SECURITIES AND EXCHANGE COMMISSION
Washington DC. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from __________ to ___________.
Commission file number: 0-27853
HYATON ORGANICS INC.
(Exact name of registrant as specified in its charter)
Nevada 86-0913555
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1500 West Georgia Street, 13th Floor,
Vancouver, British Columbia, Canada V6G 2Z6
(Address of principal executive offices) (Zip Code)
(604) 623-3300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
As of March 15, 2000, the aggregate market value for the shares of the common
stock, no par value, held by non-affiliates was approximately $71,782,020.
The number of shares outstanding of registrant's only class of common stock, as
of March 15, 2000, was 27,556,000 shares of its common stock, no par value.
Documents Incorporated by Reference: None
Exhibit Index is located at Page 18.
<PAGE>2
With the exception of historical facts stated herein, the following discussion
may contain forward- looking statements regarding events and financial trends
which may affect the Company's future operating results and financial position.
Such statements are subject to risks and uncertainties that could cause the
Company's actual results and financial position to differ materially from those
anticipated in such forward-looking statements. Factors that could cause actual
results to differ materially include, in addition to other factors identified in
this report, the Company's operating losses, its need for additional capital,
its ability to commercially develop its proposed products, and dependence on key
personnel, all of which factors are set forth in more detail in the sections
entitled "Certain Considerations" and "Management's Discussion and Analysis or
Plan of Operation" herein. Readers of this report are cautioned not to put undue
reliance on "forward looking" statements which are, by their nature, uncertain
as reliable indicators of future performance. The Company disclaims any intent
or obligation to publicly update these "forward looking" statements, whether as
a result of new information, future events, or otherwise.
In this statement, all dollar amounts are expressed in United States
dollars unless otherwise stated.
PART I.
Item 1. Description of Business
BUSINESS DEVELOPMENT
Historical Information
Hyaton Organics Inc. ("Hyaton" or the "Company") was incorporated in
Nevada on August 20, 1996, under the name Hayoton Company Incorporated as a
management company for resorts and hotel properties. In September 24, 1996, the
Company changed its name from Hayoton Company Incorporated to Hyaton Company
Incorporated and then to Hyaton Organics Inc. on October 21, 1999. The Company
was dormant until June 1997, when the Board reevaluated its business plan and
decided to focus the Company's business on commodity production and/or purchase
and resale of same through strategic alliances with leading environmental
corporations.
As part of the Company's new business plan, on November 2, 1998, the
Company entered into a Plan and Agreement of Reorganization ("Reorganization
Agreement") with Kafus Industries Ltd. ("Kafus"), a British Columbia
corporation. Under the Reorganization Agreement, the Company issued to Kafus
20,000,000 shares of its Common Stock in exchange for all of the Common Shares
of Camden Agro-Systems Inc. ("Camden"), an Ontario corporation, owned by Kafus.
Prior to the reorganization, Kafus owned 9,000 common shares of Camden,
constituting 90% of Camden's outstanding common shares. As a result of the
reorganization, Kafus owns approximately 72.6% of the Company's outstanding
shares of Common Stock and the Company's primary business interest is Camden.
Unless otherwise indicated, reference to "Hyaton" or the "Company" shall mean
Hyaton Organics Inc. and its wholly-owned subsidiary, Camden Agro-Systems Inc.
Further, as part of the Reorganization Agreement, the Company is
required to issue one additional common share to Kafus for each $.20 of
aggregate earnings before interest, taxes, depreciation and amortization of
Camden accumulated during the period beginning on the closing date of the
<PAGE>3
reorganization and ending upon the earlier of: (a) two years from November 2,
1998, or (b) eighteen months from the commencement of commercial operations by a
Camden plant.
Camden Agro-Systems Inc.
The Company's primary asset is its interest in Camden, and all of the
Company's operations are conducted by Camden. Camden is a development stage
company that intends to develop turnkey facilities capable of producing
organic-based fertilizers from animal residues such as hog and poultry manure.
Prior to January 1999, Camden also was planning the development of facilities
for the production of animal feed from food waste.
Camden Agro-Systems Inc. was incorporated under the Ontario Business
Corporation Act (1982) on November 24, 1994, for the purpose of business
management, consulting and product development. For at least the past three
years, Camden has primarily focused its business on the development of
converting organic waste into animal feed and animal residues into organic
fertilizer. Camden believes that there are environmental pollution concerns from
animal residues. Many governmental authorities are invoking stringent
environmental laws and regulations regarding pollution, contamination and the
accumulation and disposal of waste products such as animal residues. Camden
believes that it is developing a waste management process by reducing pollution
in ground and surface waters and by providing a valuable source of nutrients and
organic material for plant production.
Since February 1998, Camden had been operating a pilot program for an
organic waste processing facility at Bartow, Florida (the "Bartow Plant"). At
the Bartow Plant, Camden processed organic waste supplied by dairy, bakery and
ice cream makers into animal feed supplements. During the pilot program, Camden
entered into an exclusive marketing distribution agreement with Miracle Feeds of
Canada, Ltd., whereby Miracle Feeds of Canada agreed, subject to certain
conditions, to purchase all of Camden's animal feed supplement produced by
Camden at its Bartow Plant. In light of the agreement with Miracle Feeds of
Canada, Camden began to upgrade its Bartow Plant to full commercial production.
At full production, the Bartow Plant would have been capable of producing
approximately 22,000 short tons of animal feed per year. In addition, Camden was
negotiating a product buy-out agreement with an animal feed supplier, and was in
the planning stages for an animal feed plant in Lakeland, Florida.
In January 1999, Camden decided to discontinue its animal feed from food
waste program to concentrate its energy and resources on its organic fertilizer
products. In light of its limited capital and resources, Camden believed that
the organic fertilizer market, which is larger than the animal feed market,
provided it a better and faster opportunity to earn revenues. Further, because
Camden's proposed animal feed processing may be subject to duplication by
competitors, this could have the effect of increasing Camden's competitors. As a
result of this decision, Camden allowed its lease at the Bartow Plant to expire,
and ceased all animal feed research and development including its operations at
the Bartow Plant and proposed construction project in Lakeland, Florida.
Notwithstanding its current direction, the Company may, in the future, resume
the development of animal feed from organic waste.
Organic Fertilizer Products
Since its redirection in January 1999, Camden has focused on developing
organic fertilizer products from animal residues. Camden believes that the
organic fertilizer market provides great potential for the sale of Camden's
organic fertilizers, and justified the continued research and development of
proprietary organic fertilizers. Since 1996, Camden has been collaborating with
<PAGE>4
experts in crop science, animal sciences, agronomy, fertilizers, and equipment
manufacturers to research and test its organic fertilizer process and proposed
products in Canada, the United States and abroad.
In 1998, Camden narrowed its organic fertilizer research by selecting
organic waste materials, such as animal residues that have been aerobically
processed under specific, optimally controlled conditions. The resulting
materials have then been used to manufacture three new products. These products
were initially marketed under the brand VERDANT ORGANIC. However in 1999, Hyaton
applied for TRULY ORGANIC(TM) as its trademark in the United States. This
application is currently pending. These proposed products are as follows:
o Pure Organic Fertilizer Blends, to be marketed as TRULY ORGANIC(TM)MTO
series, are a basic product from which all other Camden fertilizer
formulas will be based upon. They are designed to supply nitrogen (N),
phosphorus (P), and potash (K) to plants as required on a
bio-modulated release basis. The composition of the Pure Organic
Fertilizer Blends is designed to restore and maintain soil organic
matter quality and quantity, to improve soil aggregation and porosity
to increase water infiltration and retention, to enhance gas and
cation exchange, to improve root growth, and to reduce water and wind
erosion;
o Enhanced Organic Fertilizer Blends, to be marketed as TRULY
ORGANIC(TM) MTE series, are organic in origin, then enhanced with
chemical nutrients. The chemical nutrients are added to the organic
blend to meet individual crop requirements such as radishes, lettuce,
and tomatoes; and
o Growing Media, to be marketed as TRULY ORGANIC(TM) GROWING MEDIA, is a
new proposed product line that can be used as a substrate for the
cultivation of greenhouse plants, a potting soil or a soil supplement
to home gardens. This product line is manufactured from organic raw
materials which contain sufficient naturally-occurring quantities of
nitrogen, phosphorus, potash and other essential elements for
commercial plant growth.
Camden plans to market Camden's organic fertilizer products by engaging
compatible corporate partners to market and distribute its organic fertilizer
products as well as large volume end users and home and garden
distributors/retailers.
As part of its business redirection, Camden is proposing to develop a 52
acre organic fertilizer facility located in North Carolina. Camden proposes to
convert organic fertilizer from animal residues acquired from local farmers.
Camden intends to use its process originally developed at the Bartow Plant as a
template for creating similar organic fertilizer facilities utilizing their
modular design and manufacturing process. Camden has filed a patent application
in the United States for this process. See "Camden Agro-Systems Inc. - Patents
and Trademarks."
The Camden Agro-System Process
The Camden process is a procedure in which animal residues such as
poultry and hog manure is treated and recycled into organic fertilizers. The
principal steps are (a) receipt and mixing of the organic waste materials, (b)
aerobic processing (which is similar to composting), (c) mixing the composting
material with plant nutrients, and (d) post aerobic processing and packaging.
<PAGE>5
Camden intends to exploit its process by establishing organic fertilizer
manufacturing facilities internationally. In order to meet this objective,
Camden believes that it must:
o Enter into long-term, supply agreements from organic waste generators
such as farmers in the case of animal waste;
o Use its proprietary manufacturing process; and
o Enter into long-term marketing and product buy-out agreements from
reputable companies.
Camden believes that its proposed organic fertilizer manufacturing
facilities can be developed worldwide. In determining an area that may be
conducive to one of Camden's facilities, Camden considers the following:
1. Identification of those areas that have documented organic waste
management problems, and can generate sufficient volumes of
animal residues to sustain an organic fertilizer operation;
2. Active industry associations that are willing to work with Camden
in identifying solutions for organic waste such as animal
residues; and
3. Active local and state governments that are willing to work with
Camden in identifying solutions for organic waste such as animal
residues.
In applying the above criteria, Camden has selected North Carolina as
its first proposed organic fertilizer processing plant. During the evaluation
process, Camden noted that the state of North Carolina had a large number of
both poultry and hog producers, had active state and national associations for
poultry and hog producers, provides incentives to poultry producers to remove
animal residues through a secondary process or where land application is
avoided, and had a mild climate that allowed year-round plant operations and
allowed animal residue transportation without damage due to weather, such as
freezing.
On May 19, 1999, Camden entered into a letter of intent to acquire
approximately 52 acres in Merry Hill, North Carolina. The property is currently
permitted as a composting facility and Camden intends to retrofit it to convert
animal residues into organic fertilizer products. The proposed purchase price is
approximately $750,000 to be paid in part by cash and the assumption of certain
debt. The letter of intent expired October 15, 1999, but Camden has extended the
deadline upon the payment of $10,000. However, Camden and the owner are still in
discussion regarding the acquisition. Camden has obtained an environmental
permit and construction permit for the Merry Hill site. The acquisition of the
property is subject to Camden, through the Company, raising sufficient funds to
pay for the property and no assurance can be given that Camden will be able to
complete the acquisition.
