HYDROMAID INTERNATIONAL INC, 10KSB40, 2000-04-13

HYDROMAID INTERNATIONAL INC
10KSB40, 2000-04-13
HOUSEHOLD APPLIANCES

Previous: AMERICAN TOWER CORP /MA/, 8-K, 2000-04-13

Next: AMERICOM USA INC, 3, 2000-04-13

<PAGE>

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, 1999

( ) 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
ON WHICH REGISTERED TITLE OF EACH CLASS
--------------------- -------------------
NONE NONE

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

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

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-B 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.

Net revenues of the registrant for the fiscal year ended December 31, 1999
were $248,665.

1
<PAGE>

The aggregate market value of the Common Stock held by non-affiliates of
the registrant on December 31, 1999 was $108,969,120 based upon the average of
the bid and asked prices of the Common Stock, as reported by the National
Quotation Bureau, LLC.

The number of shares of the Common Stock of the registrant outstanding as
of December 31, 1999 was approximately 26,807,000.

Transitional Small Business Disclosure Format (check one):

Yes No X

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 " 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, 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. 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 100% of the issued and outstanding shares of
restricted Common Stock of Environmental Systems & Solutions, Inc. ("ESSI"), a
Nevada corporation formed in 1992. The Reorganization qualified as a tax-free
reorganization under Section 368 (a) (1) (B) of the 1986 Internal Revenue Code.
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.

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 ten years. ESSI had been engaged
primarily in research and development for six years before the Reorganization.

2
<PAGE>

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.

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 household water
pressure to push cutting blades 340 degrees. These blades 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 mode if silverware is accidentally dropped into the unit
allowing 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 HydroMaid
retails for $299.

MARKET SEGMENTS. The garbage disposal market consists of two main segments,
domestic and international. The domestic market purchases approximately 5
million garbage disposals annually. The international market is virtually
untapped by the electric disposal industry. In 1997, there were less than
244,000 disposals exported throughout the world. The Company intends to
distribute to both the domestic and international markets; although, no
assurance of when significant sales in either market can be provided.

MARKETING AND DISTRIBUTION STRATEGY. During the first quarter of 2000, the
Company entered into a non-binding letter of intent with the appliance division
of General Electric ("GE"). The parties intend to sign definitive agreements
during April 2000. Under the GE agreement, GE could assume rights to distribute
the HydroMaid in the US and Canada, and the Company would retain rights to
distribute the HydroMaid throughout the rest of the world. The Company intends
to continue its current distribution efforts both domestically and
internationally in 2000 by using and building its network of distributors.

COMPETITIVE BUSINESS CONDITIONS. A recent study indicates that
approximately 94% of the disposal market is controlled 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, they believe that the HydroMaid's
unique technology will permit the Company to successfully distinguish itself
from the major industry players and capture market share.

SOURCES AND AVAILABILITY OF MATERIALS. The Company has entered into an
agreement with MVP Industries ("MVP"), a China corporation, for the manufacture
and assembly of the HydroMaid. MVP can produce up to 40,000 units per month. The
Company also has a relationship with Metric Tool & Die ("Metric"), an Illinois
corporation, to manufacture the HydroMaid in limited quantities.

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 for materials and the
manufacturing of its product.

MAJOR CUSTOMERS. The Company is currently focused on entering into
distribution agreements with major appliance retail stores and plumbing
wholesale houses and has entered into sales

3
<PAGE>

agreements with a few major customers. The Company intends to expand its
distribution through these outlets.

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

RESEARCH AND DEVELOPMENT. The Company spent $649,257 in 1999 and $673,491
in 1998 for research and development.

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.

EMPLOYEES. As of December 31, 1999, the Company employed 14 employees,
including six salaried employees on a full-time basis who are considered
executive personnel, seven 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 1999 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.

The Company has also leased a 10,000 square-foot warehouse for a two-year
period ending September 30, 2001 at an annual rent of approximately $50,000 plus
common area maintenance costs of $750 per month.

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 become a party.

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

On November 20, 1999, the Company held its Annual Meeting of Stockholders
in Salt Lake City, Utah. Stockholders were asked to (1) elect directors, (2)
approve the Company's 1999 Stock Option and Incentive Plan, and (3) ratify an
independent auditor for 1999. A total of 23,990,559 shares were entitled to be
voted at the meeting and 20,011,951 were voted. The stockholders voted for all
of the nominated directors, approved the 1999 Stock Option and Incentive Plan,
and ratified Squar, Milner & Reehl, LLP (now known as Squar, Milner, Reehl, and
Williamson, LLP) as the Company's auditors for 1999. The voting on each item was
as follows:

4
<PAGE>

Proposal 1: Election of Directors

<TABLE>
<CAPTION>
NAME VOTES FOR
---- ---------
<S> <C>
Culley W. Davis 19,996,201
Ronald L. LaFord 17,745,500
Mark S. Brewer 17,745,500
John W. Nagel 19,996,201
Bruce H. Haglund 17,751,800
Bradley E. Zarbock* 17,813,400
J. Steven Young 19,768,101

</TABLE>

- -------------------
* In December 1999, Bradley E. Zarbock resigned from the Board and Robert C.
Gay was appointed to fill the vacancy.

Proposal 2: 1999 Stock Option and Incentive Plan

<TABLE>
<CAPTION>
TOTAL FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
16,150,352 2,328,690 1,532,909
</TABLE>

Proposal 3: Ratify Auditors

<TABLE>
<CAPTION>
TOTAL FOR AGAINST ABSTAIN
--------- ------- -------
<S> <C> <C>
19,820,200 132,550 59,201

</TABLE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK PRICE

The following table sets forth, for the period from October 1998 through
December 1999, the high and low bid quotations each quarter for the Common Stock
as reported by the OTC Bulletin Board. The Company's stock began trading on
October 12, 1998 and trades under the stock symbol "HYII." The prices represent
quotations between dealers, without adjustment for retail markup, mark down or
commission, and do not necessarily represent actual transactions.

COMMON STOCK PRICE

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1999
1st Quarter 4.5000 2.2500
2nd Quarter 5.8750 2.5625
3rd Quarter 7.1250 4.6250
4th Quarter 6.8125 4.6875

1998
4th Quarter 4.0000 0.4370

</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,
1999, the approximate number of record holders of the Company's Common Stock was
1,154.

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

5
<PAGE>

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.

Between June and November 1999, the Company raised $4,800,000 through the
private sale of up to 1,200,000 shares of its common stock to accredited
investors. The shares of common stock offered through the private placement were
not registered under any federal or state securities laws; rather, the shares
were offered pursuant to available exemptions from registration. Culley W.
Davis, the Company's Chief Executive Officer, purchased 745,000 shares of the
offering for $3,200,000. The proceeds from the private offering are being used
to fund operations.

During January 2000, a group of investment funds associated with Bain
Capital completed the purchase of a total of 750,000 shares of restricted
Common Stock and warrants to purchase 1 million additional shares of Common
Stock at the price of $7.50 per share, for the aggregate purchase price of
$3,337,500. The warrants expire on January 21, 2005.

