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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal years ended: December 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number: 0-16534
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DEUCALION RESEARCH, INC.
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(Name of small business issued in its charter)
North Dakota 45-0375367
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(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
6601 E. Grant Road, Tucson, Arizona 85715-3821
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(Address of principal executive offices) (Zip Code)
(520) 886-5354
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(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,
$.0001 Par Value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was
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required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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: [ ]
State issuer's revenue for its most recent fiscal year. $0
--
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and ask prices of such stock as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act.).
Since the Company has not conducted any business since 1992 and the
common stock of the Company is not currently traded and there is no market for
the Company's Common Stock, the aggregate market value of the voting stock held
by non-affiliates is nominal.
Note: If determining whether a person is an affiliate will involve an
unreasonable effort or expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
As of March 13, 2000, 1,499,610,127 shares of Common Stock, par value
$.0001 per share, were outstanding.
Documents incorporated by reference: Schedule 14F-1 Information
Statement filed on July 17, 1999.
Transitional Small Business Disclosure Format (Check one):
Yes No X
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DEUCALION RESEARCH, INC.
FORM 10-KSB
PART I
This report may contain certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, which
represent our expectations or beliefs, including but not limited to, statements
concerning our operations, economic performance, financial condition, growth and
acquisition strategies, investments, and future operational plans. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
generality of the foregoing, words such as "may," "will," "expect," "believe,"
"anticipate," "intent," "could," "estimate," "might," or "continue" or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond our control,
and actual results may differ materially depending on a variety of important
factors, including those discussed under the captions "Risks Related to Our New
Business Ventures" and "Risks Related to the Internet and the Internet
Industry."
Item 1. Description of Business.
Note: Readers of this report should note that our business materially
changed after August 31, 1999. Except as otherwise described in this report, the
information in this report is given through December 31, 1999. As described in
the Schedule 14F-1 Information Statement, as filed with the Securities and
Exchange Commission on July 17, 1999 and incorporated herein by reference, there
was a change in control of Deucalion Research, Inc. Mr. Farley and the Metz
Trust purchased a majority of our outstanding common stock and have begun the
process of bringing our filings with the Securities and Exchange Commission
current. Under the current management, headed by Mr. Farley, we have resumed
business operations seeking opportunities in the emerging software and internet
technology industries.
(a) Business Development
Prior Business.
Deucalion Research, Inc., was incorporated under the laws of the State
of North Dakota on May 3, 1983. The company was formed to research, develop,
formulate, produce and market environmental engineering products and related
services. We initially emphasized the development of custom-engineered
environmentally sound products and processes to remove toxic hydrogen sulfide
("H2S" or "sour" gas) and other impurities from gas streams originating from
petroleum fields and sanitary landfills, leaving clean gas for immediate fuel
use (the "Deucalion Process"). As a result of the general decline of the
petroleum industry during 1986, we reduced our emphasis on oil field operations
and began devoting efforts to the development and engineering of alternative
products and processes as well as the obtaining of additional funds
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primarily through the exchange of an interest in a landfill gas project and
additional issuances of our common stock to fund such activities.
During January and February, 1988, we conducted a public offering of
227,058,000 units at $.01 per Unit resulting in net proceeds of $1,620,028.
These proceeds were used to fund our business plan until December 1991, when we
ceased active operations.
We initially developed the Deucalion Process using the proprietary
"Ferro-Fluids" (hydrated iron oxide in fluid form) for removing hydrogen sulfide
from crude oil, natural gas and landfill gas during drilling and production
operations. H2S is a toxic and corrosive waste product which must be removed
before the petroleum products can be used for fuel or other purposes.
Traditionally, sour gas has been burned which is a cause of acid rain in the
atmosphere; this method is now subject to strict regulation by the Environmental
Protection Agency and other federal and state agencies. Where sour gas is used
to fuel engines, the resulting acid causes severe damage to engine components
and results in polluted exhaust gases. We are no longer utilizing the Deucalion
Process in any operation, and we have not been successful in our attempt to
license manufacturing and marketing of the Deucalion Process since 1991.
In 1992, we determined that no further demonstration plans for the
Deucalion Process were warranted. Our initial product, Ferro-Fluids, is not
being marketed at this time, and we were not successful in attempts to license
manufacturing and marketing of the product. Since 1992, we have tried to find an
operating enterprise with which to merge or otherwise form a business
combination. However, no such opportunity presented itself until Messrs. Farley
and the Metz Trust offered to purchase our outstanding but unissued shares under
the terms of a Stock Purchase Agreement (the "Agreement"), dated April 20, 1999,
between Deucalion and Michael R. Farley and Forrest L. Metz.
Change in Control and Restructure of Deucalion
Effective August 31, 1999, we completed a transaction whereby we sold
approximately 67% of our post transaction voting common stock for an aggregate
purchase price of $110,000. Also, effective August 31, 1999, the former
directors and officers of Deucalion resigned and the purchasers were elected as
directors and officers of the Company.
