UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
Commission file Number 000-24987
AEI ENVIRONMENTAL, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO
(State or Other Jurisdiction of Incorporation)
000-24987 36-4224726
(Commission File Number) (I.R.S. Employer Identification Number)
105 East First Street, Hinsdale, Illinois 42135
(Address of Principal Executive Offices) (Zip code)
(270) 586-8688
(Registrant's Telephone Number, Including Area Code)
CHUHAK & TECSON, P.C.
225 WEST WASHINGTON STREET, SUITE 1300
CHICAGO, IL 60606-3418
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(Name and Address of agent for service)
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Indicate by check mark 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 [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date:
Common Stock, No Par Value - 9,439,535 as of March 31, 2000.
Transitional Small Business Disclsure Format:
YES [X] NO [ ]
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FORWARD LOOKING STATEMENTS
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THIS FORM 10-QSB AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
AEI ENVIRONMENTAL, INC. (HEREINAFTER REFERRED TO AS "AEI" AND/OR
"COMPANY" AND/OR "REGISTRANT") OR ITS REPRESENTATIVES CONTAIN STATEMENTS
WHICH MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, FIFTEEN
U.S.C.A. SECTIONS 77Z-2 AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF AEI
AND MEMBERS OF ITS MANAGEMENT TEAM AS WELL AS THE ASSUMPTIONS ON WHICH
SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS
AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT
FACTORS CURRENTLY KNOWN TO MANAGEMENT THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE IN FORWARD-LOOKING STATEMENTS ARE SET
FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING
STATEMENTS INCLUDED AS EXHIBIT 99.1 TO THIS FORM 10-QSB, AND ARE HEREBY
INCORPORATED HEREIN BY REFERENCE. THE COMPANY UNDERTAKES NO OBLIGATION
TO UPDATE OR REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGED
ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED EVENTS OR CHANGES TO FUTURE
OPERATING RESULTS OVER TIME.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
AEI ENVIRONMENTAL, INC.
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
MARCH 31, 2000
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
BALANCE SHEET
March 31, 2000
ASSETS
CURRENT ASSETS
Cash $ 10,104
Receivables:
Trade $ 1,822
Interest on loans 7,188
Related party 10,000 19,010
Inventories:
Purchased parts 123,192
Finished products at test sites 51,800 174,992
Prepaid expenses 99,831
TOTAL CURRENT ASSETS 303,937
PROPERTY AND EQUIPMENT
Furniture and fixtures 74,469
Computer equipment and software 27,531
Leasehold improvements 25,819
127,819
Less accumulated depreciation and amortization (45,369)
TOTAL PROPERTY AND EQUIPMENT 82,450
OTHER ASSETS
Patents 95,535
Non-compete agreement (net of
accumulated amortization of $41,667) 58,333
Goodwill (net of accumulated amortization of $56,277) 619,044
Other intangible asset (net of accumulated amortization
of $9,821) 25,179
Loans receivable 150,000
Deposits 12,073
TOTAL OTHER ASSETS 960,164
TOTAL ASSETS $1,346,551
See accompanying Notes to Financial Statements.
<PAGE>
AEI ENVIRONMENTAL, INC.
(A Development Stage Company)
BALANCE SHEET
March 31, 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 333,051
Accrued expenses:
To related parties $ 215,000
To others 96,524 311,524
Advance from related party 297,000
Notes payable:
To related parties 275,400
To individuals 160,000 435,400
Current maturities of capital lease obligations 5,572
TOTAL CURRENT LIABILITES 1,382,547
LONG-TERM LIABILITIES
Capital lease obligations, less current maturities 8,663
STOCKHOLDERS' EQUITY
Common Stock, no par value,
40,000,000 shares authorized;
9,439,535 shares issued and outstanding 3,758,564
Preferred Stock, $100 par value,
10,000,000 shares authorized;
no shares issued and outstanding -
Stock subscriptions receivable (1,000)
Deficit accumulated during development stage (3,802,223)
TOTAL STOCKHOLDERS' EQUITY DEFICIENCY (44,659)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,346,551
See accompanying Notes to Financial Statements.