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.

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

COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998. During the year ended December 31, 1999, the Company had net sales of
$248,665, compared to sales of $54,828 during 1998, an increase of $193,837. The
associated cost of sales for 1999 was $187,804, compared to cost of sales of
$53,045 for 1998.

The Statement of Operations for 1998 included in the financial statements
filed herewith has been reformatted from that presented in the 1998 Form 10-KSB.
Selling and Distribution Expenses have been broken out from General and
Administrative Expenses, and a minor amount classified as Operating Expenses in
the 1998 report has been reclassified as Research and Development Expenses in
this report. The 1999 and 1998 data reported herein have been treated
consistently.

Selling and Distribution costs for 1999 were $1,082,250 compared to
$424,092 for 1998, an increase of $658,158. This increase is attributable to a
full year of employment for our sales administration staff in 1999 verses a
partial year in 1998, the addition of a warehousing operation in mid-year 1999,
and more extensive promotional endeavors in 1999, all of which went hand-in-hand
with the startup of volume production in 1999.

General and Administrative Expenses for 1999 were $2,175,075 compared to
$2,808,941 for 1998, a decrease of $633,866. The reduction came from lower
expenditures for outside consultants, travel, and allocated charges from
Pinnacle Enterprises, Inc. and Pinnacle Enterprises, Ltd., related companies.
The 1998 accounting included nearly $1.5 million in charges from the Pinnacle
companies for payments they had made on behalf of the Company and for
allocations of their overhead. While there was an overall reduction in this
classification of expense, it should be noted that the Company incurred a
significant ($363,763) new non-cash expense item in 1999 associated with
accounting for options and stock grants to employees and directors.

6
<PAGE>

Research and development costs for 1999 totaled $649,257 as compared to
$673,491 for 1998, a decrease of $24,234. As the Company began distributing the
product, additional modifications were required to be made for which the Company
incurred further research and development costs and pursued additional patents.

The Company experienced a net loss of $3,820,547 during 1999 compared to a
net loss of $3,904,741 for the comparable period in 1998, a decrease in losses
of $84,194.

The Company's inventory increased from $479,580 at December 31, 1998 to
$905,924 at December 31, 1999.

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.

Selling, general, and administrative costs were $3,233,033 during 1998
compared to $337,087 for the comparable period in 1997, an increase of
$2,895,946. 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 $1,500,000, depreciation and amortization expenses
of approximately $75,000, and various other expenses.

Research and development costs for 1998 totaled $673,491 as compared to
$585,639 for 1997, an increase of $87,852. 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.

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 the HydroMaid 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.

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.

LIQUIDITY

The Company, which at the end of 1999 had $2,901,758 in cash and raised an
additional $3,337,500 in January 2000, does not anticipate needing to raise any
additional capital to fund operations during 2000.

7
<PAGE>

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, LLP, now
known as Squar, Milner, Reehl & Williamson, LLP, 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.

PART III

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

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The names, ages, and positions of the nominees for election as Directors
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY FIRST ELECTED
- ---- --- ------------------------- -------------
<S> <C> <C> <C>
Culley W. Davis 44 CEO, Chairman, Director 1998
Ronald L. LaFord 52 President, Director 1998
Mark S. Brewer 41 Vice President, Director 1998
John W. Nagel 59 CFO, Director 1998
Bruce H. Haglund 48 Secretary, Director 1998
Robert C. Gay 48 Director 1999
J. Steven Young 38 Director 1999

</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., which became VitriSeal, Inc. through a reorganization on March 18,
1999 (OTC/BB: "VTSL"), the developer of Vitroseal(TM), 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.

8
<PAGE>

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 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.

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

Mr. 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 & Paulsen
in Orange County, California where he has been engaged in the private practice
of law since 1980. Mr. Haglund is also the Secretary and a member of the Board
of Directors of Metalclad Corporation (Nasdaq SmallCap: MTLC), Aviation
Distributors, Inc. (OTC/BB: ADIN), Renaissance Golf Products, Inc. (OTC/BB:
FGLF), and VitriSeal, Inc. (OTC/BB: VTSL). He is a graduate of the University of
Utah College of Law.

9
<PAGE>

ROBERT C. GAY, DIRECTOR

Mr. Gay has served as a Director of the Company since December 1999. Mr.
Gay has been a Managing Director of Bain Capital since 1993 and has been a
General Partner of Bain Venture Capital since 1989. From 1988 to 1989, Mr. Gay
was a Principal of Bain Venture Capital. Prior to joining Bain Capital, Mr. Gay
was an Executive Vice President of General Electric Capital Markets Group. He
was also a Vice President and Principal of Kidder Peabody's Merchant Banking
Group. Previously, Mr. Gay was a manager at McKinsey & Company. In addition, he
taught economics at Harvard University. Mr. Gay is Vice Chairman of the Board of
Directors of IHF Capital, Inc., parent of ICON Health & Fitness Inc. Mr. Gay
also serves as a director of Cambridge Industries, Inc., Nutraceutical
Corporation, American Pad & Paper Company, GS Technologies Corporation, and
Alliance Laundry Holdings LLC. Mr. Gay received a Ph.D. in Business Economics
form Harvard University and graduated Phi Beta Kappa with an A.B. from the
University of Utah.

J. STEVEN YOUNG, DIRECTOR

Mr. Young has served as a Director of the Company since October 1999. Mr.
Young holds the honor of the highest quarterback rating in National Football
League ("NFL") history. Mr. Young has been a member of the NFL since 1985 and
has received numerous NFL and collegiate awards, including, but not limited to,
Most Valuable Player of Super Bowl XXIX, Sports Illustrated and Sporting News'
1994, 1993 and 1992 Player of the Year, NFL's Most Valuable Player 1994 and
1992, a Consensus 1983 All-American and Heisman Trophy Winner Runner-up.
Throughout his NFL history, Mr. Young has provided marketing endorsements at
various times for Nike, Sprint, VISA, Sun Microsystems, Power Bar, Pert Plus,
National Dairy Association, Wheaties, and Advil. In 1993, Mr. Young established
the Forever Young Foundation, an international, non-profit public charity, based
in Los Altos, California, that provides funding for charitable organizations
which encourage the development, security, strength, and spiritual vitality of
the family. Mr. Young is currently a spokesperson for The Children's Miracle
Network, NFL F.A.C.T., a national program promoting education for youth, and NFL
P.L.A.Y. Football. In 1994, Mr. Young received his Juris Doctorate degree from
Brigham Young University College of Law.

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.

The Board held four meetings during 1999. All Directors attended more than
75% of the Meetings held.

COMMITTEES OF THE BOARD

During 1999, the Board of Directors established a number of committees,
including a Finance Committee, an Audit Committee, and a Compensation Committee,
each of which is briefly described below.

The Finance Committee was established to oversee Company expenditures and
approve contracts entered into by the Company requiring the payment of $50,000
or more. The Committee consists of Culley W. Davis, Ronald L. LaFord, and John
W. Nagel.