Pursuant to the terms of the transaction, the purchasers paid us
$100,000 of the purchase price in exchange for 998,000,000 of shares of our
common stock. The newly appointed management of Deucalion, upon obtaining
shareholder approval, plan to effect a recapitalization of Deucalion, which may
include a reverse stock split, change the name of Deucalion to Digital Fuel,
Inc., appoint independent accountants and change the domicile of the company to
Delaware. After the reverse stock split and recapitalization, the purchasers
have agreed to pay the remaining $10,000 purchase price in exchange for shares
of Deucalion's common stock which will result in the purchasers owning 95% of
Deucalion.
The stock purchase agreement also provided for the settlement of
certain liabilities of Deucalion, including $38,836 owed for legal fees and
$93,412 owed for management service fees. The new management intends to settle
these liabilities through the issuance of common
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stock equal to 1/2% and 1%, respectively, of the total outstanding common stock
of the company after completion of the recapitalization and issuance of
additional shares of common stock to the purchasers.
(b) Narrative Description of Business
Current Status
Since the time we ceased active business operations in December 1991
and until recently, we have been essentially inactive. We did not maintain our
status as a reporting company pursuant to the rules of the Securities and
Exchange Commission and we did not seek to provide a market for our outstanding
securities. Management does not plan to voluntarily deliver an annual report to
security holders this year.
Investment in Preferred Stock Shares of SiteScape
Effective September 1, 1999, the new management completed an agreement
with F & A, Inc., an Arizona corporation ("F & A"), wholly owned by Michael R.
Farley who is also chief executive officer, a director and a majority
shareholder of Deucalion, whereby the Deucalion acquired from F & A an option to
purchase 516,667 shares of Series A Preferred Stock of SiteScape, Inc.
("SiteScape"). Deucalion acquired this option in exchange for a $200,000 draw on
a multiple advance promissory note extended to the company by F & A of up to
$800,000, bearing interest at 9% and due on demand (the "F & A Note"). The
option to purchase the SiteScape preferred stock was originally agreed to
through negotiations between F & A and SiteScape and allows F & A (or its
designee) to purchase 516,667 shares of SiteScape preferred stock at an exercise
price of $1.9354 per share. The $200,000 represents reimbursement of travel and
other direct expenses incurred by F & A in connection with their negotiations
with SiteScape and also a fee for F & A's services. The $200,000 has been
recorded as general and administrative expense in the accompanying statement of
operations.
SiteScape is an internet based start up company that acquired AltaVista
FORUM from Compaq Computer in April 1999. FORUM is collaboration software that
provides ways to communicate, share resources, and collaborate with groups of
people within a company or across organizations.
Prior to September 1999, F & A provided $400,000 to SiteScape as a
deposit on the option to purchase the preferred stock. On September 1, 1999,
Deucalion acquired F & A's rights to this deposit in exchange for a $400,000
draw on the F & A Note. In addition, F & A advanced $10,000 to the company for
the purchase of the license agreement. This results in a total notes payable to
F & A of $610,000 through December 31, 1999. Payments of $74,049 have been made
on these notes.
Effective November 5, 1999, Deucalion exercised one-half of the
SiteScape option shares and purchased 258,334 shares of preferred stock at a
total cost of $500,000. Deucalion paid $100,000 cash directly to SiteScape, and
applied the $400,000 SiteScape deposit described above. In February 2000, we
exercised the remaining one-half of the SiteScape option shares
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and purchased 258,333 shares of preferred stock for $500,000. Deucalion now owns
approximately 20% of the voting stock of SiteScape.
The SiteScape preferred stock has, among other rights, the right to
vote on general matters and the election of the board of directors of SiteScape,
the ability of a 1:1 conversion into Class A voting common stock of SiteScape
and dividend participation with common shares.
In addition, the preferred stock shall also be entitled to receive
dividends if, and when declared by SiteScape's board of directors at the
cumulative rate of 8% per year compounded annually. Dividends are due only if
the tangible net worth of SiteScape exceeds $25 million and if declared by the
board of directors of SiteScape.
Advances to Rainbow Country, Inc.
Consistent with our business strategy, our management identified this
early stage company and provided Rainbow Country, Inc. ("Rainbow") with advances
of $25,245. These funds were part of Rainbow's seed capital to continue
exploring the feasibility of delivering potable water to Tucson, Arizona. This
feasibility study included but was not limited to determining the costs
associated with securing the water rights, plus designing and building a
delivery system. In addition, some work was done to quantify the demand and
price point for deliverable water to Tucson.
The result of this six-month effort has been the determination that the
scope of this project is beyond our technical and capital resources.
Negotiations are currently under way with the Rainbow to convert this early
stage funding into either an equity position in this project or a note that will
come due and payable by years end. We have not ruled out a combination of equity
and a note to compensate us for our investment in Rainbow.
