UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
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 05-0499525
(Commission File Number) (I.R.S. Employer Identification Number)
215 Bluegrass Road, Suite C 42135
(Address of Principal Executive Offices) (Zip code)
(877) 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)
<PAGE>
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, $.001 Par Value - 10,271,780 as of
September 30, 1999.
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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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AEI ENVIRONMENTAL, INC.
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND THE PERIOD
FROM APRIL 30, 1998 (DATE
OF INCEPTION) TO SEPTEMBER 30, 1999
<PAGE>
December 8, 1999
AEI Environmental, Inc.
Hinsdale, Illinois
We have compiled the accompanying balance sheet of AEI Environmental, Inc. (a
development stage company) as of September 30, 1999, and the related
statements of operations, changes in stockholders' equity and retained deficit
accumulated during the development stage, and cash flows for the three months
then ended and for the period from April 30, 1998 (date of inception) to
September 30, 1999, and the supplementary information contained in Schedule
B-1 for the periods then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting, in the form of financial statements,
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not
express an opinion or any other form of assurance on them.
The accompanying financial statements have been prepared assuming the company
will continue as a going concern. As shown in the financial statements, the
Company has incurred considerable cost in organizing its business and
establishing itself in the marketplace during the development stage. Its
ability to remain viable depends on a combination of generating revenue before
exhausting its present investment stake and/or its ability to obtain
additional capital. Management's plans in regard to these matters are
described in Note 2 and Note 5. The financial statements do not contain any
adjustments which may result from the outcome of this uncertainty.
<PAGE>
EXHIBIT A
AEI Environmental, Inc.
(A Development Stage Company)
BALANCE SHEET
September 30, 1999
(See Accountants' Compilation Report)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 7,064
Accounts Receivable 3,098
Interest Receivable 3,407
Costs and Estimated Earnings
In Excess of Billings 35,000
Prepaid Expenses 9,656
Total Current Assets $ 58,225
PROPERTY AND EQUIPMENT
Furniture and Fixtures 35,651
Computer Equipment and Software 20,458
Leasehold Improvements 25,819
_______
81,928
Less: Accumulated Depreciation (29,108)
_______
Net Property and Equipment $ 52,820
OTHER ASSETS
Patents 77,719
Non-Compete Agreement (Net of
Accumulated Amortization of $25,000) 75,000
Goodwill (Net of Accumulated Amortization
of $33,766) 641,555
Other Intangible Asset (Net of Accumulated
Amortization of $3,987) 31,013
Loans Receivable 150,000
Restricted Cash 50,000
Deposits 3,633
_______
Total Other Assets 1,028,920
TOTAL ASSETS $1,139,965
The accompanying notes are an integral part of this financial statement.
<PAGE>
EXHIBIT A
AEI Environmental, Inc.
(A Development Stage Company)
BALANCE SHEET
September 30, 1999
(See Accountants' Compilation Report)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft $ 36,527
Current Portion - Capital Lease Obligations 3,985
Accounts Payable 239,873
Accrued Expenses 129,140
Total Current Liabilities $ 409,525
LONG-TERM LIABILITIES
Long-Term Portion - Capital Lease Obligations 6,624
STOCKHOLDERS' EQUITY
Common Stock, No Par Value
40,000,000 Shares Authorized;
8,597,035 Shares Issued and Outstanding 3,390,440
Preferred Stock, $100 Par Value,
10,000,000 Shares Authorized; 0 Shares
Issued and Outstanding -
Stock Subscriptions Receivable (41,000)
Deficit Accumulated During the
Development Stage (2,625,624)
__________
Total Stockholders' Equity 723,816
_______
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,139,965
<F1> The accompanying notes are an integral part of this financial
statement.
<PAGE>
EXHIBIT B
AEI Environmental, Inc.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For the Three Months ended September 30, 1999 and for the
Period from April 30, 1998 (Date of Inception) to September 30, 1999
(See Accountants' Compilation Report)
Three Months April 30, 1998
ended (Date of Inception)
September 30, 1999 to September 30, 1999
_________________ _____________________
Expenses
Research and Development Expenses $ 369,318 $ 1,426,827
Loss on Contract - 59,341
Operating Expenses 468,022 1,161,747
Total Expenses 837,340 2,647,915
Loss From Development Stage Activities (837,340) (2,647,915)
____________ ___________
Other Income/(Expense)
Miscellaneous Income 4,986 33,164
Interest Expense (400) (10,873)
____________ ___________
Total Other Income/(Expense) 4,586 22,291
____________ ___________
NET LOSS $ (832,754) $(2,625,624)
The accompanying notes are an integral part of this financial statement.
