be
exercisable, from the Effective Date, as hereinabove provided, by written
notice which shall;

2.1 state the election to exercise the Option, the number of
shares in respect of which it is being exercised, the person in whose name
the shares are to be issued (if the shares are issued to individuals), the
names, addresses, and Social Security Numbers of such persons;

2.2 contain such representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as
are required by law or as may be satisfactory to the COMPANY's counsel;

2.3 be signed by the person or persons entitled to exercise
the Option and, if the Option is being exercised by any person or persons
other than the OPTIONEE, be accompanied by proof, satisfactory to counsel for
the COMPANY, of the right of such person or persons to exercise the Option;
and

2.4 be accompanied by a payment for the purchase price of
those shares with respect to which the Option is being exercised in the form
of cash or check.

<PAGE>

3. ISSUING OF STOCK CERTIFICATES. The certificate or certificates
for shares of Common Stock as to which the Option shall be exercised shall
be registered in the name of the person or persons exercising the Option.
The COMPANY shall not be required to transfer or deliver any certificate or
certificates for the shares purchased upon exercise of the Option granted
hereunder until (a) compliance with the terms of this Agreement, (b)
compliance with all then applicable requirements of law; and (c) admission of
such shares for trading privileges on any stock exchange on which the stock
may then be listed.

4. STOCK SUBJECT TO THE OPTION. The COMPANY shall set aside the
number of shares of Common Stock of the COMPANY subject to be granted upon
exercise of this Option which it now holds as authorized and unissued shares.
If the Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased shares which were subject
thereto shall be free from any restrictions occasioned by this Option
Agreement. If the COMPANY has been listed on a stock exchange, the COMPANY
will not be required to issue or deliver any certificate or certificates for
shares to be issued hereunder until such shares have been listed (or
authorized for listing upon official notice of issuance) upon each stock
exchange on which outstanding shares of the same class may then be listed and
until the COMPANY has taken such steps as may, in the opinion of counsel for
the COMPANY, be required by law and applicable regulations, including the
rules and regulations of the Securities and Exchange Commission, and state
blue sky laws and regulations, in connection with the issuance or sale of
such shares. The COMPANY will use its best efforts to comply with any such
requirements forthwith upon the exercise of the Option.

5. TERMINATION OF OPTION. The Option and all rights granted
hereunder to the extent such rights shall not have been exercised, shall
terminate and become null and void on the Terminal Date or sooner if OPTIONEE
ceases to be in the continuous employ of the COMPANY (whether by resignation,
retirement, dismissal, or otherwise), except that: (a) in the event of
termination of such employment for any reason other than the permanent
disability of OPTIONEE, as defined in Section 22(e)(3) of the Internal
Revenue Code, as amended and as presently in effect (the "Code"), OPTIONEE
may at any time within a period of three months thereafter exercise the
Option granted hereunder to the extent such Option was exercisable by
OPTIONEE on the date of the termination of such employment; and (b) in the
event of the permanent disability of OPTIONEE while in the employ of the
COMPANY, the Option granted hereunder, to the extent that OPTIONEE was
entitled to exercise such Option on the date of OPTIONEE's disability, may be
exercised within one year after such termination as a result of disability by
OPTIONEE or the person or persons to whom OPTIONEE's rights under the Option
granted hereby shall pass by will or by the applicable laws of descent and
distribution. Notwithstanding anything herein to the contrary, however, the
Option and all rights herein granted shall in all events terminate and become
null and void 10 years from the date of this Agreement.

6. LIMITATION UPON TRANSFER. During the lifetime of OPTIONEE, the
Option and all rights granted hereunder shall be exercisable only by
OPTIONEE, and except as in paragraph 5 otherwise provided, the Option and all
rights granted hereunder shall not be transferred, assigned, pledged, or
hypothecated in any way (whether by operation of law or otherwise), and shall
not be subject to execution, attachment, or similar process. Upon any
attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of
such Option or of such rights contrary to the provisions hereof, or upon the
levy of any attachment or similar process upon such Option or such rights,
such Option and such rights shall immediately become null and void.