Business Model
Licensing Agreements
In 1999, Deucalion purchased, through loans made to us, various
software license agreements for $250,000. Of this amount, $45,000 was financed
in 1999 and $205,000 is due through June 30, 2000. These license agreements are
with M2Direct, Inc. and will create an opportunity for us to provide businesses
with e-commerce tools to develop alternative Internet distribution channels for
their products and services. This technology accelerates the distribution and
selling of goods and services in e-commerce by enabling the secure delivery of
digital information via email, the largest single mechanism for communication on
the Internet.
An intelligent electronic envelope is the basis for this technology.
Each envelope has a unique name and any data file can be moved into the
envelope. The envelope can be compressed and saved onto the local computer or it
can be automatically compressed and attached to the sender's email system. A
single envelope can contain as few as one file or as many as a thousand. The
process of compressing the documents and then securing them against
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unauthorized entry is done with an optional password. Submitting customer
profile data and/or the use of a credit card can also open the contents of the
envelope.
In order to attempt to market the M2Direct licensed technology,
meetings have either been conducted or are scheduled with companies that have a
need to protect copyrighted books, newspapers, and analyst's reports. Efforts
are currently underway to explore the secure envelopes application in the
security of patient recorders, to comply with health insurance legislation.
In addition to the digital rights management market, our plan of
operation includes exploring the feasibility of combining this envelope
technology with collaboration and data mining software products and companies.
As an example, documents can be securely delivered, such as bids, in the
business-to-business construction management and collaboration market segment.
In fact, technical efforts are underway to combine this licensed software with
two specific software products that will enhance our capabilities to compete in
the business-to-business market space.
We are also exploring the application of this technology with a concept
called "Reintermediation," meaning the creation of a new type of retail
middleman, the electronic commerce distributor. With the M2Direct licensed
technology, entire catalogs of goods and services can be delivered to a
customer's email address, allowing them to shop and buy from an electronic
resource that is local to their computer. We are also exploring the concept of
variety cataloging in which we could group products from different manufacturers
together with brands we may own in the future. We plan to offer the marketing
and creative expertise of our employees, together with the M2Direct licensed
technology, to serve our partners' products, as a new kind of Internet marketing
firm.
We are developing business plans to utilize the M2Direct licensed
technology in a variety of ways. Although we have presented the technology and
our ideas to several companies and have many more meetings scheduled, we have no
contracts with other companies at this time.
Neither the Company nor its officers or directors currently owns any
patents to any products or processes developed by the Company, including the
Deucalion Process.
Risks Relating to Our New Business Ventures
We have little relevant operating history to evaluate performance or
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prospects.
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We consider ourselves to be engaged primarily in research and
development activities, raising capital, acquiring licenses and/or businesses
and recruiting personnel. We have little relevant operating history upon which
we can evaluate our performance and prospects. We face all the risks common to
companies in their early stage of development, including:
o undercapitalization;
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o cash shortages;
o high capital expenditures;
o unproven business model;
o difficulties in managing rapid growth; and
o lack of sufficient customers, revenue and cash flow
Although our personnel have experience in developing and
commercializing new products based on innovative technologies, unanticipated
expenses, problems or technical difficulties could occur which would result in
material delays in product commercialization. Our efforts may not result in
successful product commercialization.
We will need additional capital to fund operations.
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We will require additional financial resources to fund our new
product development and growth. Although we are actively exploring options for
funding, we have received no commitment from any person or source for that
financing, and adequate financing may not be available on reasonable terms. Our
failure to acquire additional funding when required could impede new product
development and growth and, ultimately, our performance and prospects.
Our earnings growth is dependent upon acceptance of our products.
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Our earnings growth depends primarily upon market acceptance of our
licensed software products. Our products may not be able to be successfully
marketed or achieve customer acceptance.
Our success depends on the introduction of new products and product
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enhancements.
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Our success in the software license and development business is
heavily dependent upon the timely introduction of successful new products or
enhancements of existing products to replace declining revenues from products at
the latter stage of a product cycle. Consumer preferences for software products
are difficult to predict, and few consumer software products achieve sustained
market acceptance. If revenue from new products or enhancements does not replace
declining revenues from existing products, we may experience:
o lower operating revenues
o lower net revenues
o lower cash flows
o less liquidity
Production delays could inhibit our success.
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The process of developing our software products is extremely complex.
A significant delay in the introduction of one or more new products or
enhancements could have a material adverse effect on the ultimate success of
such products and we may experience:
o lower operating revenues
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o lower net revenues
o lower cash flows
o less liquidity
We operate in a developing market with increasing participants.
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The market for Internet products and computer software is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed products and services. Although we believe that the
diverse segments of the Internet market will provide opportunities for more than
one supplier of products and services similar to those we possesses, it is
possible that a single supplier may dominate one or more market segments.
Additionally, there may be insufficient market acceptance of our products
because the market for Internet products and computer software changes rapidly.
We are heavily dependent on our management.
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Our success depends upon the personal efforts of our Chief Executive
Officer, Michael R. Farley. The loss of the services of Mr. Farley could have a
material adverse effect on our business and prospects. We do not have
"key-person" life insurance on Mr. Farley.
Our success is linked to our ability to hire and maintain personnel.