<TABLE>
<CAPTION>
EXHIBIT C
AEI Environmental, Inc.
(A Development Stage Company)
Statements of Changes in Stockholders' Equity and
Retained Deficit Accumulated During the Development Stage
For the Three Months Ended September 30, 1999 and for the
Period From April 30, 1998 (Date of Inception) to September 30, 1999
(See Accountants' Compilation Report)
Agtech Environmental, Inc. AEI Environ. Deficit
Class A Class B Class C (F/K/A Oak Accum.
$.01 Par Add'l $.01 Par Add'l $.01 Par Add'l Brook Cap. I, During the Stock
Date ofValue Paid-in Value Paid-in Value Paid-in Inc., No Par Development Subscrip. Stockhold.
Trans. Common Capital Common Capital Common Capital Value Common Stage Receiv. Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
(no par
value) of
AEI
Environmental,
Inc. 04/30 $ 3,965 $ (3,965) $ 0 $ 0 $ 19,825 $ (19,825) $ 0 $ 0 $ 0 $ 0
Common Stock
(no par value)
of Oak Brook
Capital I, Inc. 4,200 4,200
Shares issued
pursuant to
consulting June&
agreements Sept.,
1998 700 34,300 35,000
Shares issued
in connection
with business
acquisition 12/31 8,000 792,000 800,000
Shares granted
to employees
of MPI 05/04 871 (871) 0
Shares issued
as incentive
bonus 15,000 15,000
Sale of stock 22,904 1,422,684 28,416 177,126 1,651,130
Exercise of
stock options 700 700
Conversion of
shares from
debt agreem. 06/30 3,755 296,655 300,410
Net(loss) from
April 30, 1998
(date of
inception) to
June 30, 1999 06/30 (1,792,870) (1,792,870)
Balance June
30, 1999 32,024 1,749,674 23,871 791,129 48,241 157,301 4,200 (1,792,870) 0 1,013,570
Sale of stock 5,400 534,600 540,000
Subscriptions
of Stock Sept.,
1999 4,100 36,900 (41,000) 0
Exercise of
stock
options Sept.,
1999 1,000 2,000 3,000
Common Stock
Retired at
Time of Merger09/13 (42,524)(2,321,174) (25,871) (791,129) (48,241) (157,301) (3,386,240)
Common Stock
(no par value)
Issued at Time
of Merger 09/13 3,386,240 3,386,240
Net loss for
the Three
Months Ended
September 30,
1999 09/30 (832,754) (832,754)
Balance
September 30,
1999 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $3,390,440 $(2,625,624) $ (41,000) $ 723,816
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT D
AEI Environmental, Inc.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For the Three Months ended September 30, 1999 and for the
Period From April 30, 1998 (Date of Inception) to September 30, 1999
(See Accountants' Compilation Report)
<S> <C> <C>
Three Months April 30, 1998
End (Date of Inception)
September 30, 1999 to September 30, 1999
Cash Flows from Operating Activities
Net Loss $ (832,754) $ (2,625,624)
Adjustments to Reconcile Net Loss to
Net Cash (Used) by Operating Activities:
Depreciation and Amortization 28,533 91,861
Accrued Penalties and Interest in Relation
to Debt Conversion - 25,409
Pre-Merger Costs Incurred by
Original Corporation - 4,200
Change in Accounts Receivable 7,346 (3,098)
Change in Interest Receivable 1,735 (3,407)
Change in Costs and Estimated
Earnings in Excess of Billings (18,108) (35,000)
Change in Prepaid Expenses 9,447 (9,656)
Change in Bank Overdraft 36,527 36,527
Change in Accounts Payable 76,843 239,873
Change in Accrued Expenses 77,101 129,140
Total Adjustments 219,424 475,849
Net Cash (Used) by Operating Activities (613,330) (2,149,775)
Cash Flows From Investing Activities:
Purchase of Property and Equipment - (29,328)
Patent Development - (77,719)
Deposits 2,400 (3,633)
Net Cash Provided (Used) by Investing Activities 2,400 (110,680)
The accompanying notes are an integral part of this financial statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT D
AEI Environmental , Inc.