7. CONDITION OF EMPLOYMENT. In order to be entitled to exercise
the Option granted hereunder as to the first increment of shares as shown in
Exhibit "A," OPTIONEE must remain in the continuous employ of the COMPANY for
the period of at least six months from the date hereof.

8. STOCK AS INVESTMENT. By accepting this Option, the OPTIONEE
acknowledges for OPTIONEE or any heirs and legatees, that any and all shares
purchased hereunder shall be acquired for investment and not for
distribution, and upon the transfer of any or all of the shares subject to
the

<PAGE>

Option granted hereunder, the OPTIONEE, or heirs or legatees receiving such
shares, shall deliver to the COMPANY a representation in writing that such
shares are being acquired in good faith for investment and not for
distribution. The OPTIONEE shall not dispose (whether by sale, exchange,
gift, or any other transfer) of any shares of stock acquired pursuant to the
exercise of the Option granted hereunder, within two years after the grant of
this Option or one year after the transfer of such shares to him upon his
exercise of such Option. OPTIONEE further recognizes that any disposition
(whether a sale, exchange, gift, or any other transfer) of any shares of
stock prior to the aforementioned periods will not only be a breach of this
Agreement, but will also disqualify the Option as a Incentive Stock Option
under Section 422A of the Code.

9. RECLASSIFICATION, CONSOLIDATION, OR MERGER. In the event of
any change in the Common Stock of the COMPANY subject to the Option granted
hereunder, through merger, consolidation, reorganization, recapitalization,
stock split, stock dividend, or other change in the corporate structure,
appropriate adjustment shall be made by the COMPANY in the number of shares
subject to such Option and the price per share; provided, however, that in
accordance with the provisions of Section 425(a) of the Code, a new Option
may be substituted for the Option granted hereunder or such Option may be
assumed by an employer corporation, or a parent or subsidiary of such
corporation, in connection with any transaction to which such Section is
applicable. Upon the dissolution or liquidation of the COMPANY other than in
connection with a transaction to which such Section is applicable, the Option
granted hereunder shall terminate and become null and void, but OPTIONEE
shall have the right immediately prior to such dissolution or liquidation to
exercise the Option granted hereunder to the full extent not before exercised.

10. RIGHT AS STOCKHOLDER. Neither OPTIONEE nor his executors,
administrators, heirs or legatees, shall be or have any rights or privileges
of a stockholder of the COMPANY in respect of the shares transferable upon
exercise of the Option granted hereunder, unless and until certificates
representing such shares shall have been endorsed, transferred, and delivered
and the transferee has caused his name to be entered as the stockholder of
record on the books of the COMPANY.

11. NOTICES. Any notice to be given under the terms of this
Agreement shall be addressed to the COMPANY in care of its Secretary at the
main offices for the transaction of its business, and any notice to be given
to OPTIONEE shall be addressed to OPTIONEE at the address set forth above, or
at such other place as either party may hereafter designate in writing to the
other. Any such notice shall be deemed duly given when enclosed in a
properly sealed envelope or wrapper addressed as herein required, certified
and deposited (postage and certification prepaid) in a post office regularly
maintained by the United States Government.

12. BENEFITS OF AGREEMENT. This Agreement shall inure to the
benefit of and be binding upon each successor of the COMPANY. All
obligations imposed upon the OPTIONEE and all rights granted to the COMPANY
under this Agreement shall be binding upon the OPTIONEE's heirs, legal
representatives, and successors. This Agreement shall be the sole and
exclusive source of any and all rights which the OPTIONEE, OPTIONEE's heirs,
legal representatives, or successors may have in respect to the Plan or any
options or Common Stock granted or issued thereunder, whether to OPTIONEE,
or to any other person.

13. INTERNAL REVENUE CODE. All Options granted hereunder are
granted pursuant to the Internal Revenue Code, as amended, as it is in force
and effect at the date of grant.