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Our success depends on our ability to hire and retain additional
qualified management, marketing, technical, financial and other personnel.
Competition for qualified personnel is intense and we may not be able to hire or
retain qualified personnel.
We will be dependent on contracts with other companies for promotion
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of our products and reputation.
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We plan to enter into agreements and informal relationships with
other software and computer companies under which the companies will use our
products. We believe these arrangements are important to the promotion of our
products and the public recognition of the company under the new "Digital Fuel"
name. These arrangements typically are not exclusive, and may be terminable upon
little or no notice. Termination or alteration of these agreements could have
any of the following effects on us:
o limit or eliminate the market for our products
o limit or eliminate public recognition of the "Digital Fuel" name
o reduce revenues
o lower cash flows
o impair liquidity
Risks Related to the Internet and the Internet Industry
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We face significant competition from other providers of Internet
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products and computer software.
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The markets that we intend to enter for our Internet products and
computer software are characterized by intense competition and an increasing
number of new market entrants who have developed or are developing potentially
competitive products. Further, the cost barriers to these markets are relatively
low, which means our competitors range from small companies with limited
resources to large, more established companies. Some competitors, regardless of
size, have substantially greater financial, technical, marketing, distribution,
personnel and other resources. For example, current and future competitors with
greater financial resources than us may be able to carry larger inventories,
undertake more extensive marketing campaigns, adopt more aggressive pricing
policies and make higher offers or guarantees to software developers and
co-development partners than us. It is possible that we may not have the
resources to withstand these and other competitive forces.
We may become subject to government regulation.
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We are not currently subject to direct regulation by any government
agency in the United States, other than general business regulations applicable
to conduct businesses generally. Currently there are few laws or regulations
regarding access to or commerce on the Internet. Due to the increasing
popularity and use of the Internet, laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. These laws or regulations,
if adopted, could also limit the growth of the Internet, which could, in turn,
decrease the demand for our proposed products and services and increase our cost
of doing business. Inasmuch as the applicability to the Internet of the existing
laws governing issues such as property ownership, libel and personal privacy is
uncertain, any new legislation or regulation or the application of existing laws
and regulations to the Internet could have an adverse effect on our business and
prospects.
The company may be unable to protect its licensed M2Direct technology
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rights.
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Our success depends to a significant degree upon the protection of our
licensed M2Direct technology rights. Moreover, the laws of other countries in
which the M2Direct licensed technology is marketed may afford little or no
effective protection of its proprietary technology. Reverse engineering,
unauthorized copying or other misappropriation of the M2Direct licensed
technology could enable third parties to benefit from the M2Direct technology
without paying us for it. If we resort to legal proceedings to enforce its
M2Direct licensed technology, the proceedings could be burdensome and expensive.
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Claims by other companies that the M2Direct licensed technology
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infringe their copyrights or patents could adversely affect the profitability of
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the company.
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If the licensed M2Direct technology violates third party proprietary
rights, we may be required to obtain additional licenses from third parties to
continue offering the secure delivery of digital material over the internet. Any
efforts to obtain licenses from third parties may not be successful and, in any
case, would substantially increase our costs and have a material adverse effect
on the profitability of the M2Direct licenses. Prior to the acquisition of the
M2Direct licenses there were no comprehensive patent searches to determine
whether the M2Direct technology infringes patents held by third parties. In
addition, product development is inherently uncertain in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, with regard to similar
technologies.
Employees
Our founders are Michael R. Farley and Forrest L. Metz. Mr. Farley
serves as Chief Executive Officer and Mr. Metz serves as President of the
company. The Executive Committee is composed of our Chief Executive Officer, our
President, and Our Chief Operating Officer, Grant S. Papanikolas. The total
staff size of the company is four persons.
Item 2. Properties.
The Company's offices are located at 6601 E. Grant Road, Suite 101,
Tucson, Arizona 85715, which is leased by Farley & Associates, Inc. We have been
charged $2,260 for this office space by Farley & Associates, Inc. for the months
of August through December 1999.
Item 3. Legal Proceedings.
In 1989, the Securities and Exchange Commission ("SEC") commenced an
investigation into the company's public offering of securities. The company
cooperated fully in this investigation. To date, no response or report has been
received from the SEC regarding this investigation. The investigation is
confidential in nature, and the SEC has advised the company that the
investigation "should not be construed as an indication by the SEC or its staff
that any violation of law has occurred, nor should it be construed as a
reflection upon any security, person or entity." We have received no information
regarding this investigation since 1991, and we have no reason to believe that
this investigation will result in any action against the company.
Item 4. Submission of Matters to Vote of Securities Holders
Not applicable.
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PART II
Item 5. Market for The Registrant's Common Equity and Related Stockholder
Matters.
(a) Market Information
There is currently no public trading market for the company's common
stock and the company has no information regarding any bid or asked prices for
the company's common stock since the first quarter of 1989. Prior to that time,
the company's common stock was traded in the over the counter market and
reported in the "pink sheets."
(b) Holders
The number of holders of record of common shares as of March 13, 2000
was approximately 1,499,610,127.