STATEMENT OF CASH FLOWS
For the Three Months ending September 30, 1999 and for the
Period from April 30, 1998 (Date of Inception) to September 30, 1999
(See Accountants' Compilation Report)
<S> <C> <S>
Three Months April 30, 1998
Ended (Date of Inception)
September 30, 1999 to September 30, 1999
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments on Loans Receivable $ 15,000 $ 15,000
Advances on Loans Receivable - (165,000)
Capital Contributions (Net of Negotiation Fees
of $305,000 543,000 2,484,831
Capital Lease Repayments (4,958) (17,312)
Increase in Restricted Cash - (50,000)
Net Cash Provided by Financing Activities 553,042 2,267,519
Net Increase (Decrease) in Cash and Cash
Equivalents (57,888) 7,064
Cash and Cash Equivalents, Beginning 64,952 -
Cash and Cash Equivalents, Ending $ 7,064 $ 7,064
Supplemental Disclosures:
Interest Paid $ 400 $ 1,464
Income Taxes Paid $ 0 $ 0
Non - Cash Investing and Financing Activities:
Assets Acquired in Exchange for Stock:
Goodwill $ - $ 675,321
Non-Compete Agreement - 100,000
Other Intangible Assets - 35,000
Property and Equipment - 24,679
$ 835,000
The accompanying notes are an integral part of this financial statement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT D
AEI Environmental , Inc.
STATEMENT OF CASH FLOWS
For the Three Months ending September 30, 1999 and for the
Period from April 30, 1998 (Date of Inception) to September 30, 1999
(See Accountants' Compilation Report)
<S> <C> <C>
Three Months April 30, 1998
Ended (Date of Inception)
September 30, 1999 to September 30, 1999
Stock Issued in Lieu of Payments of
Expenses $ - $ 25,409
Stock Subscriptions Receivable $ 41,000 $ 41,000
Equipment Purchased by Capital Lease $ - $ 27,921
The accompanying notes are an integral part of this financial statement.
</TABLE>
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 expects to design, manufacture, and
install waste treatment and cooling systems for dairy and
livestock operations and to supply necessary chemical products to
system users.
The Company expects to negotiate contacts with commercial
livestock operations for the installation of these systems and
may finance these contracts through a series of progress 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 size of livestock and dairy operations, the growing
environmental sensitivity and resulting economic stimuli to deal
with waste products 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.
The Company expects to evolve from the development stage to the
operating stage with the continuing refinement of its product
lines and to commence delivering systems under contracts in the
second quarter of this fiscal year.
(b) Method of Accounting
Assets, liabilities, revenues and expenses are recognized on the
accrual method of accounting, with revenues and costs of
installation to be 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
cost incurred bears to the estimated total 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.
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) Use of Estimates
The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
(d) Basis for Assigning Amounts to Equity Securities Issued for Other
Than Cash
Shares of common stock issued for other than cash have been assigned
amounts equivalent to the fair value of the service or assets
received in the exchange.
(e) Cash and Cash Equivalents
The Company considers all short-term investments in interest-bearing
accounts, securities, and other instruments with an original
maturity of three months or less, to be equivalent to cash.
(f) Allowance for Doubtful Accounts
Accounts receivable are reviewed periodically by management to
determine the adequacy of the allowance for doubtful accounts.
Amounts due from related parties are considered in relation to
their individual agreements. Based upon management's evaluation
as of September 30, 1999, an allowance for doubtful trade accounts
was not considered necessary.
(g) 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 following estimated useful
lives:
Years
Furniture and Fixtures 5
Computer Equipment and Software 5
Leasehold Improvements 5
<PAGE> AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) Fixed Assets (Continued)
Amortization expense on assets acquired under capitalized leases is
included with depreciation expense of owned assets. Depreciation
expense for the three months ended September 30, 1999 and from
April 30, 1998 (date of inception) to September 30, 1999 was
$5,905 and $29,108 respectively.
(h) Organizational Expenses
In April, 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-5,
Reporting on the Costs of Start-up Activities, which requires
costs relating to start-up activities and organizational expenses
to be expensed as incurred. The Company has adopted this SOP
during its development stage, and accordingly, these costs, in the
amount of $61,358, have been expensed for the period from April
30, 1998 (date of inception) to September 30, 1999.
(i) Patents
The Company has capitalized certain expenditures relating to patent
search and the development of a prototype of its waste treatment
technology. Although the Company had not yet applied for a patent
for its cooling technology at September 30, 1999, it is the intent
of management to patent the system upon completion of testing of
the final prototype.