On February 15, 2000, Hyaton entered into a purchase agreement with
Furst-McNess Company under which Furst-McNess shall have the right to purchase,
promote, market and distribute Hyaton's fertilizers and growing media produced
at its proposed Merry Hill, North Carolina facility. The purchase price for the
products will be equal to the net selling price to the end user less a
percentage to Furst- McNess. The amount of the percentage will be based upon the
net selling price. The term of the agreement will continue until the fifth
<PAGE>6
anniversary of the final completion date of the Merry Hill, North Carolina
facility, subject to extension and is subject to certain conditions.
Research and Development
Camden has conducted its research and development in conjunction with
universities and governmental agencies. In 1996, Camden conducted two livestock
feeding and fertilizer trials at Kansas State University, Kansas. During the
process, several short tons of organic waste were processed into two livestock
feed supplements and one organic-based fertilizer. The livestock feeding trial
conducted by Kansas State University involved 70 heads of cattle, and the
fertilizer trial consisted of comparing grain sorghum yields in a series of
replicated field plots. The trials indicated that animal residues can be used as
a supplement to livestock feed and that animal residues used in organic-based
fertilizers could exceed commercial fertilizers in yield/acre.
More recently, between September 1998 and February 1999, Camden, in
cooperation with the Eastern Cereal & Oilseed Research Centre, a Division of
Agriculture and Agri-food Canada, Ottawa, Ontario, conducted a joint research
project assessing the physical, chemical and agronomic characteristics of
Camden's organic fertilizer blends and growing media, TRULY ORGANIC(TM) MTO,
TRULY ORGANIC(TM) MTE, and TRULY ORGANIC(TM) GROWING MEDIA. The research project
compared Camden's organic fertilizer blends and growing media with traditional
growing media and chemical fertilizers. Tests were conducted on three major
types of crops: a leafy crop (lettuce); a root crop (radish); and a fruit crop
(tomato). Results of the trials indicated that the performance of Camden's
organic fertilizer blends met or exceeded that of traditional fertilizers.
Agriculture and Agri-food Canada is a Canadian governmental agency that
promotes the development, adaptation and competitiveness of the agriculture and
agri-food sector through policies and programs that are most appropriately
provided by the Canadian federal government. The overall goal is to help the
sector maximize its contribution to Canada's economic and environmental
objectives and achieve a safe, high quality food supply while maintaining a
foundation for agriculture. Since 1997, Camden has expended approximately
$200,000 for research and development of its organic products, and Camden has
committed an additional Cdn $60,000 for comparative testing and further
development of its organic fertilizer blends at Agriculture and Agri-food
Canada.
The development of Camden's organic fertilizers blends and growing media
is in its initial stages. No assurance can be given that Camden will be able to
produce the same test results under commercial production conditions.
Sources and Availability of Raw Materials
Camden's main source of raw materials for its organic fertilizer
products will be animal residues initially consisting of poultry manure and hog
manure. Camden believes that there is a great supply of these ingredients.
Camden intends to enter into by-products supply agreements with initially
poultry and hog farmers located in North Carolina. Under the by-products supply
agreement, the farmers will supply Camden with animal residues meeting certain
specifications. Camden will pay the farmer for the animal residues with the
right to receive any state incentives for the disposal of the animal residues.
Due to the increase in organic waste material, some states such as North
Carolina provide incentives and/or subsidies to companies that recycle organic
waste.
<PAGE>7
Customers
At this time, because Hyaton is in the development stage it has no
customers. However, Hyaton has entered into a purchase agreement with
Furst-McNess Company under which Furst-McNess will purchase products of Hyaton
subject to certain conditions.
Competition
Camden is directly and indirectly in competition with other fertilizer
businesses, including other organic recycling facilities. Further, many of
Camden's competitors have greater production capacity and greater financial
resources and, therefore, may be better able to compete in the domestic and
international markets. Competing technology may also be developed by the other
companies in the industry. Further, many of Camden's competitors may take action
such as price reductions to keep their markets and hinder Camden's ability to
sell its products. There can be no assurance that Camden will be able to develop
a competitive position in the fertilizer industry.
Patents and Trademarks
In the course of Camden's ongoing organic fertilizer research, it has
developed various technological innovations in the areas of manufacturing
process as well as products. At June 24, 1999, the Minister of Agriculture and
Agri-food Canada on behalf of Camden applied for patents in the United States
for its three product lines: Pure Organic Fertilizer Blends, Enhanced Organic
Fertilizer Blends, and Growing Media. Collectively, the applications include
composition claims for its organic fertilizers and manufacturing processes. In
conjunction with the evaluation of Camden's organic products, the patents were
transferred to Camden. These patent applications are currently pending.
No assurance can be given that Camden's manufacturing process will be
granted a patent, or if granted, that it will afford protection against
competitors. Further, any patent issued to Camden could be challenged,
invalidated or circumvented by others. Further, since patent applications in the
United States are maintained in secrecy until the patent is issued, Camden
cannot be certain that others have not filed patent applications directed toward
inventions covered by its pending patent applications or that it was the first
to file patent applications on such inventions. There can also be no assurance
that any application of Camden's technologies will not infringe patents or
proprietary rights of others or that licenses that might be required for
Camden's processes or products would be available on reasonable terms. The
extent to which Camden may be required to obtain licenses from others, the cost
and the availability of such licenses are unknown.
Camden also makes use of its trade secrets or "know-how" developed in
the course of its research and development in the area of manufacturing process.
To the extent that Camden relies upon trade secrets, unpatented know-how and the
development of improvements in establishing and maintaining a competitive
advantage in the market for Camden's products, there can be no assurances that
such proprietary technology will remain a trade secret or that others will not
develop substantially equivalent or superior technology to compete with Camden's
products.
Hyaton has filed a trademark for "TRULY ORGANIC" in the United States.
The trademark is currently pending.
<PAGE>8
If Camden becomes involved in litigation regarding its intellectual
property, it could consume a substantial portion of Camden's resources. Camden
may lack the financial resources to defend its intellectual property claims or
to prosecute infringements by others.
Environmental Regulations
The location, construction, and operation of organic fertilizer
facilities are regulated by state and federal environmental laws. Obtaining
local approvals and state air, water and operating permits is a detailed and
complex process. This may especially be true where the proposed facility is to
be located in or near urban areas. Requisite approvals to be obtained in most
jurisdictions include Local Planning Board, Zoning Boards, Solid Waste and Water
Disposal Boards, Composting Operation Permits, Air Permits and Building Permits.
Recently, Hyaton received an environmental permit at its proposed facility
located in Merry Hill, North Carolina.
Employees. As of December 31, 1999, the Company, and its subsidiary, had five
consultants and one employee.
CERTAIN CONSIDERATIONS
In addition to the other information presented herein, the following
should be considered carefully in evaluating the Company and its business. This
information contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below and
elsewhere herein.
Lack of Profits and Going Concern Opinion. For the year ended December
31, 1999, the three months ended December 31, 1998, and year ended September 30,
1998, the Company incurred net losses of $739,192, $126,131 and $268,548,
respectively. As a result of these losses and negative cash flows from
operations, the Company's auditors' report on the Company's consolidated
financial statements include an additional paragraph which refers to
uncertainties as to the Company's ability to continue to operate as a going
concern.
Development Stage Company. Hyaton is in its development stage,
researching and developing organic-based fertilizers. The Company has no
commercial products. Although under test conditions, the Company's proposed
organic fertilizers performed as well, if not better, than traditional chemical
fertilizers, no assurance can be given that the Company will be able to achieve
the same results under commercial conditions. Further, Hyaton will face the same
challenges experienced by other development stage companies, including, but not
limited to, developing market acceptance for its proposed products.
Need for Additional Capital. The Company believes that it will need
additional working capital to finance and develop organic fertilizer facilities
and for its operations in 2000. No assurance can be given that the Company will
be successful in raising capital for its projects or, if raised, that it will be
on terms favorable to the Company. In the event the Company is required to raise
additional capital through private placement of its equity securities, such
placement of equity securities will have the effect of diluting existing
shareholders' ownership interest in the Company. If the Company is unable to
raise sufficient funds to finance these projects, the Company may not be able to
complete its projects which will have an adverse effect on the Company's
business objectives.
<PAGE>9
Dependence on Key Personnel. The Company is dependent on Mr. Robert
Novitsky, President, for his expertise. The loss of Mr. Novitsky could have a
material adverse effect upon the Company.
Concentration of Stock Ownership. As of December 31, 1999, Kafus owned
20,000,000 shares of Common Stock of the Company constituting approximately
72.6% of the outstanding shares. As a result of its ownership, Kafus will have
substantial control over corporate matters without seeking other shareholder
approval, including the election of directors and approval of significant
corporate transactions. Further, such concentration of ownership may also have
the effect of delaying or preventing a change in control of the Company.
Authorization of Preferred Stock; Possible Anti-Takeover Effects. The Board
of Directors is authorized to issue Preferred Stock and to determine the
dividend, liquidation, conversion, redemption and other rights, preferences, and
limitations of such shares without further vote or action of the stockholders.
Accordingly, the Board of Directors is empowered, without shareholder approval,
to issue Preference Stock with dividend, liquidation, conversion, or other
rights which could adversely affect the voting power or the rights of the
holders of the Common Stock. In the event of such issuance, the Preferred Stock
could be utilized, under certain circumstances, as a method of discouraging and
delaying or preventing a change in control of the Company.
No Dividends. The Company has not paid cash dividends on its Common Stock
since its inception and does not anticipate any cash dividends on the Common
Stock in the foreseeable future. For the foreseeable future, the Company intends
to reinvest the earnings of the Company, if any, in the development and
expansion of its business.
Item 2. Description of Property
The Company, through Camden, leases 900 square feet of office space in an
office building located at 2285 St. Laurent Boulevard, Unit 16, Ottawa, Ontario,
Canada. The lease has no fixed terms and may be terminated within 30 days
written notice. The Company pays a monthly rent of approximately CDN $1,700.
Item 3. Legal Proceedings
Neither the Company nor Camden is involved in any legal proceeding.
Item 4. Submission of Matters to a vote of Security Holders
None
Item 5. Market for common equity and Related Stockholder Matters
The Company's Common Stock began trading on the OTC Bulletin Board under
the symbol "HYTN" on September 30, 1998. The Company has a limited market for
its Common Stock with no real trading volume. The following quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The high and low prices of the Company's Common
Stock on a quarterly basis since September 30, 1998, are as follows:
<PAGE>10
Quarter Ended High Low
- ------------- ---- ---
December 31, 1999 $3.25 $2.00
September 30, 1999 $2.00 $2.00
June 30, 1999 $2.50 $1.75
March 31, 1999 $3.00 $1.50
December 31, 1998 $2.00 $0.19
Item 6. Management's Discussion and Analysis or Plan of Operation
General
The following discusses the Company's financial condition and results of
operations based upon the Company's consolidated financial statements which have
been prepared in accordance with generally accepted accounting principles.