(c) Dividends
The Company has not paid a dividend with respect to its common stock
and cannot be expected to pay a dividend on its common stock in the foreseeable
future.
Item 6. Management's Discussion and Analysis and Plan of Operation.
Management's Discussion and Analysis and Plan of Operation
Plan of Operation
In order to attempt to market the M2Direct licensed technology,
meetings have either been conducted or are scheduled with companies that have a
need to protect copyrighted books, newspapers, and analyst's reports. Efforts
are currently underway to explore the secure envelopes application in the
security of patient recorders, to comply with health insurance legislation.
In addition to the digital rights management market, our plan of
operation includes exploring the feasibility of combining this envelope
technology with collaboration and data mining software products and companies.
As an example, documents can be securely delivered, such as bids, in the
business-to-business construction management and collaboration market segment.
In fact, technical efforts are underway to combine this licensed software with
two specific software products that will enhance our capabilities to compete in
the business-to-business market space.
We are also exploring the application of this technology with a concept
called "Reintermediation," meaning the creation of a new type of retail
middleman, the electronic commerce distributor. With the M2Direct licensed
technology, entire catalogs of goods and services can be delivered to a
customer's email address, allowing them to shop and buy from an electronic
resource that is local to their computer. We are also exploring the concept of
variety
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cataloging in which we could group products from different manufacturers
together with brands we may own in the future. We plan to offer the marketing
and creative expertise of our employees, together with the M2Direct licensed
technology, to serve our partners' products, as a new kind of Internet marketing
firm.
We are developing business plans to utilize the M2Direct licensed
technology in a variety of ways. Although we have presented the technology and
our ideas to several companies and have many more meetings scheduled, we have no
contracts with other companies at this time.
Stock Purchase Agreement
On July 29, 1999 and effective August 31, 1999, the Stock Purchase
Agreement between the company and Michael R. Farley and Forrest L. Metz was
closed. All of the officers and directors tendered their resignations and
Messrs. Farley and Metz were elected to the Board of Directors. Mr. Metz was
appointed Chairman of the Board, and Mr. Farley was appointed Chief Executive
Officer. In August, the company hired Grant S. Papanikolas as Chief Operating
Officer. The new management is preparing the necessary documents to cause the
company to have a special shareholders meeting for the following purposes: 1)
effect a recapitalization of the company which will include a reverse stock
split with a magnitude not yet determined; 2) change the name of the company to
Digital Fuel, Inc.; 3) appoint independent accountants; and 4) change the
domicile of the company to Delaware. As per the Stock Purchase Agreement, at the
completion of the reverse stock split and recapitalization, Messrs. Farley and
the Metz Trust will purchase additional shares of the common stock of the
company and will end up owning 95% of the common stock of the company.
SiteScape, Inc. Investment
As discussed under the heading "Investment in Preferred Stock Shares of
SiteScape" earlier in this report, through February 2000, the company exercised
options to purchase preferred stock of SiteScape for a total consideration of
$1,000,000. The company now owns 20% of the voting securities of SiteScape.
Rainbow Investment
As discussed under the heading "Advances to Rainbow Country, Inc."
earlier in this report, management identified this investment opportunity and
provided Rainbow with seed capital advances of $25,245 to continue exploring the
feasibility of delivering potable water to Tucson, Arizona. The result of this
six-month effort has been the determination that the scope of this project is
beyond our technical and capital resources. We are currently negotiating with
Rainbow to convert this early stage funding into an equity position in the
project, a note that will be due and payable by years end, or a combination of
equity and a note.
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Management's Discussion and Analysis for the twelve months ended
December 31, 1999
Results of Operations
During September 1992, the company ceased active operations. Since that
time and through July 29, 1999, our activities have primarily consisted of
maintaining the corporation's status as a corporation in good standing with the
state of North Dakota and accounting for its investment in SiteScape. During the
year ended December 31, 1999 we incurred $200,000 of expense related to the
SiteScape option (as described above) and legal and accounting expense of
approximately $39,500. The company also incurred interest expense of
approximately $22,300, in connection with the various loans as described in the
notes to the financial statements. Through December 31, 1999 entities controlled
by Mr. Farley made loans of $810,000 to the company for certain investment
transactions and the ongoing cash needs of the company of which $74,049 was
repaid prior to December 31, 1999.
Through December 31, 1999, the company incurred approximately $84,245
in research and development costs and approximately $236,000 in marketing and
advertising costs from amounts funded through its investments in SiteScape and
Rainbow.
Liquidity and Capital Resources
The independent auditors' report on the company's financial statements
as of December 31, 1999, and for each of the years in the two-year period ended
December 31, 1999, includes a "going concern" paragraph that describes
substantial doubt about the company's ability to continue as a going concern. In
1999, the company received $100,000 for the sale of a majority of its common
stock as described in Note 2 to the financial statements. The company also
received $915,000 of loans from related parties as described in Notes 7 and 9 to
the financial statements, of which $74,049 was repaid prior to December 31,
1999.