(j) Non-Compete Agreement
In December 1998, the Company purchased substantially all of the
assets and other intangibles of Numan Industries, Inc. in exchange
for 800,000 shares of common stock. In connection with this
purchase, the Company entered into a covenant not to compete with
the owners (Covenantors) of the Seller. The Covenantors have
agreed that for a period of three years they will not directly or
indirectly service any customer of the Company or engage in any
business competitive with the Company. The intangible asset is
being amortized over the term of the agreement. Amortization on
the covenant not to compete for the three months ended September
30, 1999 and for the period from April 30, 1998 (date of
inception) to September 30, 1999 was $8,379 and $25,000,
respectively.
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) Goodwill
The asset, "Goodwill" relates to the purchase of Numan Industries,
Inc. as described above and is being amortized over fifteen years.
Amortization expense of goodwill for the three months ended
September 30, 1999 and for the period from April 30, 1998 (date of
inception) to September 30, 1999 was $11,317 and $33,766,
respectively.
(l) Other Intangible Assets
On September 1, 1998, the Company entered into an agreement with
an agency to assist in acquiring state and Federal funding for the
Company's research activities. Common stock valued at $12,500 was
issued in exchange for these services.
During 1999, the company exchanged Common Stock valued at $22,500
for consulting services.
These assets are being amortized over three years. Amortization
expense of other intangible assets for the three months ended
September 30, 1999 and for the period from April 30, 1998 (date of
inception) to September 30, 1999 was $2,932 and $3,987 respectively.
(m) Research and Development
Research and development costs incident to new product development
are charged to the respective expense category when the costs are
incurred.
(n) Advertising
The Company follows the policy of charging the costs of
advertising to expense as incurred.
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(o) Income taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to differences between
the bases of certain assets and liabilities for financial and tax
reporting. Deferred tax assets and liabilities represent the
future tax consequences of those differences, which will either be
taxable when the assets and liabilities are recovered or settled.
Valuation allowances are established, if necessary, to reduce
deferred tax assets to the amount that will more likely than not be
realized.
(p) Business Combinations
Business combinations are accounted for as a pooling of interest.
2. GOING CONCERN
These financial statements have been prepared under the assumption the
Company will continue its development stage activities and eventually
emerge as a going concern. This assumption is conditioned on the
Company's ability to generate revenue before exhausting its original
capital stake, and/or attracting additional capital. Although no
revenue producing contracts have been signed, management is in the final
stages of negotiations on four separate contracts for the cooling system.
In addition, marketing and sales efforts related to the odor control
product are expected to commence shortly after January 1, 2000. As
described in Note 5, management has also taken steps to attract
additional capital.
3. CONTRACTS IN PROGRESS
As described in Note 1, the Company accounts for it long-term contracts
under the percentage of completion method of accounting. As of
September 30, 1999, the Company had one contract that had recoverable
costs in excess of billings as follows:
Costs minus estimated losses incurred
on uncompleted contracts $75,000
Less: Billings on uncompleted contracts 40,000
Costs and estimated earnings in $35,000
excess of billings
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
4. RELATED PARTY TRANSACTIONS
Loans Receivable
The Company has an unsecured loan receivable due from the President and
CEO of the Company. The loan is for $75,000 dated July 1, 1998, due
July 1, 2001, and bears interest at 5%. Interest income accrued
relating to this note at September 30, 1999 was $945.
The Company has two unsecured loans receivable from the Vice-President of
Sales. A three year loan dated January 15, 1999 for $45,000 bearing
interest at 5% is outstanding as of September 30, 1999. A three year
loan for $30,000 dated March 1, 1999 bearing interest at 5% was also
outstanding as of September 30, 1999. Both loans are due March 1, 2002.
Interest income accrued relating to these notes at September 30, 1999
was $2,462.
Included in miscellaneous income, for the three months ended September 30,
1998 and April 30, 1998 (date of inception) to September 30, 1999, is
$1,890 and $7,032, of interest income related to these officer loans.
The following is a summary of loans receivable as of September 30:
Total Loans Receivable $150,000
Less: Current Maturities -
$150,000
Consulting Agreements
The Company has a consulting contract with a management consulting firm
owned, in part, by one of the Company's management employees. The
contract is effective July 1, 1999 and continues for three years, with
an option to renew for an additional two years.