The Company was formed on August 20, 1996, to evaluate businesses for
possible acquisition. Effective November 2, 1998, the Company completed a
reorganization with Kafus whereby the Company issued 20,000,000 shares of its
Common Stock in exchange for Kafus' 9,000 common shares of Camden. Through
Camden, the Company is in the business of management consulting and product
development, and the Company's efforts have focused primarily on the development
of organic fertilizers from animal waste.
During fiscal year 1998, the Company changed its year end from September
30 to December 31. The following information discusses the Company's results of
operations for the year ended December 31, 1999, and for the three months ended
December 31, 1998. Because the Company is in the development stage, the
following financial information is not indicative of the Company's operations in
the future.
Results of Operations
For the year ended December 31, 1999
Revenues. For the year ended December 31, 1999, the Company had revenues
of $39,253.
Expenses. Total expenses for the year ended December 31, 1999, were
$778,445. Most of the expenses consisted of consulting and professional fees
related to the development of the Company's organic fertilizers and for product
development and research costs. Included in total expenses was employee equity
compensation of $222,500.
Net Loss. The Company incurred a net loss of $739,192 for the year ended
December 31, 1999, primarily related to the lack of revenues.
<PAGE>11
For the three months ended December 31, 1998
Revenues. Revenues for the three months ended December 31, 1998, were
$36,465. Revenues were primarily derived from contract services regarding
environmental studies.
Expenses. Total expenses for the three months ended December 31, 1998,
were $162,596, consisting primarily of consulting and other professional fees,
product development and research costs and administrative and other expenses.
Consulting fees related to engineer and administrative services provided to the
Company. Product development and research costs relate primarily to the
development of organic animal feed from organic waste and organic fertilizers
from animal residues, patent applications for organic fertilizers and project
costs for consulting services rendered. As previously discussed, during the
beginning of 1999, the Company began to concentrate its efforts toward the
development of organic fertilizers from animal residues.
Net Loss. The Company had a net loss of $126,131 for the three months
ended December 31, 1998.
Year ended September 30, 1998 compared to Year ended September 30, 1997
Revenues. Revenues for the year ended September 30, 1998, were $2,805
compare to no revenues for the year ended September 30, 1997. Revenues were
primarily derived from contract services regarding environmental studies.
Expenses. Total expenses for the year ended September 30, 1998, were
$271,353 compared to total expenses of $22,059 for the year ended September 30,
1997. During the year ended September 30, 1998, expenses increased substantially
in consulting and other professional fees, product development and research
costs and administrative and other expenses. Consulting fees related to engineer
and administrative services provided to the Company. Product development and
research costs relate primarily to the development of organic animal feed and
fertilizers from animal residues.
Net Loss. For the year ended September 30, 1998, the Company had a loss
of $268,548 compared to a loss of $22,059 for the year ended September 30, 1997.
The substantial loss incurred during the year ended September 30, 1998, can be
attributed to the increase in total expenses related to the development of the
Company's proposed products.
Liquidity and Capital Resources
The Company is a development stage company that intends to develop and
market fertilizer derived from animal residues. At this time, the Company has no
substantial revenues, and does not anticipate any substantial revenues until it
is able to develop and sell its products. Previously, the Company has received
loans to fund its operations and provide working capital. It is anticipated that
the Company will continue to finance its operations through loans and equity and
debt financings. As of December 31, 1999, the Company's working capital deficit
was $15,109 and as of December 31, 1998, the Company's working capital was
$12,029.
<PAGE>12
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's, or its suppliers' and customers' computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
Because the Company is in the development stage and has no significant
operations, the Company does not anticipate that its software or computer
systems will require any significant modification or replacement in response to
the Year 2000 Issue. As of December 31, 1999, the Year 2000 Issue did not
materially affect the operations of the Company and its subsidiary. The Company
will continue to monitor any Year 2000 Issue.
Item 7. Financial Statements
The information required by item 310(a) of Regulation S-B is attached to
this Annual Report.
Item 8. Changes in and Disagreements with Accountants
None
Item 9. Directors, Executive Officers, Promoters and Control Persons
MANAGEMENT
Executive Officers and Directors
The directors and executive officers of the Company as of December 31,
1999, are as follows:
<TABLE>
<CAPTION>
Name Age Office or Position Held Position Since
---- --- ------------------ -------------------
<S> <C> <C> <C>
Executive Officers and Directors
of the Company:
Robert Novitsky 52 President, Director 1999
Manfred Schultz 51 Vice President of Business 1999
Development, Director
Michael McCabe 42 Chief Financial Officer, Director 1998
Peter Schlesinger 65 Director 1999
Milton Datsopoulos 59 Director 1999
Gordon Robinson 59 Director 1999
Paul McClory 59 Director 1999
<PAGE>13
Name Age Office or Position Held Position Since
---- --- ------------------ -------------------
Tony Valentine 38 Director 1999
Lynda Murdock 38 Treasurer 1999
Fiama Walker 55 Secretary 1999
Executive Officers of Camden:
Robert Novitsky 52 President 1996
Manfred Schultz 51 Vice President of Business 1999
Development
</TABLE>
The following sets forth the principal occupations during the past five
years of the directors and certain executive officers of the Company and
executives of its subsidiary.
Robert L. Novitsky has been the President and Director of the Company since
March 1999 and has been with the Company since 1998. Mr. Novitsky has also been
the President of Camden since 1996. Mr. Novitsky was a Director of The CanFibre
Group Ltd. from August 1992 to December 1997. Since 1990, Mr. Novitsky has been
President and Director of Notra Environmental Services Inc. and Notra Marine.
From 1989 to 1990, he was Executive Vice-President in charge of management for
Amtek Engineering Service Incorporated, an engineering consulting company. From
1986 to 1990, he was President of SSI Monenco Limited and responsible for all
corporate activities associated with that professional engineering company. He
has a Bachelor degree in Chemical Engineering from Royal Military College in
Kingston, Ontario, an Ocean Engineer degree from MIT and a Master of Science in
Materials Engineering and Science from MIT.
Manfred W. Schultz has been the Vice President of Business Development of
the Company since September 1, 1999, and Director of the Company since August
1999. Mr. Schultz has also worked with Camden on a consultative basis since June
1999. From 1995 to 1999, Mr. Schultz worked as a business consultant for various
businesses and held senior executive and Director positions at Integrated
Resources Corp. and Northern Ostrich Corp. From 1987 to 1995, he founded and was
President and Chief Executive Officer of Koala Beverages Ltd. where he was
responsible for development and overall management. He has a Bachelor of Arts
degree in Economics from the University of Western Ontario.
Michael McCabe has been Chief Financial Officer and a Director of the
Company since 1998. Since 1997, Mr. McCabe has served as President and a
Director of Kafus Industries Ltd. From 1996 until May 1997, Mr. McCabe was
Managing Director of Project Finance for Key Global Finance Ltd. in Boston,
Massachusetts. From 1991 to 1996, he was Senior Vice President of BTM Capital
Corporation. He has a BS in Chemistry and Physics from Bridgewater State
College, an MS in Chemical Engineering from Purdue University, and an MBA in
Finance from Pace University.
Peter Schlesinger has been a Director of the Company since August 1999.
Since December 1993 Mr. Schlesinger has been a Director of, and since March
1998, Chairman of the Board and Chief Financial Officer of, MGPX Ventures Inc.
Now self-employed, Mr. Schlesinger was a partner of a Canadian stockbrokerage
firm, Annett Partners, for ten years and manager of a Bermuda investment
company, Tatra Ltd., since 1974. He was president of Halton Insurance, a Bermuda
<PAGE>14
insurance company, listed on The Toronto Stock Exchange, from 1988 to 1994. For
ten years he has also served as president of the Canadian Parkinson Disease
Foundation. Mr. Schlesinger has a BS in Psychology and Economics, and an MBA in
Finance from Columbia University.
Milton Datsopoulos became a Director of the Company on October 15, 1999.
Mr. Datsopoulos has also been a director of Kafus since March 25, 1998. Since
1974, Mr. Datsopoulos has been a partner of Datsopoulos, MacDonald & Lind, P.C.,
attorneys at law.
Gordon Robinson became a Director of the Company on October 15, 1999. Mr.
Robinson has also been a director of Kafus since March 25, 1998. Since 1992, Mr.
Robinson owns and operates a home improvement business.
Paul McClory was appointed to the Board of Directors on October 15, 1999.
He was also director of Kafus from June 11, 1996, until 1998. For over the past
five years, Mr. McClory, through his wholly-owned company Willow Holdings, Inc.,
has been a consultant to several public and private companies including Kafus
and North American Tire Recycling Ltd.
Tony Valentine became a Director of the Company on October 15, 1999. Mr.
Valentine has also been a director of Kafus since February 3, 1999. Since July
5, 1999, Mr. Valentine has been Executive Vice President and Chief Financial
Officer of Kafus. Prior to this time and since 1997, Mr. Valentine has been a
Vice President of Enron Capital & Trade Resources Corp.'s Industrial Services
Group in Houston. From 1993 to 1995, Mr. Valentine was a Vice President of
General Electric Capital Services and from 1989 through 1993, he was an
associate with Chase Manhattan Bank in New York. Mr. Valentine was a Chemical
Engineer with Shell Oil Company in New Orleans from 1984 through 1987. Mr.
Valentine received a Bachelor of Science degree in Chemical Engineering from the
University of Tennessee and an MBA from Harvard Business School.
Lynda Murdock was appointed Treasurer to the Company on October 15, 1999.
Since June 1999, Ms. Murdock has been Senior Vice President of Taxation, Audit
and Accounting for Kafus. Prior to her time with Kafus, Ms. Murdock has spent
the last 15 years in public accounting practice, most recently as a Tax Partner
with KPMG LLP of Canada. Ms. Murdock is a Chartered Accountant and has a B.Comm
honor's degree from the University of British Columbia.
Fiama Walker has been Secretary of the Company since September 16, 1999.
Ms. Walker has been Assistant Corporate Secretary and Manager of Compliance of
Kafus since July 7, 1998. For the last 25 years, Ms. Walker worked as a
paralegal and legal assistant for various law firms in British Columbia,
specializing in corporate and commercial law. She has completed diploma courses
in business administration, accounting and law from various colleges and
universities in British Columbia.
Item 10. Executive Compensation
Executive Compensation
None of the Company's directors, officers, or employees or officers and
employees of its subsidiaries earned in excess of $100,000 for the year ended
December 31, 1999.
<PAGE>15
The following table sets forth the compensation of the Company's
president during the last fiscal year. No officer received annual compensation
in excess of $100,000 during the last fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
------------------------------------------------------
Annual Compensation Awards Payout
------------------------------------------- --------------------------- -------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Compensation Award(s) Options Payout Compensa-
Position Period Salary Bonus ($) ($) ($) (#) ($) tion ($)
- -------------------------------------------------------------------------- --------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert L. Novitsky 1999 $45,767(1)
President 1998 $10,149(2) - - - - - -
</TABLE>
(1) Represents consulting fees. Mr. Novitsky does not receive any salary for
serving as President.
(2) Mr. Novitsky has been receiving a salary in the form of consulting fees of
Cdn $3,383 per month for serving as the president of Camden. The figure
$10,149 represents three months' salary.