As of December 31, 1999, the company had a working capital deficiency
of $1,008,166. As described in Note 2 to the financial statements, the company
has agreed to settle approximately $142,000 of current liabilities in exchange
for one and one-half percent of the company's post reverse stock split and
issuance of common stock to Michael Farley and the Metz Trust in accordance with
the Stock Purchase Agreement.
14
<PAGE>
The company anticipates a significantly increased need for working
capital during 2000 as it brings its required filings under the Securities and
Exchange Act of 1934 current and finalizes the items in the special shareholders
meeting mentioned above. The company also purchased software-licensing
agreements through the issuance of notes as described above. The company is
seeking additional working capital through debt and/or equity offerings, which
will be used for the above described purposes and to market and further develop
the licensing agreement.
Item 7. Financial Statements.
The financial statements for the Company as of December 31, 1999, and
for each of the years in the two-year period ended December 31, 1999, are
included as pages to this report on Form 10-KSB. As the Company meets the
definition of an "inactive registrant" under Rule 3-11 of Regulation S-X for the
years ending December 31, 1992 through December 31, 1998, only the financial
statements for the year ending December 31, 1999 have been audited:
Independent Auditors' Report
Balance Sheet - December 31, 1999
Statements of Operations - For the Years Ended December 31, 1999 and
1998
Statements of Shareholders' Equity (Deficit) - For the Years Ended
December 31, 1999 and 1998
Statements of Cash Flows - For the Years Ended December 31, 1999 and
1998
Notes to Financial Statements
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable
15
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
(a) Directors and Executive Officers
At the present time, there are three officers and two directors of the
Company, as follows:
Name Age Position(s)
- ------------ --- ----------------------
Forrest L. Metz 54 President, Chairman of the Board, Treasurer and
Secretary; Director since August 1999.
Michael R. Farley 56 Chief Executive Officer and Director since August
1999.
Grant S. Papanikolas 52 Chief Operating Officer since August 1999.
The company does not have any nominating committee or audit committee
or other committees performing similar functions. The officers of the company
are elected by and serve at the pleasure of the Board of Directors.
The company did not hold a shareholders' meeting during the fiscal
years ended December 31, 1992, 1993, 1994, 1995, 1996, 1997, 1998 and 1999.
Accordingly, after closing of the Agreement, Messrs. Metz and Farley became the
company's directors.
The following is a brief summary of the business experience of the
directors and executive officers of the company:
Michael R. Farley
- -----------------
Mr. Farley is the current President of Farley and Associates, Inc., a
company involved in the business of providing financing and strategic business
plans for small and medium sized companies. From 1994 until 1996, Mr. Farley
served as Chairman of the Board and CEO of Green Turf, International, Inc., a
company involved in the golf course maintenance business. From 1988 to 1994, Mr.
Farley was a member of the Board of Directors of Mid-Atlantic Paging Company,
Inc. and New Era Communications, Inc. Both of these affiliated companies were
involved in the communications industry and specialized in paging. From 1988 to
1994, Mr. Farley was also the managing General Partner of the Richmond/Tidewater
System, which was also involved in the communications industry and specialized
in paging. In 1988, Mr. Farley served as Director of Communications for George
Bush for President at the Republican National Convention. From 1985 to 1988 Mr.
Farley served as Director, Chief Financial Officer, and Vice
16
<PAGE>
President for Celutel, Inc., a company specializing in the development of
cellular telephone systems.
Mr. Farley has served in community organizations in the following
capacity: member of the Board of Trustees for St. Joseph's Hospital in Tucson,
Arizona; member of the Arizona State Board of Vocational/Technical Education;
member of the Advisory Committee on the Arts for the John F. Kennedy Center for
the Performing Arts; Chairman of the Policy Forum for the National Center for
Research in Vocational Education; Director for the University of Arizona
Foundation; Trustee for St. Gregory High School; President of the Parent-Teacher
Group for Fort Lowell School; and Treasurer of the Parents for St. Michael's
School.
Mr. Farley received his Bachelor of Science Degree from the University
of Arizona and studied at the American College of Life Underwriters. Mr. Farley
is a member of the Southern Arizona Association of Life Underwriters and the
National Association of Life Underwriters.
Forrest L. Metz
- ---------------
From 1974 until the present, Mr. Metz has served as Chairman of the
Board and CEO of Urban Engineering, Inc., a planning, engineering, and surveying
consulting firm. Mr. Metz is also Chairman of the Board and CEO of Metz, LLC, a
holding company involved in investing in communications, software, and
manufacturing industries. From 1988 to 1993, Mr. Metz served as President and a
Director of Celutel, Inc., a company that specialized in the development of
cellular telephone systems. Celutel, Inc. was sold to a regional telephone
company in 1993.
Mr. Metz is also a Board Member of the following community
organizations; United Way of Greater Tucson, Boys and Girls Club of Tucson,
Educational Enrichment Foundation, Mountain Oyster Club, Los Charros Del
Desierto, and the Pima County Fair Horse Racing Commission. Mr. Metz also served
as a board member of the Arizona Mexico Commission, University of Arizona Extra
Point Club, University of Arizona Foundation Presidents' Club, and the
Southwestern Fair Commission.