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<TABLE>
<CAPTION>
AEI ENVIRONMENTAL, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Periods of Nine and Three Months ended March 31, 2000 and for the
Period from April 30, 1998 (Date of Inception) to March 31. 2000
<S> <C> <C> <C>
Nine Months Three Months April 30, 1998
Ended Ended (Date of Inception)
March 31, 2000 March 31, 2000 to March 31, 2000
Sales $ 14,139 $ 14,139 $ 14,139
Cost of products sold 6,668 6,668 6,668
Gross profit 7,471 7,471 7,471
Expenses:
Management fee 135,000 45,000 135,000
Consulting fee 150,000 - 150,000
Research and development 526,922 - 1,624,416
Loss on contract 113,589 113,589 172,930
Selling, general and administrative 1,086,312 368,623 1,741,416
Total expenses 2,011,823 527,212 3,823,762
Interest income (5,671) (1,890) (35,212)
Interest expense 10,670 9,853 21,144
Total interest (income) expense 4,999 7,963 (14,068)
NET LOSS ($2,009,351) ($527,704) ($3,802,223)
Net loss per share ($0.23) ($0.06)
Weighted average number of
common shares outstanding 8,679,475 9,154,590
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
AEI ENVIRONMENTAL, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Periods of Nine and Three Months ended March 31, 2000
<S> <C> <C>
Nine Months Three Months
Ended Ended
March 31, 2000 March 31, 2000
Cash Flows from Operating Activities:
Net loss ($ 2,009,351) ($ 527,704)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Provision for depreciation and amortization 89,807 31,646
Change in accounts receivable 8,622 (1,822)
Change in interest receivable (2,046) (1,891)
Change in inventories (174,992) (174,992)
Change in costs and estimated
earnings in excess of billings 16,892 50,000
Change in prepaid expenses (80,728) (33,777)
Change in accounts payable and bank overdraft 170,021 (17,136)
Change in accrued expenses 255,281 75,811
Total adjustments 282,857 (72,161)
Net cash (used in) operating activities (1,726,494) (599,865)
Cash Flows From Investing Activities:
Purchase of property and equipment (40,238) (23,821)
Patents and deposits (23,856) (26,256)
Net cash (used in) investing activities (64,094) (50,077)
Cash Flows from Financing Activities:
Repayments on loan receivable 15,000 -
Advance to related party (10,000) -
Proceeds from related party advances 297,000 217,593
Proceeds from notes payable 435,400 435,400
Repayments of capital lease obligations (6,984) (1,262)
Change in restricted cash 50,000 -
Proceeds from sale of Common Stock 955,324 7,024
Net cash provided by financing activities 1,735,740 658,755
Net Increase (Decrease) in Cash (54,848) 8,813
Cash at beginning of period 64,952 1,291
CASH AT END OF PERIOD $ 10,104 $ 10,104
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
AEI ENVIRONMENTAL, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the Period from April 30, 1998 (Date of Inception) to March 31. 2000
Cash Flows from Operating Activities:
Net loss ($ 3,802,223)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Provision for depreciation and amortization 153,135
Accrued penalties and interest in relation to debt
conversion 25,409
Pre-merger costs incurred by original corporation 4,200
Change in accounts receivable (1,822)
Change in interest receivable (7,188)
Change in inventories (174,992)
Change in prepaid expenses (99,831)
Change in accounts payable and bank overdraft 333,051
Change in accrued expenses 311,524
Total adjustments 543,486
Net cash (used in) operating activities (3,258,737)
Cash Flows From Investing Activities:
Purchase of property and equipment (69,567)
Patents and deposits (107,607)
Net cash (used in) investing activities (177,174)
Cash Flows from Financing Activities:
Repayments on loan receivable 15,000
Advances on loans receivable (175,000)
Proceeds from related party advances 297,000
Proceeds from notes payable 435,400
Repayments of capital lease obligations (19,340)
Capital contributions
(net of negotiation fees of $305,000) 2,892,955
Net cash provided by financing activities 3,446,015
Net Increase (Decrease) in Cash 10,104
Cash at beginning of period -
CASH AT END OF PERIOD $ 10,104
See accompanying Notes to Financial Statements.
<PAGE>
AEI ENVIRONMENTAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Development Stage Activities
The Company has been in the development stage since its formation
on April 30, 1998. It designs, manufactures, and installs proprietary
computerized cooling, odor control and waste monitoring systems for livestock,
dairy, swine and poultry operations and provides related supply products to
system users. The systems economically reduce and manage facility
temperatures and natural odor control for greater production efficiencies
through farm management software and hardware technologies. Expansion of the
technology has more recently lead to possible industrial warehouse and
municipal applications.