At this time, the Company does not pay its directors compensation as
serving as such and for their attendance at board meetings. Further, at this
time, the Company does not provide pension, retirement or similar benefits to
its officers and directors. However, directors receive stock options as
compensation.
Outstanding Options Granted to Directors and Executive Officers
The following table provides information relating to share options
granted to directors and certain executive officers of the Company and its
subsidiary, Camden, as a group, and outstanding as of December 31, 1999.
<TABLE>
<CAPTION>
Name Number of Options Exercise Price Expiration Date
---- ----------------- -------------- ---------------
<S> <C> <C> <C>
Robert Novitsky 125,000 $1.50 October 13, 2004
Michael A. McCabe 25,000 $1.50 October 13, 2004
Peter Schlesinger 25,000 $1.50 October 13, 2004
Manfred W. Schultz 100,000 $1.50 October 13, 2004
Milton Datsopoulos 25,000 $1.50 October 13, 2004
Gordon Robinson 25,000 $1.50 October 13, 2004
Paul McClory 25,000 $1.50 October 13, 2004
Tony Valentine 25,000 $1.50 October 13, 2004
Lynda Murdock 10,000 $1.50 October 13, 2004
Fiama Walker 5,000 $1.50 October 13, 2004
<PAGE>16
Name Number of Options Exercise Price Expiration Date
---- ----------------- -------------- ---------------
Officers and Directors as 390,000
a group (9 persons)
</TABLE>
In addition to the foregoing, the Company has granted to its employees
five-year options to purchase, in the aggregate, 55,000 shares of Common Stock
of the Company at $1.50 per share.
The following table sets forth the options granted to Mr. Novitsky
during the past fiscal year.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
--------------------------------------------------------------------------------------
Number of % of Total Options
Securities Granted to
Underlying Options Employees in Exercise or Base
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Novitsky 125,000 45.5% $1.50 October 13, 2004
</TABLE>
The following table sets forth Mr. Novitsky's fiscal year option values.
No options were exercised by Mr. Novitsky during 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Unexercised In-the-
Number of Unexercised at Money Options at
FY-End (#) FY-End ($)(1)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert Novitsky None None 125,000 Exercisable/ $125,000 / $0
0 Unexercisable
</TABLE>
(1) Market price at November 3, 1999, the last reported trade for the calendar
year ended 1999, for a share of common stock was $2.81.
<PAGE>17
Item 11. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of December 31, 1999, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (a) each stockholder known by the Company to be the beneficial owner of
more than 5% of the Company's Common Stock, (b) each executive officer and
director of the Company, and (c) each director and executive officer of the
Company and its subsidiary as a group.
Percentage
Number of Beneficially
Name and Address Shares(1) Owned
- ----------------
Kafus Industries Ltd. 20,000,000 72.6%
1500 West Georgia Street 13th Floor
Vancouver, British Columbia
Canada V6G 2Z6
Robert Novitsky 245,000(2) *
Manfred Schultz 100,000(3) *
Michael McCabe 25,000(3) *
Peter Schlesinger 25,000(3) *
Milton Datsopoulos 25,000(3) *
Gordon C. Robinson 25,000(3) *
Paul McClory 25,000(3) *
Tony Valentine 25,000(3) *
Lynda Murdock 10,000(3) *
Fiama Walker 5,000(3) *
All directors and executive officers as a 510,000(3) 1.7%
group (9 persons)
* Represents less than 1%.
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of the Common Stock listed above, based on information furnished
by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable, or exercisable
within 60 days, are deemed outstanding for purposes of computing the
percentage ownership of the person holding such option or warrants, but
are not deemed outstanding for purposes of computing the percentage
ownership of any other person.
<PAGE>18
(2) As of December 31, 1999, Mr. Robert Novitsky holds an option to exchange
his ten percent (10%) interest in Camden (which represents 1,000 shares of
Camden's common shares) for 120,000 shares of the Company's Common Stock.
See "Item 12. Certain Relationship and Related Transactions." Also includes
options to purchase 125,000 shares of Common Stock.
(3) Represents options exercisable within 60 days to purchase shares of Common
Stock.
Item 12. Certain Relationships and Related Transactions
In connection with the Reorganization, Mr. Novitsky and the Company
entered into an agreement pursuant to which Mr. Novitsky has the option to
exchange his 1,000 shares in Camden, representing 10% of the outstanding Camden
common shares, for 120,000 shares of Common Stock of the Company.
The Company pays rent for office space to Notra Environmental Services
Inc. of which Mr. Robert L. Novitsky is also the President and a Director. Mr.
Novitsky is also the President and director of the Company, the President of
Camden, and a minority shareholder of Camden, owning ten percent (10%) of
Camden. For the year ended December 31, 1999, and for the three months ended
December 31, 1998, the Company paid rent of $13,730 and Cdn $5,100,
respectively.
As at December 31, 1999 and December 31, 1998, the Company had loans
outstanding in the aggregate amount of $900,710 and $373,605 due to Kafus and
its affiliates. The loans are non-interest bearing with no specific terms of
repayment.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Plan and Agreement of Reorganization, dated November 2, 1998, between
the Company and Kafus Environmental Industries Ltd.(1)
3.1 Amended and Restated Articles of Incorporation of Hyaton Company
Incorporated (1)
3.2 Amended Articles of Incorporation of Hyaton Company Incorporated
changing its name to Hyaton Organics Inc.(1)
3.3 Amended and Restated Bylaws of the Company (1)
10.1 Option Agreement between Robert Novitsky and Hyaton Company
Incorporated(2)
10.2 Purchase Agreement with Furst-McNess Company (portions of which are
deemed confidential and have been omitted)
27.1 Financial Data Schedule
(1) Previously filed with the Company's Form 10-SB on October 28, 1999.
(2) Previously filed with the Company's Form 10-SB amendment no. 1 on November
10, 1999.
(b) Form 8-K
None
<PAGE>19
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HYATON ORGANICS INC.
Dated: March 27, 2000 /s/ Robert Novitsky
By: Robert Novitsky, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ Robert Novitsky Dated: March 27, 2000
Robert Novitsky, President and Director
/s/ Manfred Schultz Dated: March 28, 2000
Manfred Schultz, Vice President and
Director
/s/ Michael McCabe Dated: March 28, 2000
Michael McCabe, Chief Financial Officer
and Director
/s/ Peter Schlesinger Dated: March 27, 2000
Peter Schlesinger, Director
/s/ Milton Datsopoulos Dated: March 29 2000
Milton Datsopoulos, Director
/s/ Gordon Robinson Dated: March 27, 2000
Gordon Robinson, Director
/s/ Paul McClory Dated: March 27, 2000
Paul McClory, Director
<PAGE>F-1
Auditors' Report
To the Shareholders and Board of Directors
Hyaton Organics Inc.
(formerly Hyaton Company Incorporated)
We have audited the consolidated balance sheets of Hyaton Organics Inc. (a
development stage enterprise) as at December 31, 1999 and 1998 and the
consolidated statements of operations and deficit and cash flows for the year
ended December 31, 1999, the three month period ended December 31, 1998, the
year ended September 30, 1998 and the period from November 24, 1994
(incorporation) through December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
December 31, 1999 and the results of its operations and its cash flows for the
year ended December 31, 1999, the three month period ended December 31, 1998,
the year ended September 30, 1998 and the period from November 24, 1994
(incorporation) through December 31, 1999 in accordance with generally accepted
accounting principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1(a) to
the consolidated financial statements, the Company is dependent on raising
financing to fund the construction of a manufacturing facility for its patented
fertilizer products and the attainment of profitable operations that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in this regard are also described in note 1(a). The financial statements
do not include any adjustment that might result from the outcome of this
uncertainty.
(signed) "KPMG LLP"
Chartered Accountants
Vancouver, Canada
March 23, 1999
<PAGE>F-2
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Consolidated Balance Sheets
(expressed in U.S. dollars)
December 31, 1999, with comparative figures for 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash $ 3,218 $ 9,210
Accounts receivable and other 11,887 41,108
------------ -----------
Total current assets 15,105 50,318
Computer equipment, net of accumulated depreciation
of $885 (1998 - $394) 1,084 1,474
------------ -----------
Total assets $ 16,189 $ 51,792
============ ===========
Liabilities and Shareholders' Deficiency
Current liability:
Accounts payable and accrued liabilities (note 3) $ 30,214 $ 38,289
Loans from related parties (note 3) 940,850 412,811
------------ -----------
Total liabilities 971,064 451,100
Shareholders' deficiency:
Capital stock (note 4):
Authorized:
100,000,000 common shares with a par value of $0.01
25,000,000 preference shares with a par value of $0.01
Issued:
27,556,000 common shares (1998 - 27,559,000) 275,560 276,247
Additional paid-in capital 223,187 -
Deficit accumulated during the development stage (1,430,962) (691,770)
Other comprehensive income (note 5):
Cumulative translation adjustment (22,660) 16,215
------------ -----------
Total shareholders' deficiency (954,875) (399,308)
Contingencies (notes 1(a) and 6)
------------ -----------
Total liabilities and shareholders' deficiency $ 16,189 $ 51,792
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>F-3
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Consolidated Statements of Operations and Deficit
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
For the period
Three month November 24,
Year ended period ended Year ended 1994 to
December 31, December 31, September 30, December 31,
1999 1998 1998 1999
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue $ 39,253 $ 36,465 $ 2,805 $ 87,666
Expenses (note 3):
Consulting and other professional fees 356,021 69,692 97,504 541,333
Product research and development
costs 131,686 64,092 126,770 325,086
Travel 12,488 1,389 22,083 41,980
Administrative and other expenses 55,750 27,423 24,996 117,139
Employee equity compensation 222,500 - - 222,500
------------ ------------ ------------- --------------
778,445 162,596 271,353 1,248,038
------------ ------------ ------------- --------------
Net loss 739,192 126,131 268,548 1,160,372
Deficit accumulated during the
development stage, beginning
of period 691,770 295,049 26,501 -
Charge to deficit (note 1) - 270,590 - 270,590
------------ ------------ ------------- --------------
Deficit accumulated during the
development stage, end of period $ 1,430,962 $ 691,770 $ 295,049 $ 1,430,962
============ ============ ============= ==============
Basic and diluted loss per share $ 0.03 $ 0.01 $ 0.01 $ 0.05
Weighted average number of
shares outstanding 27,557,997 24,847,620 20,000,000 21,960,502
============ ============ ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>F-4
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
For the period
Three month November 24,
Year ended period ended Year ended 1994 to
December 31, December 31, September 30, December 31,
1999 1998 1998 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from (used in) operating activities:
Net loss $ (739,192) $ (126,131) $ (268,548) $ (1,160,372)
Items not involving the use of cash:
Depreciation 472 114 280 866
Employee equity compensation 222,500 - - 222,500
Shares issued as a financing fee - 5,000 - 5,000
Changes in non-cash operating working capital:
Accounts receivable 31,120 (37,549) 2,403 (2,543)
Accounts payable and accrued
liabilities (10,096) 20,550 10,730 21,259
Deposit on building - - 10,158 -
------------- ------------ ------------- ------------
(495,196) (138,016) (244,977) (913,290)
Cash flows used in investing activities:
Capital expenditures - - (1,868) (1,868)
Cash flows from financing activities:
Issuance of common shares - - - 657
Loans from related parties:
Kafus Industries Ltd. 420,828 132,149 19,900 572,877
Cameron Strategic Planning Ltd. 66,827 14,470 174,060 305,217
Mr. Robert L. Novitsky - - 39,744 39,744
Kafus Bio-Composites Inc. 1,107 - - 1,107
------------- ------------ ------------- ------------
488,762 146,619 233,704 919,602
Effect of exchange rate changes on
foreign currency cash balances 442 (127) (74) (1,226)
------------- ------------ ------------- ------------
Increase (decrease) in cash (5,992) 8,476 (13,215) 3,218
Cash, beginning of period 9,210 734 13,949 -
------------- ------------ ------------- ------------
Cash, end of period $ 3,218 $ 9,210 $ 734 $ 3,218
============= ============ ============= ============
Supplementary information:
Interest paid $ - $ - $ - $ -
Income taxes paid - - - -
Non-cash transactions:
Issuance of common shares:
For investment in Camden Agro-Systems Inc. - 270,590 - 270,590
As a financing fee - 5,000 - 5,000
Options issued as employee
equity compensation 222,500 - - -
============= ============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>F-5
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Notes to Consolidated Financial Statements
(expressed in U.S. dollars)
1. Nature and continuance of operations:
Hyaton Organics Inc. (formerly Hyaton Company Incorporated) ("Hyaton") was
incorporated pursuant to the laws of the State of Nevada on August 20,
1996. Effective November 2, 1998, Hyaton holds a 90% investment in Camden
Agro-Systems Inc. ("CASI"), a Canadian company, as its sole asset. Prior to
that date Hyaton was inactive.