The agreement calls for payment of a $75,000 fee, and issuance of 400,000
shares of stock upon completion of the merger described in Note 5. As of
September 30, 1999, the Company has an accrued liability of $50,000
relating to that transaction. The agreement also provides for additional
minimum consulting fee of $75,000 and a maximum consulting fee of $375,000
for raising between $500,000 and $4,000,000 of additional capital. As of
September 30, 1999, $75,000 has been accrued.
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
4. RELATED PARTY TRANSACTIONS (CONTINUED)
The contract calls for payment of monthly consulting fees of $15,000
throughout the term of the contract. The following is a schedule of
minimum consulting fees required under the contract as of September 30:
Twelve Months ending
September 30 Amount
2000 $ 180,000
2001 180,000
2002 180,000
2003 180,000
2004 135,000
$ 855,000
The agreement also provides for a $125,000 annual expense allowance for
travel, entertainment and promotion.
During the three months ended September 30, 1999, and for the period from
April 30, 1998 (inception) through September 30, 1999 the Company incurred
consulting fees and other expenses related to the management company as
follows:
<TABLE>
<S> <C> <C>
Three Months April 30,1998
Ended (Date of Inception)
September 30, 1999 to September 30, 1999
Consulting Fees $ 45,000 $ 165,000
Capital Consulting Fees 25,000 229,500
Fees Relating to Merger 150,000 150,000
Reimbursed Expenses - 74,224
TOTAL $ 220,000 $ 618,724
Included in accounts payable at September 30, 1999, is $50,000 due to one
of the stockholder's for fees related to the merger.
</TABLE>
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
5. MERGER
On September 13, 1999, AGTech Environmental, Inc. 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 early in the year 2000.
The merger is accounted for as a pooling of interests. At the time of the
merger, OBC had no assets or liabilities. The entity had no revenue and
incurred expenses of $4,200. All other revenue and expenses up to the
date of combination were incurred by the Agtech Environmental, Inc. OBC's
authorized capital consisted of 40,000,000 shares of common stock, no
par value, and 10,000,000 shares of $100 par value preferred stock.
Upon completion of the merger, all shares of Agtech Environmental, Inc.
were converted to shares of AEI Environmental, Inc. at the following
conversion rates.
<TABLE>
<S> <C> <C>
Agtech Environmental AEI Environmental, Inc.
1 Share Class A, $0.01 par value = 1 Share No Par, Common
1 Share Class B, $0.01 par value = 0.28249 Shares No Par, Common
1 Share Class C, $0.01 par value = 0.6667 Shares No Par, Common
</TABLE>
In connection with the merger, and to show a sign of good faith, the
Company deposited $50,000 into an account to guarantee that OBC would be
reserved and made exclusively available to the Company in order to
consummate the merger. The full amount is payable to the majority
stockholders of OBC. As of September 30, 1999, the funds had not been
released.
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
6. CAPITALIZED LEASE OBLIGATIONS
The Company leases certain office furniture and equipment under
obligations that have been classified as capital leases. The equipment
leased has been recorded as fixed assets and is being depreciated over the
economic life of those assets. Net book values of the leased equipment, as
of September 30, 1999, is as follows:
Equipment $28,277
Less: Accumulated Amortization 11,571
Net Leased Property Under
Capitalized Leases $16,706
Amortization of capitalized leases assets included in depreciation
expense for the three months ended September 30, 1999 and for the period
from April 30, 1998 (date of inception) to September 30, 1999 was $1,868
and $11,571, respectively.
The future minimum lease payments required by the above-capitalized leases
together with the present value of the net minimum lease payments for the
twelve month period ended September 30 are as follows:
2000 $ 4,416
2001 4,416
2002 2,489
Total minimum lease payments 11,321
Less: Amount representing interest 712
Present value of net minimum lease
payments 10,609
Less: Current Portion 3,985
$ 6,624
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
7. INCOME TAXES
Deferred tax assets are recognized for operating losses that are available
to offset future taxable income. The valuation allowance is necessary
due to uncertainty about the Company's ability to utilize all of the loss
carryforwards before they expire. The Company's deferred tax assets and
deferred tax valuation allowance as of September 30, 1999 are as follows:
Total deferred tax assets $ 962,568
Less valuation allowance (962,568)
Net deferred tax assets $ -
The income tax provision for the three months ending September 30, 1999, is
as follows:
Three Months April 30, 1998
ended (Date of Inception) to
September 30, 1999 September 30, 1999
Current $ - $ -
Deferred (247,100) (962,568)
Increase in Valuation Allowance 247,100 962,568
Total $ - $ -
As September 30, 1999 the Company has net operating loss carryforwards of
$1,788,672. If not used, these loss carryforwards will expire in twenty
(20) years.