The Company expects to negotiate contacts with commercial
livestock, swine and poultry operations for the installation of these systems
and may finance these contracts through installment payments from the customer
or by granting credit to the customer until the system begins operating.
The Company is relying on its own estimates of the size of the
potential market for its products based on trends showing increases in the
size of livestock, dairy and poultry operations, the growing environmental
sensitivity and resulting economic stimuli to deal with animal health, odor
and waste monitoring in a safe and controlled manner, and its assumption that
productivity increases brought about by its products will create economic
advantages which will justify their costs.
During the period of three months ended March 31, 2000, the
Company sold its first environmental system controller and other related
supplies. At March 31, 2000, several cooling and odor control systems are at
trial sites. The Company expects to continue to evolve from its development
stage to the operating stage with the continuing refinement of its product
lines, and to complete installation of full-scale systems under contracts in the
fourth quarter of this fiscal year.
(b) Basis of Presentation
The financial information presented in the accompanying financial
statements reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. See Note 2 of Notes to
Financial Statements. Results shown for interim periods are not necessarily
indicative of the results for a full fiscal year. The interim financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Form SB-1, filed April 21, 2000,
for the fiscal year ended June 30, 1999.
<PAGE>
(c) Method of Accounting for Contracts
Revenues from and costs of the installations are recognized under
the percentage-of-completion method of accounting for contracts. Under the
percentage of completion method, income is recognized in the ratio that the
costs incurred on a project bear to the estimated total contract cost. This
method is used because management considers total cost to be the best
available measure of progress on contracts. Because of inherent uncertainties
in estimating costs, it is at least reasonably possible that the estimates
used will change within the near term. Adjustments to cost estimates are made
periodically, and expected losses incurred on contracts in progress are
charged to operations in the period such losses are determined. The aggregate
of costs incurred and income recognized on uncompleted contracts in excess of
related billings is shown as a current asset, and billings in excess of cost
and income recognized are shown as a current liability.
(d) Fixed Assets
Fixed assets, including capitalized equipment acquired by leases,
are stated at cost. Depreciation is computed using the straight-line and
accelerated methods, over the respective assets' estimated useful lives.
NOTE 2 - BASIS OF ACCOUNTING FOR EQUITY SECURITIES ISSUED
FOR OTHER THAN CASH
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") issued by the FASB, is effective for
specific transactions entered into after December 15, 1995. The disclosure
requirements of SFAS 123 are effective for financial statements for fiscal
years beginning no later than December 15, 1995. The new standard established
a fair value method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods or services from non-employees
in exchange for equity instruments. The Company is in the process of
evaluating various agreements it has entered into that may meet the
requirements for accounting recognition under SFAS 123, and, if applicable, it
expects to adapt provisions of the new standard prior to the end of its fiscal
year on June 30, 2000.
NOTE 3 - NOTE PAYABLE TO RELATED PARTIES
During the period of three months ended March 31, 2000, the Company received
the proceeds of a note, signed by related parties, from a bank. The Company
pledged all inventory, accounts receivable, equipment and intangibles as
collateral for said note.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the historical
financial information included in Item 1 of this Quarterly Report.
Results of Operations
During the period from April 30, 1998 through December 31, 1999, the Company
engaged in no significant operations other than organizational activities,
acquisition of capital, technology development, establishment of strategic
partner relationships, and preparation for registration of its securities
under the Securities Exchange Act of 1934, as amended. The Company recorded
no revenues during this period.
During the period of three months ended March 31, 2000, the Company recorded
the first sale of an environmental system controller and other related
supplies. At March 31, 2000, a number of cooling and odor control systems are
at trial swine and poultry sites, and it is anticipated that contracts for
these installations will be finalized in the fourth quarter of the fiscal year
or the units will be relocated to other potential customer locations. Also
during the third quarter, the Company recognized a loss of approximately
$100,000 associated with a waste treatment contract.
During the periods of nine and three months ended March 31, 2000, the Company
incurred net losses of $2,009,351 and $527,704, respectively. At March 31,
2000, the Company has accrued fees of $150,000 payable to the venture capital
firm responsible for orchestrating the September 1999 merger with its present
publicly-traded corporate entity and additional interim financing. Under
terms of consulting agreements, the Company recorded management fees of
$135,000,000 and $90,000 during the nine and three-month periods ended March
31, 2000. General and administrative expenses in the three-month period ended
March 31, 2000 increased over corresponding prior quarterly periods with the
addition of personnel, rental of warehouse facilities, and the initiation of
marketing programs.