CASI was incorporated under the Ontario Business Corporations Act (1982) on
November 24, 1994 to carry on the business of management consulting and
product development. CASI's efforts have focused primarily on the
development of organic fertilizers and animal feed from animal waste. In
early 1999, CASI's management discontinued its efforts towards the
development of organic animal feed.
Pursuant to the Plan and Agreement of Reorganization dated November 2,
1998, Hyaton issued 20,000,000 common shares from treasury for 9,000 issued
and outstanding common shares of CASI representing a 90% holding in CASI.
In addition, the agreement provides for the issuance of additional shares
of Hyaton to the vendor of the 9,000 common shares of CASI at a rate of one
common share for every $0.20 of earnings before interest, tax, amortization
and depreciation of CASI for the period from November 2, 1998 to the
earlier of November 2, 2000 or 18 months from the commencement of
commercial operations. Furthermore, the agreement provides for additional
share issuances at a rate of one share for every $0.05 of losses incurred
by the vendor under the indemnification granted to the vendor against any
legal claims and other contingencies. Related to the agreement, 500,000
common shares of Hyaton were issued to Securities Trading Services Inc., an
unrelated party, as a financing fee.
The agreement resulted in control of Hyaton passing to the former
shareholders of CASI. The transaction is accounted for as a
recapitalization of CASI, as if CASI had issued common shares to acquire
the net monetary assets of Hyaton. The financial statements reflect the
operations of CASI from its inception with the activities of Hyaton
consolidated from November 2, 1998, the date of the transaction.
At the date of the reorganization, the net assets of Hyaton were nominal.
The par value of Hyaton shares issued of $275,590 has been included in
capital stock with an offset of $270,590 to the deficit and $5,000 to
consulting fee expense. The excess of $13,879 of the costs incurred over
the cash on hand in Hyaton at the date of acquisition has been charged to
expense. The contingent shares issuable by Hyaton will be accounted for as
an additional cost of purchase, if and when issued.
Consideration:
Par value of common shares issued $ 275,590
Costs 13,879
----------
$ 289,469
==========
<PAGE>F-6
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Notes to Consolidated Financial Statements
(expressed in U.S. dollars)
1. Nature and continuance of operations (continued):
Consideration applied to:
Net assets $ -
Less:
Consulting expense 5,000
Cash costs incurred in excess of cash on hand 13,879
Charge to deficit 270,590
---------
$ 289,469
=========
(a) Future operations:
These consolidated financial statements have been prepared on the
basis of a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
The Company has suffered recurring losses and has not generated
profitable operations since inception. The continuance of the Company
as a going concern is dependent on obtaining financing for continued
operations and the construction of a manufacturing facility for its
fertilizers, the attainment of profitable operations, which are
consistent with management's plans and intentions, and the avoidance
of any cash costs from early redemption of loans from related parties.
If the Company is unable to achieve these objectives, it may be
obligated to liquidate certain assets in settlement of liabilities and
the value achieved on settlement may be less than the assets' carrying
values.
(b) Development stage enterprise:
For U.S. accounting purposes the Company is considered to be a
development stage enterprise from the inception of CASI on November
24, 1994 to December 31, 1999 as its efforts are primarily directed
towards the development of a new product. The identification of an
entity as a development stage enterprise does not impact the
measurement and recognition principles applied in these consolidated
financial statements but does require the disclosure of specified
cumulation from inception and other information.
2. Significant accounting policies:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States.
(a) Principles of presentation:
These consolidated financial statements include the accounts of Hyaton
and its 90% owned subsidiary, CASI. All intercompany balances and
transactions have been eliminated.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the 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.
<PAGE>F-7
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Notes to Consolidated Financial Statements
(expressed in U.S. dollars)
2. Significant accounting policies (continued):
(b) Foreign currency translation:
These consolidated financial statements are presented in U.S. dollars.
Hyaton's functional currency is the U.S. dollar. The functional
currency of CASI is the Canadian dollar as the majority of its
operations occur in Canada and are conducted in Canadian dollars. The
Canadian dollar accounts have been translated into U.S. dollars using
the exchange rate in effect at the balance sheet date for asset and
liability amounts and at the average exchange rate for the period for
amounts included in the determination of income. Any gains or losses
from this translation are included in the separate cumulative
translation adjustment account in shareholders' equity in the
consolidated balance sheet.
Transactions denominated in other than the operation's functional
currency are measured at exchange rates in effect at the date of the
transactions with exchange gains and losses included in the
determination of income.
(c) Computer equipment:
Computer equipment is recorded at cost. Depreciation is calculated on
the declining-balance basis from the date of acquisition at a rate of
30% per annum.
(d) Income taxes:
The Company follows the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized based on the estimated future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases and of loss carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date. To the extent that the realizability of the benefit of
deferred tax assets is not considered to be more likely than not, a
valuation allowance is provided.
(e) Revenue recognition:
Revenue relating to consulting services is recognized when the
professional services have been rendered.
(f) Research and development costs:
Research and developments costs are expensed as incurred.
(g) Stock option plan:
The Company has a stock-based compensation plan which is described in
note 4(b). For accounting purposes these options are deemed to have
been granted in the year ended December 31, 1999. For grants to
employees, compensation expense is recognized over the vesting period
in an amount equal to the difference, if any, between the market value
of the Company's common shares at that measurement date and the
exercise price. The value recognized for option grants is included in
the consolidated statements of operations as "employee equity
compensation". Options granted to non-employees will be recorded at
their fair value.
<PAGE>F-8
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Notes to Consolidated Financial Statements
(expressed in U.S. dollars)
2. Significant accounting policies (continued):
(h) Loss per share:
Loss per share is calculated using the weighted average number of
shares outstanding during the fiscal period. This average includes as
outstanding common shares, shares issued in a reporting period from
the date of their issuance. Fully diluted per share amounts are not
presented as the effect of outstanding stock options and other
convertible securities is anti-dilutive.
3. Related party transactions and balances:
Kafus Industries Ltd., a public company, is a majority shareholder of the
Company. Cameron Strategic Planning Ltd., a private Canadian company, and
Kafus Bio-Components Inc., a U.S. corporation, are subsidiaries of Kafus
Industries Ltd.
Mr. Robert L. Novitsky is an officer of the Company and a shareholder and
officer of CASI.
The Company has entered into the following material related party
transactions:
(a) Loans from related parties:
Loans from related parties consist of the following:
1999 1998
---- ----
Kafus Industries Ltd. $ 591,301 $ 149,457
Cameron Strategic Planning Ltd. 308,302 224,148
Mr. Robert L. Novitsky 40,140 39,206
Kafus Bio-Composites Inc. 1,107 -
---------- ---------
$ 940,850 $ 412,811
========== =========
The loans from related parties are non-interest bearing with no
specific terms of repayment. The loan from Mr. Robert L. Novitsky is
convertible into common shares of the Company, prior to financing of
the first manufacturing plant, on a mutually acceptable basis.
(b) Accounts payable and accrued liabilities:
Included in accounts payable and accrued liabilities is $nil (1998 -
$5,052) payable to a private company controlled by an officer of the
Company.
(c) Fees:
The Company has been charged administrative, management and consulting
fees aggregating $155,725 (three months ended December 31, 1998 -
$34,777; year ended September 30, 1998 - $70,365) by certain officers,
directors and private companies controlled by them.
<PAGE>F-9
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Notes to Consolidated Financial Statements
(expressed in U.S. dollars)
4. Capital stock:
(a) Issued:
<TABLE>
<CAPTION>
Number Value Assigned
of shares per share value
---------- --------- -----------
<S> <C> <C> <C>
Issued for cash at inception, November 24, 1994 1,000 $0.657 $ 657
---------- --------- -----------
Issued and outstanding at all period ends prior to
September 30, 1998 1,000 657
Issued during period ended December 31, 1998:
For investment in CASI 27,058,000 0.01 270,590
For financing fee 500,000 0.01 5,000
---------- --------- -----------
Issued and outstanding at December 31, 1998 27,559,000 276,247
Adjustments resulting in an increase in
additional paid-in capital:
Shares cancelled (3,000) 0.01 (30)
Authorized par value change - (657)
---------- --------- -----------
Issued and outstanding at December 31, 1999 27,556,000 $ 275,560
========== ========= ===========
</TABLE>
Shares issued for non-cash consideration have been recorded at the
market value of the shares on the date at which the obligation arises.
(b) Options:
(i) During 1999, the directors of the Company approved the "1999
Stock Option Plan" (the "Plan"). The Plan is subject to
shareholder approval which is intended to be requested at the
next annual general meeting. Generally, the Plan provides for the
granting of options to employees, officers, directors and
consultants to the Company. On October 15, 1999, the Company's
directors approved the grant of 445,000 stock options having an
exercise price of $1.50 each and an expiry date of October 13,
2004 to employees, officers and directors. The Plan and the
granting of these options are intended to be approved by the
shareholders of the Company at its annual general meeting in
2000. The vesting date and terms will also be subject to
shareholders' approval.