14. RESOLUTION OF DISPUTES. Any dispute or disagreement which
should arise under, or as a result of, or in any way relate to, the
interpretation, construction, or application of this Agreement will be
determined by the Board of Directors of the COMPANY. Any determination made
hereunder shall be final, binding, and conclusive for all purposes.

<PAGE>

IN WITNESS WHEREOF, the COMPANY has caused these presents to be
executed on its behalf by its President, to be sealed by its corporate seal,
and attested by its Secretary, and OPTIONEE has hereunto set his or her hand
the date and year first above written, which is the time of the granting of
the Option hereunder.

"COMPANY" "OPTIONEE"
ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.
a Nevada corporation

By:
------------------------------- -------------------------
Culley W. Davis, CHIEF EXECUTIVE OFFICER
-------------------------

Corporate Seal

ATTEST:

By:
-------------------------------
___________________, SECRETARY

<PAGE>

EXHIBIT "A"

INCENTIVE STOCK OPTION AGREEMENT

PURSUANT TO THE

1997 STOCK OPTION AND INCENTIVE PLAN
OF
ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.

-------------------
EXERCISE SCHEDULE

Option Period Number of Exercisable Option Shares
------------- -----------------------------------
<S> <C>
1. On or after January 1st, after the first full 1/3 of Total Grant
year following the Company's becoming
publicly traded through Terminal Date

2. On or after January 1st, after the second full 1/3 of Total Grant
year following the Company's becoming
publicly traded through Terminal Date

3. On or after January 1st, after the third full 1/3 of Total Grant
year following the Company's becoming
publicly traded through Terminal Date

</TABLE>

<PAGE>

NON-QUALIFIED STOCK OPTION AGREEMENT

PURSUANT TO THE

1997 STOCK OPTION AND INCENTIVE PLAN
OF
ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.

THIS NON-QUALIFIED STOCK OPTION AGREEMENT (the "Agreement"), is made
as of __________________ (the "Effective Date") by and between ENVIRONMENTAL
SYSTEMS AND SOLUTIONS, INC., a Utah corporation, (the "COMPANY") and
__________________________ (the "OPTIONEE"), pursuant to the COMPANY's 1997
Stock Option and Incentive Plan (the "Plan").

The Board of Directors of the COMPANY has adopted the Plan as of June
1, 1997 to which this Agreement and the option granted hereunder ("Option")
are subject, and the Board of Directors of the COMPANY has determined that it
is to the advantage and in the best interest of the COMPANY and its
stockholders to grant the Option provided for herein to OPTIONEE to afford
additional incentive to consultants, vendors, customers, and others to
increase their efforts in providing significant services to the COMPANY.

1. GRANT OF OPTION. The Company grants to OPTIONEE the right and
Option to purchase from the COMPANY, on the terms and conditions hereinafter
set forth, all or any part of an aggregate of ________________ shares of the
authorized no par value Common Stock of the COMPANY, at the purchase price
of $1.00 per share (being not less than 85% of the fair market value per
share of said stock on the date hereof) as OPTIONEE may from time to time
elect, exercisable on or after the Effective Date hereof for a period of 10
years (the latter date hereinafter referred to as the "Terminal Date"), all
in accordance with the schedule attached hereto and marked Exhibit "A." No
partial exercise of such Option may be for less than 250 full shares, unless
the number purchased is the total number at the time purchasable under the
option. In no event shall the COMPANY be required to transfer fractional
shares to OPTIONEE. This Agreement and the Option granted hereunder are
subject to the Plan, a copy of which is attached hereto and incorporated
herein by reference as Exhibit "B."

2. METHOD OF EXERCISE. The Option granted hereunder shall be
exercisable, from time to time, as hereinabove provided, by written notice
which shall;

2.4 be accompanied by a payment for the purchase price of
those shares with respect to which the Option is being exercised in the form
of cash or check.

<PAGE>

4. TERMINATION OF OPTION. The Option and all rights granted
hereunder to the extent such rights shall not have been exercised, shall
terminate and become null and void on the Terminal Date.