For the current fiscal year, the Company anticipates incurring a net loss as a
result of research and development activities during the first half of the
year, the aforementioned waste treatment contract, organizational expenses,
marketing start-up programs and costs associated with registration under the
Securities Exchange Act of 1934.
Liquidity and Capital Resources
The Company is concluding its development stage research and development
activities. The Company currently has no line of credit. During the period of
three months ended March 31, 2000, the Company received the proceeds of a
$250,000 note, signed by related parties, from a bank. The Company
pledged all inventory, accounts receivable, equipment and intangibles as
collateral for said note. In addition, the Company signed notes payable
totaling $160,000 to two individuals in March 2000, and additional notes with
these same individuals have provided further working capital in the fourth
quarter. The
<PAGE>
aforementioned venture capital firm has advanced the Company $297,000 as of
March 31, 2000.
Need for Additional Financing
The Company believes that its existing capital sources will be sufficient to
meet its cash needs, including the costs of compliance with the continuing
reporting requirements of the Securities Exchange Act of 1934, as amended, for
a period of approximately one year. There is no assurance, however, that the
available funds will ultimately prove to be adequate to allow it to fully
execute its business plan, and the Company's needs for additional financing
are likely to increase substantially.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121") issued by the FASB, is effective for financial statements for
fiscal years beginning after December 15, 1995. The standard establishes new
guidelines regarding when impairment losses on long-lived assets, which
include plant and equipment, certain identifiable intangible assets, and
goodwill, should be recognized and how impairment losses should be measured.
The Company does not expect adoption to have a material effect on its
financial position or results of operations.
See Note 2 of Notes to Financial Statements regarding Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") issued by the FASB.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
Neither the Registrant nor any of its affiliates are a party, nor is
any of their property subject, to material pending legal proceedings or
material proceedings known to be contemplated by governmental authorities.
ITEM 2. Changes in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
On September 13, 1999, the Company completed a merger with Oak Brook
Capital I, Inc., ("OBC") a fully reporting 1934 Act public SEC shell company,
which immediately thereafter changed its name to AEI Environmental, Inc. The
merger was done specifically to enhance the Company's ability to have several
options for future capital formation and to aid in attracting additional key
employees. The NASD 15c211 disclosure form has been filed with the National
Association of Securities Dealers (NASD) and the Company is expecting to begin
OTC trading before the end of the calendar year.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8 K
a. Exhibits
None
b. Reports on Form 8 K
None
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO DESCRIPTION
99.1 Safe Harbor Compliance Statement
______________________
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AEI ENVIRONMENTAL, INC.
__________________________
May 12, 2000 Mark Margason
Secretary
__________________________
May 12, 2000 Tom F. Perles
Chief Accounting Officer
<PAGE>
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), 15 U.S.C.A. Sections 77z-2 and 78u-5 (Supp. 1996), Congress encouraged
public companies to make "forward-looking statements" by creating a safe
harbor to protect companies from securities law liability in connection with
forward-looking statements. AEI Environmental, Inc. ("AEI" or the "Company")
intends to qualify both its written and oral forward-looking statements for
protection under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on
various expectations and assumptions concerning future events and they are
subject to numerous known and unknown risks and uncertainties which could
cause actual events or results to differ materially from those projected. Due
to those uncertainties and risks, the investment community is urged not to
place undue reliance on written or oral forward-looking statements of AEI. The
Company undertakes no obligation to update or revise this Safe Harbor
Compliance Statement for Forward-Looking Statements (the "Safe Harbor
Statement") to reflect future developments. In addition, AEI undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time.