The Audit Committee was established to meet with management to consider the
adequacy of the internal controls and the objectivity of financial reporting;
the committee meets with the independent auditors and with appropriate Company
financial personnel about these matters. The committee recommends to the Board
of Directors the appointment of the independent auditors, subject to
ratification by the Stockholders at the Annual Meeting. The independent auditors
periodically meet alone with the committee and always have unrestricted access
to the committee. The committee consists of John W. Nagel, Mark S. Brewer, and
J. Steven Young.

10
<PAGE>

The Compensation Committee negotiates employment contracts, recommends to
the Board of Directors compensation for officers, Directors, and employees, and
administers management incentive compensation plans, including stock option
plans. The committee consists of Ronald L. LaFord, Robert C. Gay, and Bruce H.
Haglund.

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. The Company agreed to issue Mr. Young a total of 300,000 shares of the
Company's Common Stock, 200,000 shares for the first year of service and 100,000
shares for the second year of service. Each of the other Directors was granted
50,000 options to purchase shares of Common Stock at $5.50 per share for their
service as a Director.

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 agent
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

COMPENSATION OF OFFICER

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 three years reflect fixed amounts that are deemed
competitive for executives with comparable ability and experience in the
industry.

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 between
the Company and ESSI.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------------------------
OTHER ANNUAL
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#)(1)
--------------------------- -------- ------- ----- -------------
<S> <C> <C> <C> <C>
Culley W. Davis, 1999 115,846 300,000(2)
Chairman, CEO 1998 95,000

</TABLE>
- -------------------
(1) The remuneration described in the table does not include the cost to the
Company of benefits furnished to the named executive officer, 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;

11
<PAGE>

however, the executive officer named above did not receive other
compensation in excess of the lesser of $50,000 or 10% of such Officers
cash compensation.

(2) See Option Grants in Last Fiscal Year.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION NUMBER OF PERCENT OF
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR EXPIRATION
OPTIONS EMPLOYEES IN BASE PRICE DATE
GRANTED (#) FISCAL YEAR ($)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Culley W. Davis 300,000 40% $5.50 9/20/04
</TABLE>

- -------------------
(1) A total of 250,000 of the options vest one third on each of March 20, 2000,
January 1, 2001, and January 1, 2002. The 50,000 balance vest in 12,500
increments at the start of each quarter during 2000.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
NAME SHARES ACQUIRED ON VALUE REALIZED($) FY-END(#) FY-END($)
EXERCISE(#) EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C>
Culley W. Davis -- -- -- $365,000*

</TABLE>

- --------------------
* Unexercisable

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information concerning the beneficial
ownership of the Company's Shares as of December 31, 1999 for (i) each current
Director (ii) each named executive officer of the Company as defined in
402(a)(2) of Regulation S-B of the Securities Act of 1933, (iii) all persons
known by the Company to beneficially own more than 5% of the Company's voting
Shares, and (iv) all officers and Directors of the Company as a group.

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
NAME TITLE OWNERSHIP(1)(2) CLASS(3)
- ------------------------------------ -------------------------------- ------------------ ------------------
<S> <C> <C> <C>
Culley W. Davis CEO and Chairman 40,923 *
Family Legacy, Ltd. (4) Beneficial Owner 3,827,143 14.3%
Ronald L. LaFord President and Director -0- -0-
Mark S. Brewer Vice President and Director 36,000 *
John W. Nagel CFO and Director 10,000 *
Bruce H. Haglund Secretary and Director 72,000 *
Robert C. Gay Director 8,000 *
J. Steven Young Director 170,000 *
All Directors and Executive
Officers as a Group 4,164,066 15.5%

</TABLE>

- -------------------
* Less than one percent.

(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 contact address of each
individual 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 26,807,000 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 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.

(4) Culley W. Davis is a manager of the general partner of Family Legacy, Ltd.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS DURING 1999

On October 20, 1999, J. Steven Young was appointed as a Director of the
Company. For his service as a Director for a two-year period, Mr. Young will
receive a total of 300,000 shares of the

12
<PAGE>

Company's Common Stock, 200,000 shares for the first year of service and 100,000
shares for the second year of service.

During 1999, Culley W. Davis, the Company's Chief Executive Officer,
purchased 745,000 shares of the Company's private stock offering for $3,200,000
cash infusion.

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 & Paulsen, the Company's attorneys, were paid approximately
$230,000 in legal fees for services rendered during 1999. Bruce H. Haglund, an
Officer and Director of the Company, is a member of the law firm.

TRANSACTIONS DURING 1998

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.

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 the Company's
stock to investors at $8.00 per share. The stock sold by Mr. Davis was
personally owned by him or Pinnacle Enterprises Group, 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 post-Reorganization
shares of Common Stock to Culley W. Davis, or his assigns, 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.

COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT

Section 16 (a) of the Securities Exchange Act 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 SEC. 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. Officers of the Company did not file Form 4's
regarding options granted to them during 1999 and which first vest during 2000.
Form 5's were filed in 2000 regarding the options granted during 1999;
accordingly, the Company believes all filing requirements applicable to its
Officers, Directors, and greater than 10% beneficial owners have now been
complied with.

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, 1999 and 1998:

Independent Auditors' Report
Balance Sheets
Statements of Operations
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:

13
<PAGE>

27 Financial Data Schedule.

(b) Reports on Form 8-K.

None

14
<PAGE>

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 April 12, 2000.

HYDROMAID INTERNATIONAL, INC.

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 April 12, 2000
- ----------------------- Chief Executive Officer
Culley W. Davis (Principal Executive Officer)

/s/ RONALD L. LAFORD President, Director April 12, 2000
- -----------------------
Ronald L. LaFord

/s/ JOHN W. NAGEL Chief Financial Officer, Director April 12, 2000
- -----------------------
John W. Nagel

/s/ BRUCE H. HAGLUND Secretary, Director April 12, 2000
- -----------------------
Bruce H. Haglund

15
<PAGE>

HYDROMAID INTERNATIONAL, INC.

FINANCIAL STATEMENTS

DECEMBER 31, 1999 AND 1998

<PAGE>

INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report................................................ 1

Balance Sheets.............................................................. 2

Statements of Operations.................................................... 3

Statements of Stockholders' Equity.......................................... 4

Statements of Cash Flows.................................................... 5

Notes to Financial Statements............................................... 7
</TABLE>

<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
HydroMaid International, Inc.

We have audited the accompanying balance sheets of HydroMaid International, Inc.
(the "Company") as of December 31, 1999 and 1998 and the related statements of
operations, stockholders' equity, and cash flows for the years then ended. 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 auditing standards generally accepted
in the United States. 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 HydroMaid International, Inc.
at December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.