5. TRANSFERABILITY OF OPTION. This Option may be transferred in
any manner by will or the laws of descent or distribution and may be
exercised during the lifetime of the OPTIONEE or by an assignee of the
OPTIONEE.

6. STOCK SUBJECT TO THE OPTION. The COMPANY shall set aside the
number of shares of Common Stock of the COMPANY subject to be granted upon
exercise of this Option which it now holds as authorized and unissued shares.
If the Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased shares which were subject
thereto shall be free from any restrictions occasioned by this Option
Agreement. If the COMPANY has been listed on a stock exchange, the COMPANY
will not be required to issue or deliver any certificate or certificates for
shares to be issued hereunder until such shares have been listed (or
authorized for listing upon official notice of issuance) upon each stock
exchange on which outstanding shares of the same class may then be listed and
until the COMPANY has taken such steps as may, in the opinion of counsel for
the COMPANY, be required by law and applicable regulations, including the
rules and regulations of the Securities and Exchange Commission, and state
blue sky laws and regulations, in connection with the issuance or sale of
such shares. The COMPANY will use its best efforts to comply with any such
requirements forthwith upon the exercise of the Option.

7. RECLASSIFICATION, CONSOLIDATION, OR MERGER. In the event of
any change in the Common Stock of the COMPANY subject to the Option granted
hereunder, through merger, consolidation, reorganization, recapitalization,
stock split, stock dividend, or other change in the corporate structure,
appropriate adjustment shall be made by the COMPANY in the number of shares
subject to such Option and the price per share; provided, however, that in
accordance with the provisions of Section 425(a) of the Code, a new Option
may be substituted for the Option granted hereunder or such Option may be
assumed by an employer corporation, or a parent or subsidiary of such
corporation, in connection with any transaction to which such Section is
applicable. Upon the dissolution or liquidation of the COMPANY other than in
connection with a transaction to which such Section is applicable, the Option
granted hereunder shall terminate and become null and void, but OPTIONEE
shall have the right immediately prior to such dissolution or liquidation to
exercise the Option granted hereunder to the full extent not before exercised.

8. RIGHT AS STOCKHOLDER. Neither OPTIONEE nor his executors,
administrators, heirs, or legatees, shall be or have any rights or privileges
of a stockholder of the COMPANY in respect of the shares transferable upon
exercise of the Option granted hereunder, unless and until certificates
representing such shares shall have been endorsed, transferred, and delivered
and the transferee has caused his name to be entered as the stockholder of
record on the books of the COMPANY.

9. NOTICES. Any notice to be given under the terms of this
Agreement shall be addressed to the COMPANY in care of its Secretary at the
main offices for the transaction of its business, and any notice to be given
to OPTIONEE shall be addressed to OPTIONEE at the address set forth above, or
at such other place as either party may hereafter designate in writing to the
other. Any such notice shall be deemed duly given when enclosed in a
properly sealed envelope or wrapper addressed as herein

<PAGE>

required, certified, and deposited (postage and certification prepaid) in a
post office regularly maintained by the United States Government.

10. BENEFITS OF AGREEMENT. This Agreement shall inure to the
benefit of and be binding upon each successor of the COMPANY. All
obligations imposed upon the OPTIONEE and all rights granted to the COMPANY
under this Agreement shall be binding upon the OPTIONEE's heirs, legal
representatives, and successors. This Agreement shall be the sole and
exclusive source of any and all rights which the OPTIONEE, OPTIONEE's heirs,
legal representatives, or successors may have in respect to the Plan or any
options or Common Stock granted or issued thereunder, whether to OPTIONEE,
or to any other person.

11. RESOLUTION OF DISPUTES. Any dispute or disagreement which
should arise under, or as a result of, or in any way relate to, the
interpretation, construction, or application of this Agreement will be
determined by the Board of Directors of the COMPANY. Any determination made
hereunder shall be final, binding, and conclusive for all purposes.