AEI provides the following risk factor disclosure in connection with its
continuing effort to qualify its written and oral forward-looking statements
for the safe harbor protection of the Reform Act and any other similar safe
harbor provisions. Important factors currently known to management that could
cause actual results to differ materially from those in forward-looking
statements include the disclosures contained in the Quarterly Report on Form
10-QSB to which this statement is appended as an exhibit and also include the
following:
FORWARD LOOKING STATEMENTS
THIS QUARTERLY REPORT AND OTHER STATEMENTS ISSUED OR MADE FROM TIME TO TIME BY
AEI ENVIRONMENTAL, INC. (HEREINAFTER REFERRED TO AS "AEI" AND/OR "COMPANY") OR
ITS REPRESENTATIVES CONTAIN STATEMENTS WHICH MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED BY THE PRIVATE
<PAGE>
SECURITIES LITIGATION REFORM ACT OF 1995. FIFTEEN U.S.C.A. SECTIONS 77Z-2
AND 78U-5 (SUPP. 1996). THOSE STATEMENTS INCLUDE STATEMENTS REGARDING
THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF AEI AND MEMBERS OF ITS
MANAGEMENT TEAM AS WELL AS THE ASSUMPTIONS ON WHICH SUCH STATEMENTS ARE BASED.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES,
AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN FORWARD-
LOOKING STATEMENTS ARE SET FORTH IN THE SAFE HARBOR COMPLIANCE STATEMENT FOR
FORWARD-LOOKING STATEMENTS INCLUDED ASEXHIBIT 99.1 TO THIS FORM 10QSB, AND
ARE HEREBY INCORPORATED HEREIN BY REFERENCE.
THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE FORWARD-LOOKING
STATEMENTS TO REFLECT CHANGED ASSUMPTIONS, THE OCCURRENCE OF UNANTICIPATED
EVENTS OR CHANGES TO FUTURE OPERATING RESULTS OVER TIME.
RISK FACTORS
1. Year 2000.
The Company's currently installed computer systems, software products or other
business systems, and those of the Company's customers, vendors or resellers,
working either alone or in conjunction with other software or systems, have
experienced no significant problems in accepting input of, storing,
manipulating and/or processing dates for the years 1999, 2000 or thereafter
without error or interruption (commonly known as the "Year 2000" problem).
2. Control by Principal Shareholders, Officers and Directors.
The Company's principal shareholders, officers and directors beneficially own
approximately forty-six (46%) of the Company's Common Stock. As a result,
such persons may have the ability to control the Company and direct its
affairs and business. Such concentration of ownership may also have the
effect of delaying, deferring or preventing change in control of the Company.
3. Conflicts of Interest.
Certain conflicts of interest exist between the Company and its officers and
directors. They have other business interests to which they devote their
attention, and they may be expected to continue to do so although management
time should be devoted to the business of the Company. As a result, conflicts
of interest may arise that can be resolved only through their exercise of such
judgment as is consistent with his fiduciary duties to the Company.
<PAGE>
4. Possible Need for Additional Financing.
The Company has limited funds, and such funds may not be adequate to take
advantage of any available business opportunities. The ultimate success of
the Company may depend upon its ability to raise additional capital. The
Company has not investigated the availability, source, or terms that might
govern the acquisition of additional capital and will not do so until it
determines a need for additional financing. If additional capital is needed,
there is no assurance that funds will be available from any source or, if
available, that they can be obtained on terms acceptable to the Company. If
not available, the Company's operations will be limited to those that can be
financed with its modest capital.
5. Regulation of Penny Stocks.
The Company's securities, when available for trading, will be subject to a
Securities and Exchange Commission rule that imposes special sales practice
requirements upon broker-dealers who sell such securities to persons other
than established customers or accredited investors. For purposes of the rule,
the phrase "accredited investors" means, in general terms, institutions with
assets in excess of $5,000,000, or individuals having a net worth in excess of
$1,000,000 or having an annual income that exceeds $200,000 (or that, when
combined with a spouse's income, exceeds $300,000). For transactions covered
by the rule, the broker-dealer must make a special suitability determination
for the purchaser and receive the purchaser's written agreement to the
transaction prior to the sale. Consequently, the rule may affect the ability
of broker-dealers to sell the Company's securities and also may affect the
ability of purchasers to sell their securities in any market that might
develop.
In addition, the Securities and Exchange Commission has adopted a number of
rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1,
15g-2, 15g-3, 15g-4, 15g-5, 15g-6, and 15g-7 under the Securities Exchange Act
of 1934, as amended. Because the securities of the Company may constitute
"penny stocks" within the meaning of the rules, the rules would apply to the
Company and to its securities. The rules may further affect the ability of
owners of shares to sell the securities of the Company in any market that
might develop for them.
Shareholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include (i)
control of the market for the security by one or a few broker-dealers that are
often related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) "boiler room" practices involving high-pressure sales tactics
and unrealistic price projections by inexperienced sales persons; (iv)
excessive and undisclosed bid-ask differentials and markups by selling
broker-dealers; and (v) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the
<PAGE>
resulting inevitable collapse of those prices and with consequent investor
losses. The Company's management is aware of the abuses that have occurred
historically in the penny stock market. Although the Company does not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to the Company's securities.