Squar, Milner, Reehl & Williamson, LLP

March 10, 2000
Newport Beach, California

<PAGE>

- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------

1999 1998
-------------- ---------------
<S> <C> <C>
ASSETS

CURRENT ASSETS
Cash $ 2,901,758 $ 20,342
Accounts receivable 71,261 5,130
Inventory, net 905,924 479,580
Prepaid expenses and other assets 184,874 25,210
-------------- ---------------
4,063,817 530,262

Property and equipment, net 744,117 500,259

Patents, net 93,861 143,874
Deposit on tooling - 80,000
Advances to related party 167,495 -
-------------- ---------------

$ 5,069,290 $ 1,254,395
-------------- ---------------
-------------- ---------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued expenses $ 507,758 $ 390,049
Current portion of note payable to related party - 6,599
Advances from related party - 51,467
-------------- ---------------
507,758 448,115

Note payable to related party - 29,964

Commitments and contingencies

STOCKHOLDERS' EQUITY
Common stock, par value $0.001 per share,
30,000,000 shares authorized; 26,807,000
shares issued and outstanding at December
31, 1999; 24,000,000 shares issued and
outstanding at December 31, 1998 26,807 24,000
Additional paid-in capital 18,041,093 6,072,566
Subscriptions, stock options, and deferred compensation (4,567,408) (201,837)
Accumulated deficit (8,938,960) (5,118,413)
-------------- ---------------
4,561,532 776,316
-------------- ---------------

$ 5,069,290 $ 1,254,395
-------------- ---------------
-------------- ---------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

PAGE 2

<PAGE>

- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
REVENUES
Sales $ 254,863 $ 54,828
Less returns and allowances (6,198) -
------------- -------------
248,665 54,828

COST OF GOODS SOLD 187,804 53,045
------------- -------------

GROSS PROFIT 60,861 1,783

OPERATING EXPENSES
Selling and distribution expenses 1,082,250 424,092
General and administrative expenses 2,175,075 2,808,941
Research and development 649,257 673,491
------------- -------------
3,906,582 3,906,524

LOSS BEFORE INTEREST AND TAXES (3,845,721) (3,904,741)

INTEREST INCOME 25,174 -
------------- -------------

LOSS BEFORE TAXES (3,820,547) (3,904,741)

INCOME TAX BENEFIT (EXPENSE)
Current - -
Deferred (190,000) 1,450,000
Less change in valuation allowance 190,000 (1,450,000)
------------- -------------
- -
------------- -------------

NET LOSS $(3,820,547) $(3,904,741)
------------- -------------
------------- -------------

Basic and diluted loss per share $ (0.16) $ (0.19)
------------- -------------
------------- -------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

PAGE 3

<PAGE>

- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Subscriptions,
Common Stock Additional Stock Options,
-------------------------- Paid-in and Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
---------- ----------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 7,474,539 $ 74,745 $ 1,402,624 $ - $(1,213,672) $ 263,697
Common stock issued for cash 2,520,000 2,520 2,644,700 - - 2,647,220
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)
Adjustment in connection with
reorganization (5,520,000) (72,790) 22,270 - - (50,520)
Contributed capital - - 1,767,947 - - 1,767,947
Stock options outstanding - - 235,025 - - 235,025
Deferred compensation - - - (201,837) - (201,837)
Net loss - - - - (3,904,741) (3,904,741)
---------- ----------- ----------- --------------- ------------ ------------
BALANCE - DECEMBER 31, 1998 24,000,000 24,000 6,072,566 (201,837) (5,118,413) 776,316
Common stock issued for cash 1,851,000 1,851 7,240,149 - - 7,242,000
Common stock issued for services 200,000 200 1,212,300 - - 1,212,500
Stock options outstanding - - 161,334 - - 161,334
Common stock subscribed 756,000 756 3,354,744 - - 3,355,500
Common stock subscriptions
outstanding - - - (3,355,500) - (3,355,500)
Deferred compensation - - - (1,010,071) - (1,010,071)
Net loss - - - - (3,820,547) (3,820,547)
---------- ----------- ----------- --------------- ------------ ------------
BALANCE - DECEMBER 31, 1999 26,807,000 $ 26,807 $18,041,093 $(4,567,408) $(8,938,960) $ 4,561,532
---------- ----------- ----------- --------------- ------------ ------------
---------- ----------- ----------- --------------- ------------ ------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

PAGE 4

<PAGE>

- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,820,547) $ (3,904,741)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 164,908 74,684
Provision for obsolete inventory 240,000 180,000
Abandonment of patents pending 35,329 -
Stock option and grant expense 363,763 33,188
Changes in operating assets and liabilities:
Accounts receivable (66,131) (5,130)
Inventory (666,344) (632,456)
Prepaid expenses and other assets (159,664) (25,210)
Accounts payable and accrued expenses 117,709 370,352
--------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (3,790,977) (3,909,313)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (311,077) (400,740)
Acquisition of patents (3,005) (56,348)
Deposit on tooling - (80,000)
--------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (314,082) (537,088)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on note payable to related party (36,563) (1,415)
Advances from related party 1,448,774 1,478,467
Repayment of advances from related party (1,667,736) (1,427,000)
Proceeds from issuance of common stock 7,242,000 2,647,220
Contributions of paid-in capital - 1,767,947
--------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,986,475 4,465,219
--------------- --------------

NET INCREASE IN CASH 2,881,416 18,818

CASH - beginning of year 20,342 1,524
--------------- --------------

CASH - end of year $ 2,901,758 $ 20,342
--------------- --------------
--------------- --------------
</TABLE>

(continued)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

PAGE 5

<PAGE>

SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES

<TABLE>
<S> <C> <C>
Issuance of note payable for property and
equipment $ - $ 37,978
--------------- --------------
--------------- --------------

Stock transactions in connection with
reorganization $ - $ 30,725
--------------- --------------
--------------- --------------

Conversion of deposit on tooling to property
and equipment $ 80,000 $ -
--------------- --------------
--------------- --------------

Issuance of common stock for services $ 1,212,500 $ -
Stock options granted 161,334 235,025
--------------- --------------
1,373,834 235,025
Less: stock option and grant expense (363,763) (33,188)
--------------- --------------

Deferred compensation activity, net 1,010,071 201,837

Deferred compensation - beginning of year 201,837 -
--------------- ---------------
Deferred compensation - end of year $ 1,211,908 $ 201,837
--------------- ---------------
--------------- ---------------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

PAGE 6

<PAGE>

- --------------------------------------------------------------------------------
HYDROMAID INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------

1. NATURE OF BUSINESS AND REORGANIZATION

NATURE OF BUSINESS

HydroMaid International, Inc. (the "Company") was incorporated in 1992 in the
State of Nevada and engages in the development, manufacture, and sale of
patented water-powered garbage disposals known as the HydroMaid-Registered
Trademark- (the "Product"). Technological improvements and field-testing were
completed in 1997, and the Product was introduced to the market in 1998. The
Company intends to market the Product worldwide; however, its primary market
in 1999 was the entire United States. The Company operates from a leased
facility of approximately 8,000 square feet near Salt Lake City, Utah. The
majority of its manufacturing is performed by a contractor in China.

Under accounting principles generally accepted in the United States ("GAAP"),
the Company was classified as a development stage enterprise through December
31, 1998.