Mr. Metz received his Bachelor of Science Degree from the University of
Arizona and took graduate level courses in Planning and Engineering there as
well. Mr. Metz is a member of the Urban Land Institute, American Planning
Association, and Society of Military Engineers.
Executive Officers
In addition to Messrs. Farley and Metz, Grant S. Papanikolas serves as
an executive officer of Deucalion.
Grant S. "Skip" Papanikolas
- ---------------------------
Skip assumed the position of Chief Operating Officer of the Company in
August of 1999. Skip has over 30 years experience in the electronics and
computer industry. He is an experienced entrepreneur who founded an electronics
manufacturing company and operated it
17
<PAGE>
for 15 years prior to selling. His experience also includes 12 years of
experience in the early development stages of the computer and electronics
industry in California. He has had close ties to emerging technologies through
out his business career.
(b) Significant Employees.
Michael R. Farley
Forrest L. Metz
Grant S. Papanikolas
(c) Involvement in Certain Legal Proceedings.
During the past five years, none of the Company's directors have:
(1) Filed or has had filed against him a petition under the federal
bankruptcy laws or any state insolvency law, nor has a receiver, fiscal agent or
similar officer been appointed by a court for the business or property of such
person, or any partnership in which he was a general partner, or any corporation
or business association of which he was an executive officer at or within two
years before such filings;
(2) Been convicted in a criminal proceeding or is a named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining such person from, or
otherwise limiting, the following activities:
(i) Acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator, floor
broker, leverage transaction merchant, any other person regulated by
the Commodity Futures Trading Commission, or an associated person of
any of the foregoing, or as an investment adviser, underwriter, broker
or dealer in securities, or as an affiliated person, director, or
employee of any investment company, bank, savings and loan association
or insurance company, or engaging in or continuing any conduct or
practice in connection with such activity;
(ii) Engaging in any type of business practice; or
(iii) Engaging in any activity in connection with the purchase
or sale of any security or commodity or in connection with any
violation of federal or state securities laws or federal commodities
laws;
18
<PAGE>
(4) Been the subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any federal or state authority barring,
suspending or otherwise limiting for more than 60 days the right of such person
to engage in any activity described in paragraph (3)(i) above, or to be
associated with persons engaged in any such activity; or
(5) Been found by a court of competent jurisdiction in a civil action
or by the Securities and Exchange Commission (the "Commission") to have violated
any federal or state securities law, and the judgment in such civil action or
finding by the Commission has not been subsequently reversed, suspended, or
vacated.
(6) Been found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any federal
commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
(d) Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the officers and directors of the Company and persons
who own more than ten percent of a registered class of the Company's securities
(collectively, "reporting persons"), to file reports of ownership and changes in
ownership on Forms 3, 4, and 5 with the Securities and Exchange Commission
("SEC"). Reporting Persons are required by SEC regulation to furnish the Company
with copies of all Forms 3, 4, and 5 filed.
To the best knowledge and belief of the Company, each of the 10%
Beneficial Owners and directors, with the exception of James Fransen, made the
necessary filing on Form 3. James Fransen was required to file an Initial
Statement of Beneficial Ownership of Securities on Form 3 when he was appointed
director on April 5, 1999. The company has been informed that Mr. Fransen filed
his Form 3 on July 14, 1999. The reports on Form 3 were due on or before April
15, 1999, and accordingly, were filed late.
Item 10. Executive Compensation.
(a) Summary Compensation Table
The following table sets forth information regarding compensation paid
to (i) the Company's Chief Executive Officer and (ii) each of its other
executive officers whose total annual compensation exceeded $100,000 for the
years ended December 31, 1997, 1998, and 1999.
19
<PAGE>
<TABLE>
<CAPTION>
Annual Long Term All Other
Compensation Compensation Compensation
-------------------------------------------------------------------------
($$) ($$)
Securities
Underlying
Name and Position Year Salary Bonus Other Options
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jon Geyerman, 1999 -0- -0- -0- -0- -0-
Chief Executive Officer 1998 -0- -0- -0- -0- -0-
and Director 1997 -0- -0- -0- -0- -0-
Resigned August 31, 1999
Michael R. Farley, 1999 $60,000 -0- -0- -0- -0-
Chief Executive Officer 1998 -0- -0- -0- -0- -0-
and Director 1997 -0- -0- -0- -0- -0-
</TABLE>
(b) Compensation Under Plans.
The company has no stock option plan, stock bonus plan, other
compensatory plan or arrangement, or employee benefit plan for employees,
consultants, officers, or directors.
(c) Other Compensation.
No compensation was paid or distributed to any officer or director of
the company for services rendered to the company during the period from December
31, 1989 through December 31, 1998. Compensation under $100,000 was paid to
Messrs. Farley and Papanikolas during the period from September 1999 through
December 31, 1999.
(d) Compensation of Directors.