6. No Operating History.
The Company has no significant operating history and limited revenues from
operations. The Company faces all of the risks of a new business and the
special risks inherent in the investigation, acquisition, or involvement in a
new business opportunity. The Company must be regarded as a new or "start-up"
venture with all of the unforeseen costs, expenses, problems, and difficulties
to which such ventures are subject.
7. Reporting Requirements May Delay Or Preclude Acquisition.
Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act"),
requires companies subject thereto to provide certain information about
significant acquisitions, including certified financial statements for the
company acquired, covering one or two years, depending on the relative size of
the acquisition. The time and additional costs that may be incurred by some
target entities to prepare such statements may significantly delay or
essentially preclude consummation of an otherwise desirable acquisition by the
Company. Acquisition prospects that do not have or are unable to obtain the
required audited statements may not be appropriate for acquisition so long as
the reporting requirements of the 1934 Act are applicable.
8. Lack of Diversification.
Because of the limited financial resources that the Company has, it is
unlikely that the Company will be able to diversify its acquisitions or
operations. The Company's probable inability to diversify its activities into
more than one area will subject the Company to economic fluctuations within a
particular business or industry and therefore increase the risks associated
with the Company's operations.
9. Indemnification of Officers and Directors.
The Company's Articles of Incorporation provide for the indemnification of its
directors, officers, employees, and agents, under certain circumstances,
against attorney's fees and other expenses incurred by them in any litigation
to which they become a party arising from their association with or activities
on behalf of the Company. The Company will also bear the expenses of such
litigation for any of its directors, officers, employees, or agents, upon such
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person's promise to repay the Company therefore if it is ultimately determined
that any such person shall not have been entitled to indemnification. This
indemnification policy could result in substantial expenditures by the Company
which it will be unable to recoup.
10. Director's Liability Limited.
The Company's Articles of Incorporation exclude personal liability of its
directors to the Company and its stockholders for monetary damages for breach
of fiduciary duty except in certain specified circumstances. Accordingly, the
Company will have a much more limited right of action against its directors
than otherwise would be the case. This provision does not affect the
liability of any director under federal or applicable state securities laws.
11. No Foreseeable Dividends.
The Company has not paid dividends on its Common Stock and does not anticipate
paying such dividends in the foreseeable future.
12. No Public Market Exists.
There is no public market for the Company's Common Stock, and no assurance can
be given that a market will develop or that a shareholder ever will be able to
liquidate his investment without considerable delay, if at all. If a market
should develop, the price may be highly volatile. Factors such as those
discussed in this "Risk Factors" section may have a significant impact upon
the market price of the securities offered hereby. Owing to the low price of
the securities, many brokerage firms may not be willing to effect transactions
in the securities. Even if a purchaser finds a broker willing to effect a
transaction in these securities, the combination of brokerage commissions,
state transfer taxes, if any, and any other selling costs may exceed the
selling price. Further, many lending institutions will not permit the use of
such securities as collateral for any loans.
13. Rule 144 Sales.
All of the outstanding shares of Common Stock held by present stockholders are
"restricted securities" within the meaning of Rule 144 under the Securities
Act of 1933, as amended. As restricted shares, these shares may be resold
only pursuant to an effective registration statement or under the requirements
of Rule 144 or other applicable exemptions from registration under the Act and
as required under applicable state securities laws. Rule 144 provides in
essence that a person who has held restricted securities for a prescribed
period may, under certain conditions, sell every three months, in brokerage
transactions, a number of shares that does not exceed the greater of 1.0% of a
company's outstanding common stock or the average weekly trading volume during
the four calendar weeks prior to the sale.
As a result of revisions to Rule 144 which became effective on or about April
29, 1997, there will be no limit on the amount of restricted securities that
may be sold by a nonaffiliated shareholder after the restricted securities have
been held by the owner for a period of two years. A sale under Rule 144 or \
under any other exemption from the Act, if available, or pursuant to subsequent
registrations of shares of Common Stock of present stockholders, may have a
depressive effect upon the price of the Common Stock in any market that may
develop.
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14. Blue Sky Considerations.
Because the securities registered hereunder have not been registered for
resale under the blue sky laws of any state, the holders of such shares and
persons who desire to purchase them in any trading market that might develop
in the future, should be aware that there may be significant state blue-sky
law restrictions upon the ability of investors to sell the securities and of
purchasers to purchase the securities.