"COMPANY" "OPTIONEE"
ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.
a Utah corporation

By:
------------------------------------ --------------------
Culley W. Davis, PRESIDENT
--------------------

Corporate Seal

ATTEST:

By:
------------------------------------
________________________, SECRETARY

<PAGE>

EXHIBIT "A"

NON-QUALIFIED STOCK OPTION AGREEMENT

PURSUANT TO THE

1997 STOCK OPTION AND INCENTIVE PLAN
OF
ENVIRONMENTAL SYSTEMS AND SOLUTIONS, INC.

-------------------

EXERCISE SCHEDULE

<TABLE>
<CAPTION>
Option Period Number of Exercisable Option Shares
------------- -----------------------------------
<S> <C>
1. On or after January 1st, after the first full 1/3 of Total Grant
year following the Company's becoming
publicly traded through Terminal Date

2. On or after January 1st, after the second full 1/3 of Total Grant
year following the Company's becoming
publicly traded through Terminal Date

3. On or after January 1st, after the third full 1/3 of Total Grant
year following the Company's becoming
publicly traded through Terminal Date

</TABLE>

<PAGE>

AGREEMENT

THIS AGREEMENT is entered into the 4th day of December, 1998 by and
between ENVIRONMENTAL SYSTEMS & SOLUTIONS, INC., a Nevada corporation
("ESSI"), on the one hand, and PACIFIC AMERICAN CULTURAL EXCHANGE, INC., a
Japanese corporation ("PACE"), and HIDEYUKI NAKAMURA ("NAKAMURA") under the
following terms and conditions:

RECITALS:

WHEREAS, ESSI owns the worldwide rights to the patented "HydroMaid"
product; and

WHEREAS, NAKAMURA is the sole shareholder of PACE which has paid-in
capital of Y35,000,000; and

WHEREAS, NAKAMURA and PACE desire to acquire manufacturing and
marketing rights under license from ESSI (the "License Rights") for Japan,
Korea, the People's Republic of China, Hong Kong, Macao, the Republic of
China (Taiwan), the Philippines, Vietnam, Laos, Cambodia, Malaysia,
Singapore, Thailand, Myanmar, Indonesia, New Guinea, Sri Lanka, India,
Pakistan, Afghanistan, Iran, and Iraq (the "Territory"); and

WHEREAS, ESSI is willing to grant the License Rights for the Territory
to PACE on the terms and conditions of this Agreement;

NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:

1. LICENSE.

1.1 ESSI hereby agrees to grant to PACE the License Rights to the
Territory upon the terms and conditions set forth in remainder of Section 1
of this Agreement. The License Rights as set forth in this Agreement shall
be incorporated into a License Agreement reasonably agreeable to the parties
and their respective counsel.

1.2 The parties agree that the License Rights shall be exclusive,
subject to the condition that the license will revert to a non-exclusive
license if PACE does not achieve sales as follows:

1.2.1 3,840 HydroMaid units in the second calendar quarter of
1999;

1.2.2 7,680 HydroMaid units in the third calendar quarter of
1999;

1.2.3 11,520 HydroMaid units in the fourth calendar quarter of
1999;

1.2.4 15,360 HydroMaid units in the first calendar quarter of
2000;

1.2.5 17,920 HydroMaid units in the second calendar quarter of
2000; and

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<PAGE>

1.2.6 19,200 HydroMaid units per calendar quarter commencing
in the third quarter of 2000 and in each quarter thereafter.

1.3 ESSI shall be entitled to cancel the License Rights upon 90
days written notice to PACE if PACE does not achieve a minimum of 50% of the
sales required for two consecutive calendar quarters as set forth in Section
1.2 above.

1.4 The parties agree that PACE will pay a royalty to ESSI equal to
U.S. $50.00 per HydroMaid unit (the "Royalty"), up to an aggregate of U.S.
$5,000,000.00 (the "Royalty Cap"), subject to the conditions set forth in
Section 1.5 below. After payment of Royalties equal to the Royalty Cap, the
license granted hereby shall be considered a fully-paid license and no
further Royalties shall be payable.