<PAGE>F-10
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Notes to Consolidated Financial Statements
(expressed in U.S. dollars)
4. Capital stock (continued):
(b) Options (continued):
In accordance with the Company's accounting policy for its Plan,
compensation expense of $222,500 has been recognized for its
stock options equal to the difference between the market price
and exercise price on the date of board approval with an offset
to additional paid-in capital. As accounting principles require
the disclosure of information as if the Company determined
compensation expense based on the fair value at the grant date
for its stock options, the Company's loss for 1999 would have
been increased to the pro forma amounts indicated below:
Net loss:
As reported $ 739,192
Per share 1,304,342
Basic and diluted loss per share:
As reported $ 0.03
Pro forma 0.05
The per share weighted-average fair value of stock options
granted during 1999 was $1.77 on the date of grant using a
binomial option-pricing model with the following assumptions:
expected dividend yield of 0%, risk-free interest rate of 6%, an
expected life of 5 years, and a volatility 62.5%. These
calculations assume that all options vested at date of grant.
(ii) Call/put options:
The Company has entered into a call/put option agreement with the
minority shareholder (the "Shareholder") of CASI exercisable at
any time on or before November 3, 2003. Under this option, both
Hyaton and the Shareholder have the option to exchange the
Shareholder's 1,000 common shares of CASI for 120,000 shares of
Hyaton common stock at $1.00 per Hyaton share.
5. Comprehensive income:
The Company is required to disclose changes in other comprehensive income,
which include gains and losses that affect shareholders' equity but are
excluded from net income. The components of comprehensive income to the
Company are net loss and changes in the foreign currency cumulative
translation adjustment account.
<TABLE>
<CAPTION>
For the period
Three month November 24,
Year ended period ended Year ended 1994 to
December 31, December 31, September 30, December 31,
1999 1998 1998 1999
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss $ (739,192) $ (126,131) $ (268,548) $ (927,472)
Currency translation adjustment (38,875) 4,261 15,216 (22,660)
------------ ------------ ------------ -------------
$ (778,067) $ (121,870) $ (253,332) $ (950,132)
------------ ------------ ------------ -------------
</TABLE>
<PAGE>F-11
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Notes to Consolidated Financial Statements
(expressed in U.S. dollars)
6. Contingencies:
(a) Legal claims:
In the normal course of business, the Company may be subject to
various claims and contingencies related to lawsuits, taxes and other
matters. Management believes the ultimate liability, if any, arising
from such claims or contingencies is not likely to have a material
adverse effect on the Company's results of operations or financial
condition.
(b) Concentration of risk:
The Company was formed to develop, operate, finance, and construct a
manufacturing facility which will produce high quality fertilizer
products from animal waste. Because a project of this scope and
technology has not yet been completed, there is concentration of risk
inherent in the Company's business, including, but not limited to,
technology, construction, financing, and operations risk.
7. Income taxes:
The Company has approximately $845,000 of non-capital losses carried
forward available to reduce taxable income otherwise calculated in Canada.
These losses expire up to 2006.
1999 1998
Future tax asset:
Non-capital loss carry forwards $ 845,000 $ 360,000
Less valuation allowance (845,000) (360,000)
----------- ----------
Net future tax assets $ - $ -
=========== ==========
Future tax liabilities $ - $ -
=========== ==========
8. Financial instruments:
(a) Fair value:
The fair values of financial instruments included in current assets
and liabilities (excluding loans from related parties) are equal to
their carrying values due to their ability for prompt liquidation or
the short-term to their settlement.
The fair value of loans from related parties cannot be reasonably
estimated due to the nature of the amounts due and their relationship
between the liable party and the Company and the lack of a ready
independent market for such amounts payable.
(b) Currency fluctuation risk:
The Company has not entered into any material foreign exchange
contracts to minimize or mitigate the effects of foreign exchange
fluctuations on the Company's operations or these financial
statements. However, as the majority of assets and liabilities are
located in Canada and originally denominated in Canadian dollars,
management does not believe it faces any significant foreign currency
fluctuation risk.
<PAGE>F-12
HYATON ORGANICS INC.
(formerly Hyaton Company Incorporated)
(a development stage enterprise)
Notes to Consolidated Financial Statements
(expressed in U.S. dollars)
9. Segmented information:
At December 31, 1999, the Company's operations were primarily situated in
Canada or related to operations that are situated in Canada. Through CASI,
the Company's primary focus is on the manufacturing of organic fertilizer
from animal waste. Accordingly, the Company is considered to operate in a
single reportable and geographic segment.
Purchase Agreement
This Purchase Agreement (this "Agreement"), dated as of the 15th day of February
2000, among:
(1) Furst-McNess Company, an Illinois corporation operating under the laws of
the United States ("Purchaser"), and
(2) Hyaton Organics Inc., a subsidiary of Kafus Industries Ltd., a British
Columbia corporation, operating under the laws of the United States
("Supplier").
W I T N E S S E T H:
WHEREAS, Supplier is developing the Facility to produce Organic Products (such
terms and all other capitalized terms used herein having the respective meanings
set forth in Section 1).
WHEREAS, Supplier desires to obtain a contract for the purchase of the annual
production of the Facility.
WHEREAS, Purchaser desires to purchase and distribute the Organic Products.
NOW THEREFORE, in consideration of the premises and the mutual promises and
agreements herein expressed, and for other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto,
intending legally to be bound, hereby agree as follows:
SECTION 1. Definitions
Unless otherwise specified herein, the following terms shall have the
meanings specified below. The singular shall include the plural, and the
masculine shall include the feminine and neuter, as the context requires.
"Includes" or "is including" shall mean "including", but not limited to."
All definitions of agreements shall include all amendments thereto in
effect from time to time.
"Agreement" means this Purchase Agreement.
"Contract Price" means the price per Unit of product sold hereunder
determined in accordance with Section 4.2.
"Cure Provision Period" has the meaning set forth in Section 6.3.
"Dollars" and "$" means lawful currency of the United States.
"Facility" means the plant to be developed, financed, constructed and owned
by the Supplier at a site in Merry Hill, North Carolina.
"Final Completion Date" means the date when the following condition is
satisfied: Supplier's construction contractor certifies that the Facility
has completed performance testing and has performed to the degree necessary
<PAGE>
to constitute substantial completion (or its equivalent) under the
construction contract and is capable of producing annually not less than
the volumes prescribed in Schedule A.
"Financial Closing" means the execution and delivery of definitive
documentation for the financing of all costs of construction, procurement
and equipping of the Facility which will not be financed by Supplier or its
affiliates.
"Force Majeure" has the meaning set forth in Section 9.
"Initial Delivery Date" has the meaning specified in Section 2.4.
"Initial, Basic and Operating Terms" mean the periods described in Section
2.1.
"Mechanical Completion Date" means the date which Supplier and Supplier's
construction contractor agree is the date that the Facility has been
completed to the extent necessary to begin start-up and performance
testing.
"Minimum Purchase Price" has the meaning specified in Section 4.1(b).
"Product" means Organic Products meeting the Specifications set forth in
Section 8.0 and produced using technology of Hyaton Organics Inc., which
technology is, as of the date of this Agreement, proprietary.
"Purchase Order" has the meaning specified in Section 3.3(a).
"Required Annual Amount" means the amount of product in tons as set out in
section 3.1 (b), or if less, the maximum that the Facility can product in
any given Contract Year.
"Selling Price" has the meaning set forth in Section 4.1.
"Shipment" means product identified on a single invoice and shipped to
Purchaser pursuant to this Agreement.
"Specifications" means, with respect to Product, the specifications set
forth in Section 8.0
"Term" means, collectively, the Initial Term, and the Operating Term.
SECTION 2. Term; Development of Facility
2.1 Basic Term
(a) This Agreement shall be effective from the date hereof and, unless earlier
terminated in accordance with this Agreement, continue until the fifth (5)
anniversary of the Final Completion Date. The period from the date hereof
until the Final Completion Date is herein called the "Initial Term". The
period from the date following the Final Completion Date to the fifth (5)
anniversary of the Final Completion Date is herein called the "Operating
Term".
(b) At least six (6) months prior the expiration of the Operating Term, the
parties may agree to renew this Agreement for an additional five (5) year
term, starting Final Completion Date on the terms of the initial Agreement
or under new terms agreed by both parties.
<PAGE>
(c) Notwithstanding Paragraph (b) above, if the parties have not reached an
agreement, Supplier will be entitled to seek arrangements with other
parties for the marketing of Products. Supplier will not contract with a
third party on better terms without first offering in writing the same
terms and conditions to Purchaser. Purchaser shall have fifteen (15) days
from receipt of such notice to accept or reject the third party offer. If
Purchaser declines, Supplier upon six (6) months notice may contract with a
third party.
(d) Notwithstanding Paragraph (c) above, Supplier shall fulfill forward sales
orders placed by Purchaser as under the original terms of the Agreement.
2.2 Construction Progress
Supplier agrees to keep Purchaser informed periodically of progress in
construction of the Facility and to notify Purchaser immediately of any
changes in the construction schedule that materially affect the anticipated
Initial Delivery Date.
2.3 Financial Closing
Should Financial Closing not have occurred within two (2) years from the
execution of this Agreement, Purchaser may terminate this Agreement by
written notice of intent to terminate given not less than six (6) months
prior to the effective date of termination; provided, however, that:
(a) Supplier shall have the right to extend the deadline for Financial Closing
on one or more successive occasions for up to three additional months in
the aggregate, by notice to Purchaser given on or prior to the initial
deadline for Financial Closing or any subsequent deadline then in effect,
which notice shall state that Supplier is diligently and in good faith
working to consummate Financial Closing and such extension is necessary to
enable Financial Closing to occur based upon a term sheet for all necessary
Facility financing having been executed by Supplier and the party or
parties providing financing, and;
(b) Termination shall not be effective if Financial Closing occurs on or before
the date Termination otherwise would become effective pursuant to the
notice given by Purchaser. Any extension of the deadline for Financial
Closing shall cause a corresponding extension of the deadline for the Final
Completion Date set forth in Section 2.5.
(c) In the event that Purchaser terminates the Agreement as outlined within
this Section 2.3, then Supplier shall reimburse Purchaser for all
reasonable marketing expenses agreed to by the parties incurred by
Purchaser in anticipation of supply of Product from the Supplier.
2.4 Initial Delivery Date
(a) After the Mechanical Completion Date but prior to the Final Completion
Date, when the Facility is capable of producing Product meeting the
Specifications, Supplier shall notify Purchaser and designate the date of
anticipated shipment of the first quantities of Product to Purchaser (the
"Initial Delivery Date").
(b) Should the Mechanical Completion Date not have occurred within the period
of 12 months after the date of Financial Closing (as such period may be
extended in accordance with Section 2.3), Purchaser may terminate this
Agreement by notice to Supplier of intent to terminate given not less than
<PAGE>
30 days prior to the effective date of termination; provided, however,
that:
i. Supplier shall have the right to extend the deadline for Mechanical
Completion Date on one or more successive occasions for up to six
additional months in the aggregate, by notice to Purchaser given on or
prior to the initial deadline for Mechanical Completion Date or any
subsequent deadline then in effect, which notice shall state that
Supplier, and Supplier's contractor are diligently and in good faith
working to complete the construction of the Facility to the point when
the Mechanical Completion Date will be deemed to have occurred; and,
ii. Termination shall not be effective if the Mechanical Completion Date
occurs on or before the date termination otherwise would become
effective pursuant to the notice given by Purchaser.