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
8. COMMITMENTS
Operating Lease Obligations
The Company leases operating facilities in Franklin, Kentucky under an
operating lease originally dated August 24, 1998 and expiring on September
1, 2000. Terms of the lease require annual rent of $12,960 plus payment of
all operating expenses of the leased facilities. The Company leased
additional operating facilities under an operating lease dated November 1,
1998 and expiring on October 31, 2000. Terms of this additional lease
require rent of $16,560 plus payment of all operating expenses of the
leased facilities.
These two leases are renewable for an additional one-year term with an
additional rental increase on September 1, 1999 and October 31, 2000 that
will be tied to the increase in the Consumer Price Index.
The Company leases operating facilities on Goldsboro, North Carolina from
Wooten Oil Company Assigns under an operating lease originally dated
February 8, 1999, and expiring on February 8, 2000. Terms of the lease
require annual rent of $9,000 plus payment of all operating expenses of the
building. The lease is renewable for an additional one-year term with an
additional rental increase on February 8, 2000, which will be tied to the
increase in the Consumer Price Index.
The future minimum lease payments required, not including potential
increases in the Consumer Price Index, for these leases are as follows for
the twelve month period ending September 30:
2000 $ 32,520
2001 1,380
Total $ 33,900
The Company has various leases with non-related entities under lease
agreements beginning in 1998 and expiring in 2002. The minimum annual
rental payments required under these leases, having initial or remaining
non-cancelable terms in excess of one year, are as follows for the years
ending September 30:
2000 $ 11,357
2001 11,009
2002 1,784
Total $ 24,150
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
8. COMMITMENTS (CONTINUED)
Rent expense for these leases for the three months ended September 30,
1999 and for the period from April 30, 1998 (date of inception) to
September 30, 1999 was $13,924 and $69,731, respectively.
Employment and other Service Agreements
The Company has employment and independent contractor agreements with
officers, employees, and stockholders that were entered into in 1998 and
expiring in 2001.
These employment agreements automatically renew for two additional years.
Each agreement specifies the amount of compensation to be paid and the
fringe benefits to which the officer or employee or stockholder is
entitled.
Additionally, each agreement provides an option to purchase class B common
stock at .01 per share in a vesting schedule stipulated in the agreement.
Other
The Company entered an exclusive four year agreement dated June 22, 1998,
and amended December 11, 1998, to use A-Tek Technologies for the
development of hardware and software related to the Company's cooling and
waste treatment systems. A-Tek is a shareholder of the Company.
The Company entered a three-year agreement dated September 1, 1998, to
utilize Pearce Research Associates, Inc. to strategize and to market the
Company's lagoon-less technology in order to obtain state and federal
grants. Pearce Research Associates, Inc. is a shareholder of the Company.
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
9. CAPITAL STOCK
<TABLE>
<CAPTION>
The following schedule summarizes the share activity of the capital stock
from inception through September 30, 1999:
AG Tech Environmental, Inc.
<S> <C> <C> <C> <C>
AEI
$.01 Par $.01 Par $.01 Par OBC Capital 1, Inc.)
Value, Class Value, Class Value, Class No Par
A Common B Common C Common Common
Stock Stock Stock Stock
Balance April 30, 1998
Shares granted to founders 396,500 1,982,500 1,228,000
Shares granted to employees of MPI 80,000
Issuance of shares as incentive bonus 1,500,000
Issuance of shares in connection with
Business Acquisition 800,000
Sale of capital stock 2,292,345 2,841,600
Exercise of stock options 70,000
Issuance of shares relating to 70,000
Consulting Agreements
Conversion of shares from debt
agreement 375,512 0 0
Balance June 30, 1999 3,204,357 2,380,000 4,824,100 1,228,000
Sale of Capital Stock 591,000
Exercise of Stock Options 100,000 1,100,000
Issuance of shares in connection with
Asset Acquisition 160,000
Issuance of shares in connection with
merger 300,000
Issuance of shares relating to
Consulting Agreements 25,000
Common Stock retired at time of merger (3,895,357) (3,665,000) (5,124,100)
Common Stock Issued at time of
merger 7,369,035
Balance September 30, 1999 - - - 8,597,035
Preferred Stock
The Company has authorized 10,000,000 shares of $100 par value preferred
stock. As of September 30, 1999, none are issued and outstanding. The
participation and liquidation rights as of the preferred shares have not
been determined.