PROPOSED AGREEMENT WITH GENERAL ELECTRIC

On March 10, 2000, the Company entered into a non-binding letter of intent
with the Appliance Division of General Electric Company ("GE") under which GE
may obtain exclusive distribution rights to the Product in the United States
and Canada through October 31, 2003.

REORGANIZATION

Environmental Systems & Solutions, Inc. ("ESSI"), the predecessor entity,
completed a reverse reorganization with a publicly traded "shell" company on
December 11, 1998. ESSI entered into an Agreement and Plan of Reorganization
(the "Reorganization Plan") designed to result in the acquisition by Cherokee
Minerals and Oil, Inc. ("Cherokee") of at least 80% of the issued and
outstanding shares of restricted common stock of ESSI. ESSI was a privately
held company with no public market for its stock, while Cherokee was a
dormant entity with no significant assets or revenues since 1985. 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
Reorganization Plan, the former stockholders of ESSI received four shares of
Cherokee for each share of ESSI and ultimately acquired approximately 92% of
the 24 million post-Reorganization outstanding shares of Cherokee. Certain
restrictions on such shares began expiring on the one-year anniversary of the
Reorganization (Note 6).

In January 1999, Cherokee changed its name to HydroMaid International, Inc.
The Company's common stock trades on the OTC Bulletin Board of the National
Association of Securities Dealers under the symbol "HYII".

Page 7

<PAGE>

1. NATURE OF BUSINESS AND REORGANIZATION (continued)

REORGANIZATION (continued)

The Reorganization has been 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. 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 Cherokee financial information differs significantly from its previously
issued financial statements. 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 has been carried forward to the post-acquisition period
and no goodwill has been recorded. Reorganization transaction costs, such as
legal fees, have been expensed as incurred.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies 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.

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 materially differ from the estimates used to
prepare the accompanying financial statements in the near term.

CONCENTRATION OF CREDIT RISK

Financial instruments that may subject the Company to credit risk principally
consist of uninsured cash-in-bank balances. At times, the Company's bank
balance exceeded the amount insured by the Federal Deposit Insurance
Corporation. As of December 31, 1999, the Company's bank balance reported by
its principal financial institution exceeded the insured amount by
approximately $2,800,000.

Page 8

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

CONCENTRATIONS

The Company's business plan calls for virtually all product assembly and
cutting blade manufacturing to take place in China in the near term. The
majority of the Company's product assembly has been contracted to one company
in China.

REVENUE RECOGNITION

Except when the Company has significant future performance obligations,
revenue is recognized upon shipment of the Product. Product shipments with
unexpired rights-of-return or which otherwise do not qualify for full-accrual
revenue recognition are accounted for by the Company as consignment
transactions or are recorded as deferred revenue at the time of sale.

INVENTORY

Inventory is stated at the lower of cost (using the first-in, first-out
method) or estimated market value. Management periodically reviews inventory
and outstanding purchase commitments to identify any significant obsolete or
slow-moving items and provides allowances for such items.

PROPERTY AND EQUIPMENT

Equipment, fixtures, and leasehold improvements are stated at cost less
accumulated depreciation or amortization. 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 9

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

PROPERTY AND EQUIPMENT (continued)

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 an estimated useful life of five years.

Completed tooling used in commercial production is carried at cost less
accumulated depreciation. 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.
Completed tooling is depreciated using the straight-line method over its
estimated useful life of five years.

PATENTS

In 1992, the Company acquired trademarks and several patents on the Product.
The Company capitalizes the cost and related expenses of patents and patents
pending, and amortizes them over the shorter of their remaining legal lives
or their estimated economic life. In 1999, the Company wrote-off costs
related to abandoned patents pending of approximately $35,000. Amortization
expense for the years ended December 31, 1999 and 1998 approximated $18,000
and $17,000, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. No impairment losses were recorded during the years ended
December 31, 1999 and 1998.

INCOME TAXES

Using the liability method required by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 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 (Note 9).

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to expense when incurred. Such
costs primarily relate to pre-production prototype tools and dies,
modifications of the Product's original design, and engineering activities
intended to advance the Product's technology to the point of commercial
production.

WARRANTY COSTS AND RELATED MATTERS

The Company provides a lifetime warranty on the Product's housing and steel
blades, and an unconditional ten-year warranty on workmanship and other
components. The Company will buy the Product back from customers after the
ten-year warranty expires for $25 cash or a $35 credit toward the purchase of
a new unit. Estimated warranty expense is recorded in the year of sale based
on historical experience, Product performance, and management's review of
Product quality as compared to the current state of the technology.

STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS

For employee compensatory stock options that will eventually vest,
compensation expense is recognized during the periods in which the related
employee services are rendered. Such expense is generally measured by
determining the excess, if any, of the grant date estimated fair market value
of the underlying stock over the amount to be paid

Page 10

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS (continued)

by the employee in conformity with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25").

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 market 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 Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").

Certain of the options discussed in the preceding paragraph were granted
before the Company became a publicly held entity. GAAP allows the 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
fair market value 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 estimate the present value. This method ignores the expected
volatility of the underlying stock, which can provide much of an option's
value. The Company has not declared any cash dividends since inception, and
expected dividends have not been considered in the fair value computation
(Notes 7 and 8).

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 Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128").

The weighted average number of common shares outstanding for the years ended
December 31, 1999 and 1998 were 24,568,000 and 20,044,000, respectively.

As discussed in Notes 7, 10, and 13, securities that could potentially dilute
basic loss per share in the future were not included in the
diluted-loss-per-share computation because their effect is antidilutive.

ELEMENTS OF OTHER COMPREHENSIVE INCOME

For the years ended December 31, 1999 and 1998, the Company did not have any
elements of other comprehensive income as defined by Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Therefore, a
statement of comprehensive income has not been presented.

Page 11

<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

RECLASSIFICATIONS

Certain amounts in the 1998 financial statements have been reclassified to
conform to their 1999 presentation.

3. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS

The names and relationships of related parties referred to in these notes are
set forth below (Company stock beneficial ownership percentages, which are as
of December 31, 1999, are rounded):

- - Culley W. Davis, founder, CEO and chairman of the Board of Directors; sole
owner and CEO of Pinnacle Enterprises, Inc. ("PEI"), a debtor of the
Company; manager of the general partner of Family Legacy, Ltd. ("FLL");
direct and beneficial owner of Company stock and stock options to buy such
stock (Note 7); controls approximately 14% of the outstanding stock of the
Company.

- - Bruce H. Haglund, an officer and director of the Company, the
brother-in-law of the Company's CFO, owner of Company stock options (Note
7), and a less than 1% stockholder of the Company. Bruce H. Haglund is a
partner in the law firm of Gibson, Haglund, & Paulsen ("GHP"), legal
counsel to the Company. For the years ended December 31, 1999 and 1998, the
Company paid or incurred legal fees to GHP of approximately $230,000 and
$188,000, respectively. The Draper, Utah office of GHP rents office space
from PEI.