2.5 Final Completion Date
Should the Final Completion Date not have occurred within the period of 18
months after the date of Financial Closing (as such period may be extended
in accordance with Section 2.3), Purchaser may terminate this Agreement by
notice to Supplier of intent to terminate given not less than 30 days prior
to the effective date of termination; provided, however, that:
(a) Supplier shall have the right to extend the deadline for Final
Completion Date on one or more successive occasions for up to six
additional months in the aggregate, by notice to Purchaser given on or
prior to the initial deadline for Final Completion Date or any
(b) subsequent deadline then in effect, which notice shall state that
Supplier, and Supplier's contractor are diligently and in good faith
working to complete the construction of the Facility to the point
Final Completion Date will be deemed to have occurred and that the
Facility is substantially complete; and,
(c) Termination shall not be effective if the Final Completion Date occurs
on or before the date Termination otherwise would become effective
pursuant to the notice given by Purchaser.
SECTION 3. Sale and Purchase
3.1 Sale and Purchase
(a) Subject to the terms and conditions herein set forth, commencing on
the Initial Delivery Date, Supplier agrees to sell to Purchaser, and
Purchaser agrees to market and purchase from Supplier, all Product
manufactured at the Facility during the Operating Term and all Product
manufactured at the Facility during any Contract Year up to the
Required Annual Amount for each Contract Year.
(b) The Required Annual Amount for the duration of this contract estimated
by Supplier are as follows: (Schedule A)
Year 1 15,000 (short tons-2000 lbs.)
Year 2 30,000 short tons
Year 3-5 50,000 short tons
<PAGE>
3.2 Distributorship
Purchaser shall use all reasonable efforts and due diligence to promote,
market and distribute Product and at its own expense shall provide
aggressive, dedicated, continuous sales representation by means of actual
sales personnel contact with existing and prospective customers of Product.
Supplier and Purchaser shall establish a co-operative program pertaining to
the establishment of the Products' trademarks and subsequent media
promotion thereof. Costs pertaining directly to product and trademark
development as well as direct brand media spending will be borne by
Supplier. Supplier and Purchaser shall communicate as required and at least
semi-annually the parties shall have a joint marketing meeting to be held
at a convenient location for the parties. In connection therewith,
Purchaser shall, among other things at its own expense;
(i) respond to all inquiries concerning Product,
(ii) maintain sufficient equipment, and hire and maintain a sales staff
sufficient in number and qualifications to aggressively promote,
distribute and sell Product, and
(iii)develop in conjunction with Supplier from time to time and implement
such advertising strategies for Product as necessary and agreed to by
the parties. Within 15 business days following the end of each
calendar month, Purchaser shall deliver to Supplier a sales report in
a form satisfactory to both parties.
3.3 Purchase Orders
(a) In order to accommodate the continuous production process of the
Facility, Purchaser shall confer with Supplier to establish monthly
Product Purchase Order requirements at intervals of six months, two
months and one month. Purchaser shall deliver to Supplier individual
purchase orders covering each month's shipments at least twenty-one
(21) days in advance of the desired shipping date specifying the
Selling Price, packaging requirements of the Product required by
Purchaser (each, a "Purchase Order"). To the extent practicable,
Supplier will use its best efforts to accommodate Purchase Orders on
shorter notice as may be required from time to time, but in no event
shall Purchaser request changes to such Purchase Order less than 48
hours prior to expected delivery from the Facility.
(b) All Product purchased by Purchaser shall be shipped in such lots as
the parties may agree.
(c) All monthly Product requirements as previously agreed to by the
Purchaser will be transported from the Facility during the month. In
the event that contracted Product is not removed from the Facility, a
storage charge will be levied to the Purchaser.
(d) Supplier shall invoice each shipment at the time of delivery to the
carrier. Invoices shall include the Purchase Order Number, quantity,
types of product, selling price and any applicable taxes.
3.4 Additional Features
The parties agree to discuss on an ongoing basis different varieties and
packaging forms for the Product and other additions or deletions that would
provide additional revenue benefits to the Supplier and Purchaser.
<PAGE>
3.5 Delivery
All Product Purchase Orders are F.O.B. Facility by the Purchaser's own
carrier or contracted carrier at the Purchaser's expense.
SECTION 4. Pricing
4.1 (a) Selling Price
With respect to any Product purchased by Purchaser and sold by Supplier to
Purchaser hereunder, the "Selling Price" for each Purchase Order shall be
the price at which the Purchaser, exercising its best efforts to maximize
price, has resold the Product to the end user, which is the subject of the
Purchase Order. In the event Product purchased by Purchaser has not been
pre-sold by Purchaser, the minimum purchase price (4.1(b)) will be applied
to the subject Product. If the actual selling price received by the
Purchaser from the end user is higher than the minimum purchase price, the
entire amount shall be recalculated and adjusted in favour of the Supplier
and will be credited in the next month's reconciliation statement.
4.1 (b) Minimum Purchase Price
A guaranteed minimum purchase price F.O.B. Facility is to be established
annually on each anniversary date of the Agreement to the Purchaser
(Schedule B).
4.2 Basis of Payment
Purchaser will provide a statement on a monthly basis showing total
volumes, revenues and costs (defined under Net Selling Price below) for all
Products sold or stored within ten (10) days of the previous monthly
period. The statement will be accompanied by payment from Purchaser to
Supplier for the amount due for all Product purchased and received from
Supplier during the preceding monthly period. Any Product shipped that is
not pre-sold as set out in (4.1), will be invoiced to Purchaser at the
Minimum Purchase Price (4.1 (b)) at month end and will be due for payment
within 15 days.
Percentage revenues (commission) to Purchaser shall be calculated on the
Net Selling Price (as per the schedule below) and payment will be forwarded
to Purchaser from Supplier within f15 days of receipt of statement and full
payment from Purchaser.
Commission Revenue payment to Purchaser from the Supplier for the Products
purchased during the previous month will be based on the following table:
Net Selling Price % to Purchaser
(a) Fertilizers (1) (1)
(1) (1)
(1) (1)
(b) Growing Media (1) (1)
(1) (1)
(1) (1)
* short ton (2000 pounds)
(1) Confidential portion has been omitted and filed separately with the
Commission.
<PAGE>
NET SELLING PRICE shall be defined as the sale price of the Product to
Purchaser's customers (end user) after deducting all direct costs relating
to the customers' orders for freight, storage, interest carrying cost,
handling and custom cost actually incurred by Purchaser but shall not
include Purchaser's overhead or fixed cost (Schedule C).
Purchaser shall be entitled to set selling prices but shall keep Supplier
informed of its pricing structure.
4.3 Product Only
All prices under this Agreement are for Product only and do not include
technical data, proprietary rights of any kind, or patent rights, and any
packaging other than normal domestic commercial packaging, unless expressly
agreed to in writing by the Supplier.
SECTION 5. Title and Risk of Loss
Title and risk of loss for all product sold hereunder shall pass to
Purchaser upon delivery onto Purchaser's or Purchaser's contractors
equipment at the Facility and the sale by Supplier to Purchaser will be
complete upon such delivery, Purchaser being deemed to have accepted
delivery thereof.
SECTION 6. Default.
6.1 Default
Notwithstanding anything herein contained, either party may terminate this
Agreement upon written notice to the other party in the event that;
(a) such other party commits a breach (other than a breach which in all
the circumstances is insignificant) of any provision of this Agreement
(which notice must specify in reasonable detail the breach or breaches
complained of);
(b) Supplier decides to close the Facility producing the Product;
(c) Such other party becomes the subject of any bankruptcy, insolvency or
similar proceedings;
(d) Any legislation, regulations, policy, ruling or decision of a Federal,
State or Municipal government or of any agency thereof are
implemented, repealed or altered in such a way as to significantly
prevent either party from lawfully exercising its rights or performing
its obligations hereunder.
6.2 Remedies
Upon the occurrence and during the continuation of any default hereunder,
the party not in default shall have the right:
<PAGE>
(a) to give written notice of the party's intention to terminate this
Agreement and thus begin the Cure Provision Period effective
immediately upon the other party's receipt of such notice; and
(b) to pursue any other remedy given under this Agreement or now or
hereafter existing at law or in equity or otherwise.
6.3 Cure Provision Period
Upon written notice being received by either party of the other's intention
to terminate, a Cure Provision Period of 30 days from the date of receipt
of such notice shall commence. During this period, the party receiving the
notice will have the opportunity to correct the situation giving rise to
the termination notice and to make current any amounts past due that may
have arisen from such situation. Failure to correct (or in the event such
correction cannot by its nature be accomplished within 30 days, failure to
start and diligently proceed to correct) the situation during the Cure
Provision Period or the waiving of the Cure Provision Period by the party
in receipt of the termination notice will result in the notifying party
having the right to terminate the Agreement immediately. In the event of a
correction which cannot be accomplished within 30 days, and notwithstanding
the immediately preceding sentence, either party shall have the right to
invoke the remedies specified in Section 6.2 above if a default continues
for more than 90 days following the defaulting party's receipt of notice of
termination.
SECTION 7. Warranty; Indemnification; Insurance.
7.1 Warranty
Supplier warrants to Purchaser that all Product sold to Purchaser hereunder
shall be free and clear of liens, claims, encumbrances, and restrictions
against sale of any type or nature not authorized by this Agreement, and
shall at the time of delivery to the carrier conform to the Specifications
and the descriptions thereof in the Purchase Order covering the product in
question.
7.2 Indemnification
Each of the parties hereto covenants and agrees to indemnify and hold
harmless the other against and from any and all liability, damages, losses
and costs (including without limitation reasonable attorneys' fees)
suffered or incurred by such other party as a result of any breach of this
Agreement by the other party other than any negligent act or neglect of
itself, its servants, employees, agents, invitees, or licensees, including
liability for injury or damage to any person or property.
7.3 Liability Insurance
Supplier and Purchaser shall each provide and keep in force, comprehensive
general liability insurance in respect of personal injury, death or
property damage with generally accepted insurance carriers as are customary
for risks of this nature and with minimum amounts of $5,000,000.00 per
occurrence and each party will provide to the other, proof of such
insurance and renewal thereof, upon request.
<PAGE>
SECTION 8. Product Features
8.1 Product Specifications
The Products sold under the "Truly Organic" brand name are pure organic
fertilizers and pure organic growing media (substrates) that contain no
chemical additives and are formulated on a bio-modulated release basis. The
Products are produced from selected organic waste materials that have been
aerobically processed under specific, optimally controlled conditions.
The Products will be formally certified by a recognized national and/or
state organic certification body, such as OMRI (The Organic Materials
Review Institute) and/or any other regulatory body required by law where
the Product is sold.
(i) Growing Media:
Professional-All Purpose Mix -consumer retail market
-ready-to-use
-complete multi-purpose blend
-packaged in multi-color, laminated,
re-sealable bags
(ii) Fertilizer
MTO (Magic Touch Organic) -consumer retail market
-pelletized pure organic fertilizer
-general purpose use
-packaged in multi-color, laminated,
re-sealable bags
(iii)Compost - detailed specifications and packaging shall be determined
and agreed to by the parties acting reasonably and attached hereto as
a schedule prior to production of same.