</TABLE>
10. RESEARCH AND DEVELOPMENT EXPENSES
As of September 30, 1999, the Company is in the development stage. During
the three months ended September 30, 1999 and the period from April 30,
1998 (date of inception) to September 30, 1999, research and development
expenses were as follows:
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
10. RESEARCH AND DEVELOPMENT EXPENSES (CONTINUED)
Three Months April 30, 1998
ended (Date of Inception) to
September 30, 1999 September 30, 1999
Consultant Expenses $ 277,036 $1,018,826
Management Fees 45,000 173,775
R & D Miscellaneous 29,166 89,010
R & D Salaries 18,116 145,216
Total $ 369,318 $1,426,827
11. CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash balances in one financial institution
located in Hinsdale, Illinois. The balances are insured by the Federal
Deposit Insurance Corporation up to $100,000. The Company's cash balances
exceed these insured limits from time to time.
12. DEBT EXCHANGED FOR STOCK
On March 9, 1999, the Company executed convertible notes in the amount of
275,000 due June 9, 1999 with two shareholders, each bearing an interest
rate of 8.75%. Each note also contained a penalty clause charging the
maker of the note 11.75% interest on all outstanding principal and
interest as well as an additional 10,000 shares each of common stock for
every 30 day period the note has not been paid. The holder of each note
may convert the outstanding principal, and accrued interest into common
stock at a conversion price of $.80 share. Attached to each note is a
stock warrant for 100,000 shares of Common stock at par. This stock
warrant is exercisable within five years of the date of the related note.
On June 30, 1999, the shareholder's converted their notes as follows:
# 1 # 2
Principal $137,500 $137,500
Accrued Interest @ 8.75% 3,008 3,008
Accrued Interest @ 11.75% 1,697 1,697
Total principal and accrued interest $142,205 $142,205
Total number of shares exchanged 177,756 177,756
Additional Class A shares issued
due to note past due 10,000 10,000
Total shares converted into Common
Stock 187,756 187,756
<PAGE>
AEI Environmental, Inc.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
13. STOCK OPTIONS
During its development stage, the Company has granted stock options to
certain individuals as an incentive to become associated with the
Company in key management positions.
At September 30, 1999, there were 887,531 shares of common stock
reserved for the granting of these options.
Unexercised Options at April 30, 1998 -
Granted 1,618,322
Exercised 730,791
Expired -
Unexercised Options at September 30, 1999 887,531
Non-vested Options at September 30, 1999 635,605
All options are exercisable at $.01 per share and are subject to the
conversion rated for Class B stock described in Note 5. Certain options
are subject to a vesting schedule. All options are fully vested by
December 31, 2001. All options expire between June 2002 and December 2002.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE B-1
AEI Environmental, Inc.
(A Development Stage Company)
SCHEDULES OF OPERATING EXPENSES
For the Three Months ended September 30, 1999 and for the
Period from April 30, 1998 (Date of Inception) to September 30, 1999
(See Accountants' Compilation Report)
<S> <C> <C>
Three Months April 30, 1998
Ended (Date of Inception)
September 30, 1999 to September 30, 1999
Advertising and Business Promotion $ 874 $ 11,311
Amortization 22,628 62,753
Auto Expenses 8,704 38,650
Bank Charges 725 725
Depreciation 5,905 29,108
Equipment Rental 2,321 2,321
Insurance 16,784 69,521
Office Expenses 11,133 62,070
Office Salaries 11,993 55,603
Officers' Salaries 96,050 249,092
Organization Expenses - 61,358
Postage 835 835
Outside Service and Professional Fees 242,026 306,834
Rent 9,720 44,644
Taxes 7,061 40,839
Telephone 9,407 37,904
Travel and Entertainment 19,628 85,951
Utilities 2,228 2,228
Total $ 468,022 $ 1,161,747
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
AEI ENVIRONMENTAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1999
=====================================
NINE MONTHS ENDING SEPTEMBER 30, 1999
=====================================
The following information should be read in conjunction with the historical
financial information included in Item 1 of this Quarterly Report.
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.
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 does not expect adoption to
have a material effect on its financial position or results of operations.
<PAGE>
Liquidity and Capital Resources
The Company remains in the development stage and, since inception,
has experienced no significant change in liquidity or capital resources
or stockholder's equity. The Company's balance sheet as of September 30,
1999, reflects a total asset value of $1,345,073. The Company currently
has no line of credit.