Page 12

<PAGE>

3. RELATED PARTY TRANSACTIONS AND RELATIONSHIPS (continued)

- - 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 post-Reorganization shares of the Company's common stock
under certain conditions (Note 10). MTD is the Company's primary research
and development facility as well as a domestic contractor for manufacturing
and assembly.

Because the Company, PEI, FLL, and other entities have commonality of ownership
and/or management control, the reported operating results and/or financial
position of the Company could significantly differ from what would have been
obtained if such entities were autonomous.

Other related party transactions are discussed elsewhere in these notes to the
financial statements.

4. INVENTORY

Inventory consists of the following at December 31, 1999 and 1998:

1999 1998
-------------- --------------
<S> <C> <C>
Components $ 486,984 $ 447,089
Finished goods 774,264 212,491
Finished goods on consignment 64,676 -
-------------- --------------
1,325,924 659,580
Less valuation allowance (420,000) (180,000)
-------------- --------------

$ 905,924 $ 479,580
-------------- --------------
</TABLE>

At December 31, 1999, the inventory valuation allowance included
approximately $385,000 resulting from estimated write-downs for obsolescence
created by design changes during the Product's development.

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Machinery, equipment, and tooling $ 472,987 $ 251,591
Computer hardware and software 46,186 19,994
Furniture and fixtures 57,830 54,439
Vehicles 126,147 98,990
Leasehold improvements 111,233 109,329
Demonstration equipment 132,537 21,500
------------ ------------
946,920 555,843
Accumulated depreciation and amortization (202,803) (55,584)
------------ ------------

$ 744,117 $ 500,259
------------ ------------
------------ ------------
</TABLE>

Production tooling located in China approximated $180,000 and $80,000 at
December 31, 1999 and 1998, respectively.

6. COMMON STOCK

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
"Securities Act"), in reliance upon an exemption from its requirements. Such
restrictions begin to phase out

Page 13

<PAGE>

6. COMMON STOCK (continued)

after a one-year holding period. Rule 144 of the Securities and Exchange
Commission allows a stockholder who has held restricted securities for at
least one year to sell in any three-month period not more than the greater of
(a) 1% of the number of shares outstanding or (b) the average weekly trading
volume during the preceding four calendar weeks. These limitations do not
apply to non-affiliated persons who have held restricted securities for at
least two years. See Note 13 for a discussion of subscribed common stock and
stock warrants.

7. STOCK OPTIONS

1999 STOCK OPTION AND INCENTIVE PLAN

Effective September 20, 1999, the Company adopted the 1999 Stock Option and
Incentive Plan (the "1999 Plan"), which permits the issuance of options for a
maximum of 1.2 million shares. On the same date, the Company granted options
for a total of 750,000 shares under the 1999 Plan as follows:

<TABLE>
<S> <C>
Culley W. Davis, as an employee 250,000
Directors 300,000
Employees (excluding Culley W. Davis) 175,000
Non-employees 25,000
-------------
750,000

Less forfeitures in 1999:
Directors (50,000)
Employees (32,500)
-------------
(82,500)
-------------

667,500
-------------
-------------
</TABLE>

The 250,000 options granted to Culley W. Davis, as an employee, are exercisable
at $5.50 per share in equal installments on March 20, 2000, January 1, 2001, and
January 1, 2002 and expire five years from the date of grant.

The options, net of forfeitures, granted to Directors for their services as
employees totaled 250,000, are exercisable at $5.50 per share in four equal
quarterly installments beginning on January 1, 2000. Such options expire ten
years from the date of grant.

The options granted to employees (except for Culley W. Davis) and non-employees,
net of forfeitures, totaled 167,500 and are exercisable at $5.00 per share in
equal installments on March 20, 2000, January 1, 2001, and January 1, 2002. Such
options expire ten years from the date of grant.

The other significant provisions of the 1999 Plan, including those related to
nonstatutory stock options, are substantially similar to those described below.

Page 14

<PAGE>

7. STOCK OPTIONS (continued)

1997 STOCK OPTION AND INCENTIVE PLAN

Effective June 1, 1997, the Company adopted the 1997 Stock Option and Incentive
Plan (the "1997 Plan"), which permits the issuance of options for a maximum of 2
million shares (as adjusted for the Reorganization) and has a life of ten years.
Employee options to purchase common stock for $0.25 per share ($1.00 per share
on the grant dates, determined by management to be not less than 100% of the
estimated pre-Reorganization fair market value of ESSI common stock) are
generally exercisable in three equal annual installments beginning in January of
2000.

For employees who own more than 10% of the outstanding stock of the Company,
such options are required to have a minimum exercise price of 110% of the grant
date estimated fair market value 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 of not less than their grant-date
estimated fair market value.

The employees' rights under the 1997 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 employees shall not dispose of shares
acquired from exercising stock options within two years of the grant date or
within one year after the exercise date.

Options to acquire 633,334 post-Reorganization common shares with an exercise
price of $0.25 per share were outstanding at December 31, 1999 under the 1997
Plan, including options owned by Culley W. Davis to acquire 80,000 shares.

NON-STATUTORY STOCK OPTIONS

At December 31, 1999, Bruce H. Haglund owned options to acquire a total of
150,000 shares as follows: (a) 100,000 shares under the 1997 Plan at $0.25
per share, which are exercisable in three equal annual installments beginning
January 1, 2000 and (b) 50,000 shares as a Director under the 1999 Plan at
$5.50 per share, which are exercisable in four equal quarterly installments
beginning January 1, 2000.

Any grant of non-statutory 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.

STOCK OPTION ACTIVITY

A summary of the aggregate stock option activity for the 1999 and 1997 Plans
(including the non-statutory stock options discussed above) for the years ended
December 31, 1999 and 1998 is presented below:

Page 15

<PAGE>

7. STOCK OPTIONS (continued)

STOCK OPTION ACTIVITY (continued)

<TABLE>
<CAPTION>
POST-MERGER SHARES
---------------------------------
1999 1998
----------------- ---------------
<S> <C> <C>
Options outstanding - beginning of year 700,000 567,500
Options granted 750,000 132,500
Options forfeited (149,166) -
----------------- ---------------

Options outstanding - end of year 1,300,834 700,000
----------------- ---------------
----------------- ---------------

Exercisable options - end of year 33,334 None
----------------- ---------------
----------------- ---------------
</TABLE>

On January 1, 2000, additional options for 262,500 shares became exercisable.

OTHER MATTERS

The disclosures in this and the following paragraph apply to the 1999 and
1997 Plans. The estimated fair value of the options granted is amortized to
expense over the options' vesting period. The fair value of stock options
granted before December 11, 1998 has been estimated as described in Note 2.
The fair value of stock options granted after December 10, 1998 has been
estimated using the Black-Scholes stock option pricing model based on the
exercise price per share, the market price of the Company's common stock, and
the following weighted average assumptions:

<TABLE>
<S> <C>
Expected life 2.2 years
Estimated volatility 90.0%
Risk-free interest rate 5.2%
Dividends Zero
</TABLE>

The weighted average exercise price of stock options outstanding at December 31,
1999 approximated $2.88 per share. The weighted average grant date fair value of
stock options granted in 1999 and 1998 approximated $2.32 and $0.10 per share,
respectively. The weighted average fair value of stock options granted in 1999
when the exercise price exceeded the grant-date market price approximated $2.32
per share. Options exercisable at December 31, 1999 had an exercise price of
$0.25 per share. The weighted average exercise price of options forfeited in
1999 approximated $3.05 per share. The weighted average remaining contractual
life of stock options outstanding at December 31, 1999 approximated seven years.