1.5 PACE shall have the right to purchase, up to 2,500 HydroMaid
units per month at a price of U.S. $155.00 from ESSI's production facilities
in the United States for sale in the direct marketing, multi-level marketing,
or to installers of water purification equipment in Japan, in accordance with
terms to be agreed upon in negotiations between such parties as PACE may
determine. After either ESSI or PACE has production capabilities in China or
Japan, sales to such channels will be made from production in China or Japan,
with royalties payable to ESSI in accordance with the provisions of Section
1.4 above.

1.6 As a condition for the grant of the License Rights, NAKAMURA
agrees to establish a credit facility in the amount not to exceed U.S.
$5,000,000 (the "Credit Facility") for the benefit of PACE to be utilized for
the manufacture and/or purchase of HydroMaid units to be marketed in the
Territory. NAKAMURA agrees to fund the Credit Facility from time to time in
such amounts as may be necessary to satisfy the reasonable production
requirements to meet the demand for HydroMaid units in the Territory. To the
extent that NAKAMURA funds the Credit Facility, the Royalty Cap shall be
reduced by the amount of the funded Credit Facility. For example, if a line
of credit in the amount of U.S. $1,000,000.00 is established by NAKAMURA, the
Royalty Cap shall be reduced by U.S. $1,000,000.00. The specific terms and
conditions of the Credit Facility shall be determined by the parties hereto
based upon the reasonable production requirements to meet the demand for
HydroMaid units in the Territory.

1.7 As a condition for the grant of the License Rights, NAKAMURA
agrees to provide $200,000 in working capital to PACE for operating expenses
from the Closing, as defined in Section 5 below. The parties agree to bear
their own expenses relating to the development of the business in Japan up to
and including the Closing Date.

1.8 The parties agree to continue negotiations with Seiko
Instruments, Inc. for the manufacture of the HydroMaid units in Japan. If
the HydroMaid units are manufactured in Japan, the parties acknowledge that
no Credit Facility shall be required.

1.9 As a condition precedent for the grant of the License Rights to
PACE, NAKAMURA agrees to assign 50% of the issued and outstanding shares of
PACE to ESSI.

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<PAGE>

1.10 As a condition to and in consideration for the transfer of the
PACE shares to ESSI, ESSI agrees to issue to NAKAMURA 25,000 shares of ESSI,
such number of shares to be subject to adjustment in the event of a merger,
reorganization, or other similar transaction.

1.11 As a condition to the grant of the License Rights to PACE,
NAKAMURA, in his capacity as the shareholder of PACE, agrees to elect YASUO
KANAI, HIROFUMI SHIMOZATO, NAOYA NAKAMURA, CULLEY W. DAVIS, RONALD L. LaFORD,
and BRUCE H. HAGLUND as members of the Board of Directors of PACE and
YASUHIRO FUJITA as Statutory Auditor.

1.12 As a condition to the grant of the License Agreement, the
parties agree that the officers of PACE, to be elected by the Board of
Directors, shall be as follows:

Chairman Emeritus HIDEYUKI NAKAMURA
Chairman of the Board CULLEY W. DAVIS
President/ Chief Executive Officer YASUO KANAI
Chief Financial Officer JOHN W. NAGEL
Secretary/General Counsel BRUCE H. HAGLUND
Vice President NORIYUKI NAKAMURA
Vice President NAOYA NAKAMURA
Vice President RONALD L. LaFORD
Vice President HIRORUMI SHIMOZATO
Vice President SHOICHIRO MIYAKAWA

1.13 As a condition to the grant of the License Agreement, PACE
agrees to purchase a 40-foot container of approximately 1,280 HydroMaid units
with PACE responsible to pay U.S. $155.00 per unit. PACE and ESSI agree that
payment for half of the units shall be due on the later of February 15, 1999
or 45 days after the delivery of the shipment and payment for the other half
of the units shall be due on the later of March 31, 1999 or 90 days after the
delivery of the shipment.