Results of Operations
During the period from January 1, 1998 through September 30, 1999,
the Company has engaged in no significant operations other than
organizational activities, acquisition of capital and preparation for
registration of its securities under the Securities Exchange Act of 1934,
as amended. No revenues were received by the Company during this period.
For the current fiscal year, the Company anticipates incurring
a loss as a result of organizational expenses, expenses associated with
registration under the Securities Exchange Act of 1934.
Need for Additional Financing
The Company believes that its existing capital will be sufficient
to meet the Company's 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.
<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.
The Company is currently negotiating a private placement of a $4
million convertible preferred stock issue with an institutional
investor.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8 K
a. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on Form 8 K
-Filed on September 30, 1999, Item 1 and 2, Change of Control,
Plan of Merger.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO DESCRIPTION
<S> <C> <C>
# 3.1 Articles of Incorporation of the Registrant, as amended;
# 3.2 Bylaws of the Registrant;
# 4.1 Instruments Defining Rights of Security Holders/Minutes
of Annual/Special Meetings of the Registrant;
# 10.1 Issuance of Restricted Shares from Authorized Shares
# 23.1 Consent of Mark T. Thatcher, P.C.;
x 27 Financial Data Schedule
x 99.1 Safe Harbor Compliance Statement
_______________________
x Filed herewith.
# Incorporated by reference from the Registrant's Amendment No. 3 to the
Registration Statement filed on Form 10-SB on or about July 29, 1999.
SIGNATURES
Pursuant to 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.
/s/ Mark Margason
DATE: February 11, 2000 By: MARK MARGASON
Name: MARK MARGASON
Title: Vice Chairman
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
Article 5 Fin. Data Schedule for 1st Qtr 10-Q
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 97,378
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,270
<PP&E> 28,458
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,345,073
<CURRENT-LIABILITIES> 3,722
<BONDS> 0
0
0
<COMMON> 541,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,345,073
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 272,421
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (299,049)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> (299,049)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (299,049)
<EPS-BASIC> (.00)
<EPS-DILUTED> (.00)
</TABLE>
EXHIBIT 99.1
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
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 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.
<PAGE> 1
RISK FACTORS
1. YEAR 2000.
It is possible that the Company's currently installed computer system,
software products or other business systems, or those of the Company's
customers, vendors or resellers, working either alone or in conjunction with
other software or systems, will not accept input of, store, manipulate and
output dates for the years 1999, 2000 or thereafter without error or
interruption (commonly known as the "Year 2000" problem). The Company has
conducted a review of its business systems, including its computer systems,
and is querying its customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached.
The detail planning and inventory for the majority of the Company's legacy
systems that are being modified for Year 2000 compatibility has been
completed and such systems are in remediation.
The estimated cost of the Company's Year 2000 efforts is $10,000 to
$15,000 over 1998 and 1999, the majority of which represents redirection
of internal resources. However, there can be no assurance that the Company
will identify all such Year 2000 problems in its computer systems or those
of its customers, vendors or resellers in advance of their occurrence or
that the Company will be able to successfully remedy any problems that are
discovered. The expenses of the Company's efforts to identify and address
such problems, or the expenses or liabilities to which the Company may become
subject as a result of such problems, could have a material adverse effect on
the Company's business, financial condition and results of operations.
In addition, failure of the Company to identify and remedy Year 2000
problems could put the Company at a competitive disadvantage relative to
companies that have corrected such problems.
<PAGE>
2. Control by Principal Shareholders, Officers and Directors.
The Company's principal shareholders, officers and directors will
beneficially own approximately fifty-four percent (54%) 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. See "Principal Stockholders."
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. See
"Management," and "Conflicts of Interest."
4. Possible Need for Additional Financing.
The Company has very 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 opera-
tions 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 in this offering to sell their securities in any market that
might develop therefor.
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"
<PAGE>
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 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 operating history, revenues from operations, or assets
other than cash from private sales of stock. 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.
<PAGE>
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 Market Research or Marketing Organization.
The Company has neither conducted, nor have others made available to it,
results of market research indicating that market demand exists for the
transactions contemplated by the Company. Moreover, the Company does not
have, and does not plan to establish, a marketing organization.
9. 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.
10. 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 person's promise to repay the Company
therefor 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.
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11. 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.
12. No Foreseeable Dividends.
The Company has not paid dividends on its Common Stock and does not
anticipate paying such dividends in the foreseeable future.
13. 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.
14. 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
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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 nonaffiliate
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.
15. 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.