Under both plans, the Company may also grant stock appreciation rights and
restricted stock awards. As of December 31, 1999, no such equity instruments had
been granted.

Page 16

<PAGE>

7. STOCK OPTIONS (continued)

OTHER MATTERS (continued)

Both plans include 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 whereby the
Company is not the surviving entity, and (3) the sale of all or substantially
all of the Company's assets in its entirety. If such an event occurs, all
outstanding stock options and stock appreciation rights may become immediately
exercisable or fully vested at the discretion of the Board of Directors;
similarly, restricted stock may be freed of any restrictions at the discretion
of the Board of Directors.

8. STOCK-BASED COMPENSATION AND OTHER EXPENSES

As discussed in Note 2, compensatory stock options and similar equity
instruments issued to non-employees are accounted for using the fair value
method of SFAS 123. The Company recognized compensation expense related to such
equity instruments of approximately $44,000 and $21,000 for the years ended
December 31, 1999 and 1998, respectively. The expense incurred in 1999
represents the cost associated with the Company's commitment to issue 50,000
post-Reorganization shares of common stock to Don Sullivan, based on the terms
and vesting schedule set forth in the "Commitment to Issue Common Stock and
Other Matters" section of Note 10.

Incentive stock options granted to employees are accounted for using the
intrinsic value method of APB 25. Estimated compensation expense related to
such options approximated $81,000 and $13,000 for the years ended December
31, 1999 and 1998, respectively. If the fair value method of accounting had
been applied to such options, the Company's reported net loss would have
increased by approximately $160,000 ($0.01 per share) and $60,000 (less than
$0.01 per share) in 1999 and 1998, respectively.

On October 20, 1999, the Company entered into an agreement with Steve Young
("Young") to retain his services as a Director for a two-year period (the
"Young Agreement"). Young is a quarterback for the San Francisco 49ers, a
professional football team. The Young Agreement provides that the Company
will compensate Young by (a) issuing to him 200,000 shares of its restricted
common stock for his first year of service as a Director, and (b) agreeing to
issue to Young an additional 100,000 shares of restricted common stock after
he has completed one year of service as a Director. Based on the market price
of the Company's common stock when the issuance of the 200,000 shares was
authorized, the Company recorded compensation expense of $239,000 for the
year ended December 31, 1999.

Deferred compensation related to the Young Agreement totaled approximately
$973,500 at December 31, 1999 and represents the cost attributable to the
services Young has agreed to provide for the year ending December 31, 2000.
Such amount has been reported as a deduction from

Page 17

<PAGE>

8. STOCK-BASED COMPENSATION AND OTHER EXPENSES (continued)

stockholders' equity in the December 31, 1999 balance sheet. If the Young
Agreement is terminated early for any reason related to Young's breach of
contract or inability to perform the specified services, Young is required to
(1) return any unearned shares of stock on a pro rata basis and (2) if
applicable, waive his right to receive the additional 100,000 shares. If the
Young Agreement is terminated early because of the Company's breach of contract,
Young shall receive all 300,000 shares.

9. INCOME TAXES

As a result of the Reorganization, Cherokee's tax net operating loss ("NOL")
carryforward was eliminated by operation of tax law.

For the period June 24, 1992 (inception) through December 31, 1998, the
Company was considered a start-up entity for federal and state income tax
purposes. As a result, research and development and start-up expenses were
capitalized during such period for tax purposes, while such costs were
expensed as incurred for financial reporting purposes. This item is the only
significant temporary difference at December 31, 1999 and 1998. In addition,
in 1999, the Company recorded compensation expense of $239,000 related to
stock issued for services. Such expense is not deductible for income tax
reporting purposes.

The Company's tax NOL carryforward approximates $4,500,000 at December 31, 1999
and principally expires in 2019.

The Company's deferred tax asset approximated $1,520,000 and $1,710,000 at
December 31, 1999 and 1998, respectively. Because 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 deferred tax assets
during the years ended December 31, 1999 and 1998 is presented below:

<TABLE>
<S> <C>
Balance - December 31, 1997 $ 259,000

Adjustment for 1998 1,450,000
--------------
Balance - December 31, 1998 1,709,000

Adjustment for 1999 (190,000)
--------------
Balance - December 31, 1999 $ 1,519,000
--------------
--------------
</TABLE>

Page 18

<PAGE>

9. INCOME TAXES (continued)

In 1999 and 1998, an additional income tax benefit (and an equal amount of
valuation allowance) of approximately $60,000 and $88,000, respectively, was
allocated to items credited directly to stockholders' equity. In 1999 and 1998,
the Company recorded additional paid-in-capital related to stock option
accounting of approximately $160,000 and $235,000, respectively (Note 7).

The income tax benefit for the year ended December 31, 1998 differs from the
amount that would result from applying the federal statutory rate to the
pre-tax loss because of state income tax at a rate of approximately 5%. The
income tax expense for the year ended December 31, 1999 results principally
from a change in estimated start-up expenses deferred at December 31, 1998
for income tax reporting purposes. The components of the deferred income tax
expense (benefit) are set forth below for the years ended December 31, 1999
and 1998:

<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Federal $ 165,000 $ (1,220,000)
State 25,000 (230,000)
---------------- ---------------

$ 190,000 $ (1,450,000)
---------------- ---------------
---------------- ---------------
</TABLE>

10. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

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
September 2005. Rent expense under this lease increases 3% per annum. The
Company is also responsible for insurance, utilities, property taxes and common
area maintenance costs, which approximated $16,000 for the year ended December
31, 1999; such costs are subject to increase based on the lessor's actual
expenses. The Company has also leased a 10,000 square-foot warehouse for a
two-year period ending September 30, 2001 at an annual rent of approximately
$50,000 plus common area maintenance costs of $750 per month.

Future minimum rental payments required under these noncancelable operating
leases are as follows for the years ending December 31:

<TABLE>
<S> <C>
2000 $ 159,000
2001 146,500
2002 105,000
2003 89,500
-----------------

$ 500,000
-----------------
-----------------
</TABLE>

Page 19

<PAGE>

10. COMMITMENTS AND CONTINGENCIES (continued)
LEASE COMMITMENTS (continued)

Total rent expense approximated $142,000 and $60,000 for the years ended
December 31, 1999 and 1998, respectively.