2. OPERATIONAL PHILOSOPHY.

2.1 The parties agree that the operational philosophy of PACE shall
be to concentrate initially on sales in Japan and to establish a strategic
plan for the marketing of HydroMaid units in other countries in the Territory
to be approved by the Board of Directors (the "Strategic Plan"). The
Strategic Plan shall establish a target date for the commencement of sales in
each country in the Territory and a target amount of HydroMaid units to be
sold by identified dates. Prior to approval of the Strategic Plan, Mr. KANAI
and Mr. HAGLUND shall (i) agree upon the direction of the business of PACE,
(ii) jointly approve all agreements with distributors, office lease
arrangements, employment arrangements, and (iii) coordinate the business
decisions of PACE to insure that PACE and ESSI are fully informed as to all
material business matters.

2.2 The parties agree that if ESSI receives a bona fide offer in
writing (the "Offer") for a license or distributorship in any market in the
Territory in which PACE is not selling HydroMaid units in accordance with the
Strategic Plan, ESSI shall notify

Page 3

<PAGE>

PACE in writing that it has received the Offer. PACE shall have a right of
first refusal to agree to a license or distributorship in such country on the
same terms and conditions as set forth in the Offer during the 30-day period
following notice by ESSI to PACE (the "Initial Deadline"). If PACE does not
agree to the terms set forth in the Offer by the Initial Deadline, such
country shall no longer be considered part of the Territory and ESSI shall be
free to grant license or distribution rights in such country on the terms set
forth in the Offer. If no agreement in accordance with the Offer is entered
into between ESSI and the party advancing the Offer within 30 days after the
Initial Deadline, such country shall be deemed included again in the
Territory for purposes of the License Rights.

2.3 The parties agree that the Board of Directors of PACE shall
meet on a quarterly basis to review financial statements, budgets, forecasts,
marketing plans, manufacturing plans, and such other matters as reasonably
necessary to provide proper oversight to the operations of PACE. The place
of such meetings shall be (i) Tokyo, Japan, (ii) Salt Lake City, Utah, or
(iii) such other place as the Board of Directors may determine by majority
agreement. The parties agree that NAKAMURA, in his capacity as Chairman
Emeritus of PACE, and Mr. FUJITA, in his capacity as the Statutory Auditor,
shall be entitled to receive all notices of meetings of the Board of
Directors and to attend such meetings.

2.4 English shall be the official language of PACE. All Board
meetings shall be conducted in English and all notices and official
communications shall be in English. Except for required filings with the
Japanese government, all official corporate documents shall be maintained in
English, and the English version of any such document shall prevail in the
event of a conflict between the English and Japanese versions. At the
Closing (as defined in Section 5), English translations of all official
corporate documents (e.g. Articles of Incorporation and Bylaws) shall be
delivered to ESSI.

3. PHILIPPINES.

The parties agree that PACE shall have the right to negotiate a
sublicense or distributorship for the Philippine Islands on the basis of a
joint venture company owned 50% by PACE and 50% by a Philippine joint partner
for approval by the Board of Directors.

4. NAME CHANGE.

The parties agree that PACE shall change its name to "Environmental
Systems International, Inc." and ESSI hereby consents to the use of such
corporate name.

5. CLOSING.

The parties agree to conduct a closing at the earliest practicable
date to accomplish the grant of the License Rights at such time (the "Closing
Date") and place in Tokyo, Japan as the parties mutually agree upon (the
"Closing"). The following shall be accomplished at the Closing:

Page 4

<PAGE>

5.1 PACE shall deliver a current balance sheet to ESSI as of the
Closing Date.

5.2 NAKAMURA shall deliver a certificate to ESSI representing 50%
of the outstanding shares of capital stock of PACE to ESSI.