(iv) Enhanced Growing Media - detailed specifications and packaging shall
be determined and agreed to by the parties acting reasonably and
attached hereto as a schedule prior to production of same
Dependant on market demands and conditions, the Supplier in conjunction
with the Purchaser will develop other products and packaging to meet other
markets' and customers' needs.
8.2 Product Claims
Purchaser agrees to service all claims made or submitted by its customers
arising out of the sale of Product under this Agreement in the best
interests of Supplier; provided, however, that claims in excess of $500.00
shall not be settled by Purchaser without the prior written approval of
Supplier, which approval shall not be unreasonably withheld or delayed. For
claims under $500.00, Purchaser shall settle the claim in accordance with
this Section 8.2, and an adjustment shall be made by Supplier in the next
regularly prepared billing statement to reflect such settlement and payment
by Purchaser. For claims over $500.00, Purchaser shall promptly notify
Supplier of such claim and upon settlement agreement, Supplier shall pay
for such claim directly.
<PAGE>
SECTION 9. Force Majeure
If any cause reasonably beyond the control of either party, including but
not limited to fire, tempest, earthquake, inclement weather, Act of God,
power interruption, fuel shortage, strike, lockout or other labor dispute,
riot or civil commotion, act of public enemy or enactment, rule, order or
act of government or governmental agency, prevents such party (the
"defaulting party") from complying with any provision of the Agreement,
then the defaulting party shall be excused from complying while such cause
continues to prevent the defaulting party from so complying for a period of
forty-five (45) days.
Where non-compliance by the defaulting party continues beyond forty-five
(45) days and relates to a material term or terms of this Agreement, then
the other party shall have the option to terminate this Agreement effective
upon giving written notice of termination to the defaulting party.
SECTION 10. General Provisions.
10.1 Entire Agreement
The provisions of this Agreement and the Schedules attached hereto contain
the entire agreement between the parties concerning the transactions
contemplated herein and supersede all prior agreements or understandings
between the parties relating to the subject matter hereof, written or oral
and all prior agreements or understandings, written or oral, between
Purchaser and Supplier or any of their affiliates relating to the subject
matter hereof. The provisions of this Agreement shall supersede any
provisions, terms and conditions contained on any Purchase Order (other
than as to the volumes and sizes on a Purchase Order delivered hereunder),
sale order or other writing Purchaser or Supplier may give or receive, and
the rights of the parties shall be governed exclusively by the provisions,
terms and conditions hereof.
10.2 Successors and Assigns
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns; provided,
however, that neither party may assign any of its duties and obligations
hereunder without the prior written consent of the other party, which
consent shall not be unreasonably withheld. In no event shall any
assignment relieve the assigning party of its obligations and duties
hereunder or impair the rights of the non-assigning party hereunder.
Notwithstanding the foregoing, Purchaser hereby agrees and consents to the
assignment of this Agreement by Supplier for the purpose of financing or
refinancing the Facility. Such assignment, for purposes of financing or
refinancing, may be to any entities providing debt or credit to Supplier or
the Facility or any trustee or other representative of such entities and
the initial assignees or designees thereof (but not to any subsequent
assignees or designees).
Notwithstanding the foregoing:
(a) Purchaser agrees to execute and deliver, at no expense to Supplier,
such documents and/or instruments as may be reasonably required by
Supplier or any other person providing financing or refinancing,
including, without limitation, opinions of counsel and written
confirmation, as of date of Financial Closing, of the satisfaction by
Supplier of all conditions required to be satisfied under this
Agreement as of such date.
<PAGE>
(b) Supplier hereby agrees and consents to Purchaser contracting with a
joint venture between Kafus Industries Ltd. or an affiliate thereof
and Purchaser for the joint venture to supply market development,
research and advertising services in support of the marketing and
distribution of the Product by Purchaser hereunder; provided, that the
foregoing shall not be deemed to relieve Purchaser of any of its
duties or obligations thereunder.
10.3 Amendment
This Agreement may not be modified or amended, nor may the provisions
hereof be waived, except in writing signed by the parties hereto.
10.4 No Waiver
Any waiver by any party hereto of any of its rights hereunder shall be
without prejudice to its future assertion of any such right or of any other
right hereunder, and any delay in exercising any right shall not operate as
a waiver thereof or any other right.
10.5 Applicable Law
This Agreement shall be governed by and construed in accordance with the
laws of the state of North Carolina.
10.6 Headings
Section headings used herein are for convenience of reference only, are not
part of this Agreement and are not to affect the construction of, or to be
taken into consideration in interpreting, this Agreement.
10.7 Arbitration
(a) All disputes, controversies or differences which may arise between the
parties, regardless of value should be first attempted to be resolved
between the parties in a friendly manner and only once all reasonable
attempts at resolving such differences have been exhausted, or where,
without immediate resolution to an apparently unresolvable difference
will cause significant economic hardship on one of the parties, shall
Arbitration be used as a method of dispute resolution.
(b) All disputes, controversies, claims or differences which may arise
between the parties hereto out of or in relation to or in connection
with this Agreement or the breach thereof where the amount claimed or
in dispute is $1,000,000 or less (exclusive of costs and attorney's
fees and expenses) shall be finally settled by arbitration conducted
in accordance with the Commercial Arbitration Rules (the "Rules") of
the ----- American Arbitration Association ("AAA"), as from time to
time in effect any and all --- disputes concerning the suitability of
any Shipment of the Products purchased and sold hereunder shall be
determined by an independent testing laboratory with substantial
industry experience. Whenever any dispute, controversy, claim or
difference which may be submitted to arbitration under this Section
10.7 arises between the parties hereto, either party hereby may given
to the other party hereto notice, in accordance with Section 10.8
hereof of its intention to submit such dispute, controversy, claim or
difference to arbitration.
<PAGE>
(c) Arbitration shall take place before one arbitrator agreed to by the
parties or, in the event agreement cannot be reached about such
appointment, the arbitrator shall be appointed by the AAA. Once
appointed, such arbitrator shall be neutral.
(d) The parties hereto agree that all fees and expenses associated with
the arbitration, including attorneys' fees and expenses, shall be
borne by the parties as determined by the arbitration.
(e) The determination of such arbitrators shall be final and binding upon
the parties to the arbitration, and judgment upon the award rendered
by arbitrators may be entered in any court having jurisdiction, or
application may be made to such court for a judicial acceptance of the
award and an order of enforcement, as the case may be. The arbitrators
shall set forth the grounds for their decisions in the award.
(f) The place of arbitration shall be in Raleigh, North Carolina if
Arbitration is initiated by Purchaser and in Raleigh, North Carolina
if Arbitration is initiated by Supplier.
10.8 Notices
All notices and other communications given hereunder must be in writing and
may be sent by personal delivery, by overnight courier or delivery service
for which a delivery receipt can be obtained, by facsimile for which
receipt is confirmed or by certified mail, return receipt requested (or the
functional equivalent) to any party at the address of the party shown
below. Any party hereto may change its address by giving notice in writing
to the other party or parties of such change.
if to Supplier:
Hyaton Organics Inc.
2285 St.Laurent Blvd.
Bldg. C16
Ottawa, Ontario
Canada
K1G 4Z6
Attention: President
Telephone: 613-738-0887
Facsimile: 613-738-4406
if to Purchaser:
Furst-McNess Company
2100 Oxford St. E.
Suite 39
London, Ontario
Canada
N5V 4A4
Attention: Vice President
Telephone: 519-659-8600
Facsimile: 519-659-1600
<PAGE>
Copy: Furst-McNess Company
120 East Clark Street
Freeport, Illinois 61032
United States
Attention; President
Telephone: 815-232-9700
Facsimile: 815-232-9765
All notices and other communications given to any party hereto in
accordance with the provision of this Agreement shall be deemed to have
been given on the date of receipt if delivered by hand or overnight courier
service or sent by facsimile, or on the date five (5) Business Days after
dispatch by certified or registered mail if mailed.
10.8 Partial Invalidity
The unenforceability or invalidity of any term or provision contained
herein, or of any portion thereof, shall not affect the validity or
enforceability of any other term or provision, or portion thereof, herein
contained.
10.9 No Agency Relationship
Nothing contained in this Agreement shall be construed as creating any
agency, joint venture or partnership between the parties. Each party shall
at all times be an independent contractor under this Agreement.
10.10 Non-Disclosure and Confidentiality
Supplier acknowledges that, by reason of the Agreement, it will become
privy to confidential information belonging to Purchaser, including the
identities of Purchaser's customers, agents and contractors and pricing
information. Supplier agrees that it will not, without the prior written
consent of Purchaser, disclose to any third party or use for its own
benefit any such confidential information either during the continuance of
the Agreement or thereafter.
Purchaser acknowledges that it shall become privy to confidential
information such as production forecasts and other information belonging to
Supplier. Purchaser agrees that it will not, without the prior written
consent of Supplier, disclose to any third party or use for its own benefit
any such confidential information either during the continuance of the
Agreement or thereafter.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first written above.
Hyaton Organics Inc.
By: ____________________________________
Name: Robert Novitsky
Title: President
<PAGE>
Furst-McNess Company
By: ____________________________________
Name: Jack Smit
Title: Vice President, New Business Development
<PAGE>
Schedule A
REQUIRED ANNUAL AMOUNT
Short tons (2000 pounds)
TOTAL GROWING
PRODUCTION FERTILZER MEDIA
YEAR 1 15,000 5,000 10,000
YEAR 2 30,000 10,000 20,000
YEAR 3-5 50,000 17,000 33,000
<PAGE>
Schedule B
MINIMUM PURCHASE PRICE - FOB FACILITY
$US per Short Ton
I. GROWING MEDIA
Professional/All-Purpose Mix $_____ per ton (1)
II. FERTILIZERS
MTO (Magic Touch Organic) $_____ per ton (1)
(1) Confidential portion has been omitted and filed separately with the
Commission.
<PAGE>
Schedule C
NET SELLING PRICE DEFINITION
A. PRICE TO PURCHASER'S CUSTOMER = ($000)
LESS
B. DIRECT COSTS:
1. Freight cost to customer from shipping point
2. Handling
3. Customs
4. Storage*
5. Interest carrying cost for prepayment of account over 30 days
EQUALS
C. NET SELLING PRICE
*Monthly storage charge including in and out charges at public warehousing
facilities.
Note: Purchaser's overhead and fixed costs not included.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,218
<SECURITIES> 0
<RECEIVABLES> 11,887
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,105
<PP&E> 1,969
<DEPRECIATION> 885
<TOTAL-ASSETS> 16,189
<CURRENT-LIABILITIES> 30,214
<BONDS> 0
0
0
<COMMON> 275,560
<OTHER-SE> (1,230,435)
<TOTAL-LIABILITY-AND-EQUITY> 16,189
<SALES> 0
<TOTAL-REVENUES> 39,253
<CGS> 0
<TOTAL-COSTS> 778,445
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (739,192)
<INCOME-TAX> 0
<INCOME-CONTINUING> (739,192)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (739,192)
<EPS-BASIC> 0.03
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