COMMITMENT TO ISSUE COMMON STOCK AND OTHER MATTERS

In January 1999, the Company executed a contract to (a) memorialize the ongoing
manufacturing and consulting arrangement with MTD and Don Sullivan, and (b)
purchase at least 19,000 finished-product units from MTD in 1999 at a fixed
price. Such contract also requires the Company to execute an agreement whereby
50,000 post-Reorganization shares of its common stock will be issued at no cost
to Don Sullivan, contingent upon (1) his continued employment by MTD and (2) MTD
maintaining its existing business relationship with the Company (Note 8).

Although a definitive agreement regarding the stock issuance had not been
consummated as of March 10, 2000, the Company and Don Sullivan have agreed in
principle that, if the above conditions are not satisfied, the rights to such
common stock will be forfeited as follows:

<TABLE>
<CAPTION>
Number of
Forfeiture Date Shares Forfeited
- ---------------------------------- ------------------
<S> <C>
December 31, 2000 20,000
December 31, 2001 10,000
</TABLE>

Since the equity instrument discussed above has an exercise price of zero, its
grant date fair value of approximately $130,000 has been estimated based
exclusively on the market price of the Company's stock.

In December 1998, the Company entered into a preliminary agreement with a
Japanese corporation to license certain rights to manufacture and market the
Product in Asia. Since a further definitive agreement was not consummated in
1999, this agreement was effectively dissolved.

PURCHASE COMMITMENT AND RELATED CONTINGENT LIABILITY

At December 31, 1999, the Company had outstanding commitments of approximately
$2,070,000 to purchase finished goods from a vendor in China. Pending the
outcome of the proposed agreement with GE discussed in Note 1, the vendor has
agreed to suspend production of certain units representing approximately
$1,650,000 of such commitment. The Company has indemnified the vendor in the
amount of approximately $240,000 for any loss that may result from vendor-owned
components if such inventory becomes obsolete due to a change in the Product's
design.

Page 20

<PAGE>

11. GOING CONCERN AND LIQUIDITY CONSIDERATIONS

As discussed in Note 1, the Company manufactures and markets the
HydroMaid-Registered Trademark- water-powered garbage disposal. Since the
introduction of the HydroMaid-Registered Trademark- to the marketplace in
1998, sales have not been sufficient to provide positive operating cash flow.
The Company's operating cash flow deficit for the year ended December 31,
1999 was approximately $4,000,000 on sales of approximately 2,000 units.
Management believes that the Company will have sufficient cash to meet its
obligations for the year ending December 31, 2000 based upon the Company's
sale of common stock for approximately $3,400,000 in cash in January 2000 and
the Company's cash balances at December 31, 1999 of approximately $2,900,000.

12. ADVANCES TO/FROM RELATED PARTY

The Company periodically receives advances from and makes advances to PEI
relating to common expenses and shared resources. Management's policy is to
settle related party advances quarterly. During the year ended December 31,
1999, the Company received noninterest-bearing unsecured advances from PEI
totaling $1,448,774 and made repayments to PEI totaling $1,667,736. At
December 31, 1999, advances to related party totaled $167,495.

In 1998, Culley W. Davis made unsecured advances to the Company totaling
$1,478,467, including $1,427,000 of proceeds from sales of his Company stock
to other investors at $8 per share. Advances from related party totaled
$51,467 at December 31, 1998. In 1999, the Company repaid such amount in its
entirety.

The stock sold by Culley W. Davis was personally owned by him or PEI, and the
proceeds were advanced to the Company based on an agreement between the
parties. In December 1998, the Company issued 178,375 post-Reorganization
shares of common stock to Culley W. Davis valued at $8 per share as
reimbursement 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.

13. SUBSCRIBED COMMON STOCK AND WARRANTS

In December 1999, the Company agreed to accept an equity investment from a group
of investment funds associated with Bain Capital ("Bain") to purchase certain
restricted stock of the Company in a private offering. Pursuant to the related
agreement, 750,000 common shares were issued to Bain. Because the Company
received payment for such shares in the year 2000, the 750,000 shares have been
reported as subscribed stock at December 31, 1999.

In January 2000, the Company received payment for the 750,000 subscribed common
shares at a price of $4.44 per share and simultaneously issued 1,000,000
detached stock-purchase warrants at a price of $0.01 per warrant. Each warrant
entitles the owner, on or

Page 21

<PAGE>

13. SUBSCRIBED COMMON STOCK AND WARRANTS (continued)

before January 21, 2005, to (a) purchase one share of Company stock at a price
of $7.50 per share or (b) convert the warrant directly to common shares, using a
formula based on the then current market price of the Company's stock. If the
market price of the Company's common stock exceeds $10.00 for 30 consecutive
trading days and the average daily trading volume for such period exceeds
100,000 shares, the Company has the right to accelerate the expiration date of
the warrants to a date not earlier than 60 days after providing notice to that
effect.

The warrants discussed above (and any stock issued upon their exercise or
conversion) have not been registered under the Securities Act. Thus, such
warrants and any stock issued as a result thereof are restricted securities as
described in Note 6. Because of such restrictions and the magnitude of the
investment, management determined that it was appropriate to discount the then
current market price (approximately $5.00 per share) of the Company's common
stock in this transaction.

Based on the Black-Scholes stock option pricing model, the warrant conversion
price per unit, the market price of the Company's stock, and the assumptions
listed below, management has estimated that the issue-date fair value of such
warrants approximates $2,000,000. Such amount has been reported as subscribed
warrants in the accompanying December 31, 1999 balance sheet.

The assumptions used to estimate such fair value are as follows:

<TABLE>
<S> <C>
Expected life 2 years
Estimated volatility 90.0%
Risk-free interest rate 5.2%
Dividends Zero
</TABLE>

The Company has entered into an agreement with the investors who purchased the
stock and warrants described above to make a good faith effort under certain
circumstances to file a maximum of two effective registration statements under
the Securities Act.

Page 22

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

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,901,758
<SECURITIES> 0
<RECEIVABLES> 71,261
<ALLOWANCES> 0
<INVENTORY> 905,924
<CURRENT-ASSETS> 4,063,817
<PP&E> 946,921<F1>
<DEPRECIATION> 202,803
<TOTAL-ASSETS> 5,069,290
<CURRENT-LIABILITIES> 507,759
<BONDS> 0
0
0
<COMMON> 26,807
<OTHER-SE> 4,534,724
<TOTAL-LIABILITY-AND-EQUITY> 5,069,290
<SALES> 248,665
<TOTAL-REVENUES> 273,839
<CGS> 187,804
<TOTAL-COSTS> 187,804
<OTHER-EXPENSES> 3,906,582<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,605
<INCOME-PRETAX> (3,820,547)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,820,547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,820,547)
<EPS-BASIC> (.16)
<EPS-DILUTED> (.16)<F3>
<FN>
<F1>GROSS INVESTMENT IN PP&E, I.E. BEFORE DEPRECIATION DEDUCTION
<F2>SELLING 1,082,250; GENERAL 2,175,075; R&D 649,257
<F3>DILUTIVE EFFECT LESS THAN REPORTABLE LEVEL
</FN>

</TABLE>