5.3 ESSI shall deliver a stock certificate for 25,000 shares of
Common Stock to NAKAMURA.

5.4 PACE shall deliver a Certificate of Secretary of PACE
evidencing (i) the election of YASUO KANAI, NORIYUKI NAKAMURA, NAOYA
NAKAMURA, CULLEY W. DAVIS, RONALD L. LaFORD, and BRUCE H. HAGLUND as members
of the Board of Directors, (ii) the election of Mr. FUJITA as the Statutory
Auditor, and (iii) the change of the name of PACE to "Environmental Systems
International, Inc."

5.5 YASUO KANAI, NORIYUKI NAKAMURA, NAOYA NAKAMURA, CULLEY W.
DAVIS, RONALD L. LaFORD, and BRUCE H. HAGLUND, as members of the Board of
Directors of PACE, shall execute a Unanimous Written Consent electing the
officers as set forth in Section 1.12 above.

6. BUDGET; BUSINESS PLAN.

After the Closing, the Board of Directors will meet to develop a
budget and business plan for 1999, including the approval of the Strategic
Plan.

7. MISCELLANEOUS.

7.1 This Agreement supersedes any and all Agreements, whether oral
or written, between the parties hereto and contains all of the covenants and
Agreements between the parties with respect to the rendering of such services
in any manner whatsoever. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, orally or otherwise,
have been made by any party, or anyone acting on behalf of any party, which
are not embodied herein, and that no other agreement, statement or promise
with respect to such employment not contained in this Agreement shall be
valid or binding. Any modification of this Agreement will be effective only
if it is in writing and signed by the parties hereto.

7.2 If any provision in this Agreement is held by a court of
competent jurisdiction to be invalid, void, or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way.

7.3 This Agreement will be governed by and construed in accordance
with the laws of the State of Utah, except where the Japanese corporate laws,
anti-trust laws, and other Japanese laws apply to a Japanese corporation on a
mandatory basis, in which case Japanese law will supersede the contractual
arrangements agreed to by the parties to this Agreement.

Page 5

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and at the place indicated below their respective signatures.

ESSI: ENVIRONMENTAL SYSTEMS & SOLUTIONS, INC.

By: /s/ Culley W. Davis
------------------------
Culley W. Davis,
Chief Executive Officer

Date: 12/4/98
----------------------

Place: Salt Lake City, Utah
----------------------

NAKAMURA:

/s/ Hideyuki Nakamura
---------------------------
HIDEYUKI NAKAMURA

Date: 12/4/98
----------------------

Place: Tokyo, Japan
---------------------

PACE: PACIFIC AMERICAN CULTURAL EXCHANGE, INC.

By: /s/ Hideyuki Nakamura
------------------------
Hideyuki Nakamura,
Its Authorized Officer

Date: 12/4/98
----------------------

Place: Tokyo, Japan
---------------------

Page 6

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FOR HYDROMAID INTERNATIONAL, INC., A
DEVELOPMENT STAGE COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,342
<SECURITIES> 0
<RECEIVABLES> 5,130
<ALLOWANCES> 0
<INVENTORY> 479,580
<CURRENT-ASSETS> 530,262
<PP&E> 555,841<F1>
<DEPRECIATION> 55,584
<TOTAL-ASSETS> 1,254,395
<CURRENT-LIABILITIES> 448,115
<BONDS> 29,964<F2>
0
0
<COMMON> 24,000
<OTHER-SE> 752,316
<TOTAL-LIABILITY-AND-EQUITY> 1,254,395
<SALES> 54,828
<TOTAL-REVENUES> 54,828
<CGS> 53,045
<TOTAL-COSTS> 53,045
<OTHER-EXPENSES> 3,905,629<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 895
<INCOME-PRETAX> (3,904,741)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,904,741)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,904,741)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)<F4>
<FN>
<F1>GROSS INVESTMENT IN PP&E, I.E., BEFORE DEPRECIATION DEDUCTION
<F2>NOTE PAYABLE
<F3>OPERATING EXPENSE 3,259,385; R&D 647,139.
<F4>DILUTIVE EFFECT LESS THAN REPORTABLE LEVEL.
</FN>

</TABLE>