The company does not pay its directors for their services in that
capacity; however, officers and directors may receive reimbursement for
out-of-pocket expenses incurred by them in connection with the business of the
company. Currently, the company does not pay any directors a fee for attendance
at board meetings.
The company has no other arrangements pursuant to which any director of
the company was compensated from January 1, 1990 through December 31, 1998 for
services as a director. However, Mr. Farley received compensation under $100,000
as an officer of the company from September 1999 through December 31, 1999.
20
<PAGE>
(e) Termination of Employment and Change in Control.
There are no compensatory plans or arrangements with respect to any
director or executive officer which results from the resignation, retirement or
any other termination of the individual's employment with the Company, or from a
change of control of the Company, or from a change of the individual's
responsibilities.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners.
The following table sets forth information as of December 31, 1999,
regarding the beneficial ownership of shares of the company's only outstanding
class of securities, its Common Stock, by the directors of the company and by
each person who, to the knowledge of the company at that date, was a beneficial
owner of 5% or more of the outstanding shares of common stock. The table does
not include information regarding shares of common stock held in the names of
certain depositories/clearing agencies as nominee for various brokers and
individuals. No such broker or individual is believed to hold greater than 5% of
the company's common stock.
Name and Address Number of Shares Percent of
Owned Beneficially Class
Michael R. Farley 499,000,000 33.4%
Forrest L. Metz(1) 499,000,000 33.4%
Officers and Directors as a Group(2) 998,000,000 66.9%
Item 12. Certain Relationships and Related Transactions.
Advance Notes
- -------------
On September 1, 1999, F & A extended a multiple advance promissory note
to the company for up to a maximum aggregate principle amount of $800,000,
bearing interest at 9% and due on demand (the "F & A Note"). On October 28,
1999, the Metz Trust extended a multiple advance promissory note with identical
terms to the F & A Note (the "Metz Trust
- --------
(1) Includes shares placed in the Metz Trust, of which Mr. Metz is the trustee,
for the benefit of D. Kim Metz, Forrest L. Metz, Jr. and Jenifer K. Metz.
(2) After the planned shareholders meeting and as a result of the reverse stock
split, recapitalization, and purchase of additional shares of common stock by
Mr. Farley and the Metz Trust for an additional $10,000, Mr. Farley and the Metz
Trust will own 95% of the company.
21
<PAGE>
Note") (The F & A Note and the Metz Note are referred to collectively at the
"Advance Notes") for up to $150,000. The Metz Trust is controlled by Forrest
Metz who is also an officer, director and majority stockholder of the company.
F& A is wholly owned by Michael R. Farley who is also an officer, director and
majority stockholder of the company. Under the Advance Notes, F & A and the Metz
Trust will each receive 100,000 shares of the post recapitalization common stock
of the company. Management believes that these shares have a nominal market
value based on various factors including the company's financial position and
the fact that there is no current market for the company's common stock. In
addition, through December 31, 2000 each of the holders of the Advance Notes may
convert all or part any outstanding principal to post recapitalization Units at
the rate of $1.00 per Unit. Each Unit is to consist of one share of the
company's common stock and one share of the company's 8% preferred stock (which
has not yet been authorized) (the "8% Preferred Stock"). The company also has
the right to require the holders of the Advance Notes to convert the outstanding
principal of the notes to Units if the company has sold 4,000,000 shares of the
8% Preferred Stock before December 31, 2000.
Other Loans
- -----------
On September 30, 1999, the Farley Family Partnership extended the
company $200,000 in return for a promissory note of $200,000, bearing interest
at 9% and payable on demand. The Farley Family Partnership is controlled by
Michael R. Farley. The $200,000 was advanced for immediate cash needs of the
company.
In 1999, Deucalion entered into four software license agreements in
exchange for initial fees of $250,000. The licenses relate to an "electronic
envelope" technology used for the secure distribution and selling of goods and
services via the Internet. The technology was developed by and the licensor is
M2DIRECT, Inc. The company obtained the license agreements from the original
parties who negotiated the terms with M2DIRECT, Inc. Two of these parties are
entities controlled by the majority shareholders and management of the
Deucalion. The other two parties are unrelated entities. The initial fees and
the continuing license fees to be paid by Deucalion are equivalent to the
fees negotiated between M2DIRECT, Inc. and each of the parties. The initial fees
of $250,000 are included in general and administrative expense. Of the total,
$40,000 was financed through long-term notes payable ($30,000 due to related
parties) which bear interest at 8%, are unsecured, and are due October 2001;
$5,000 was financed through the F&A Note; and the remaining balance of $205,000
($145,000 due to related parties) has been accrued and is due through June 2000.
Repayment of debts to NJ&A and Former Legal Counsel
- ---------------------------------------------------
The company is in debt to NJ&A, Inc., formerly know as "Norman Jessen
and Associates, Inc.", a company owned and operated by former Chief Executive
Officer Jon Geyerman, in the amount of $93,411.94. After the proposed
shareholders meeting, recapitalization, and the additional purchase of shares by
Mr. Farley and the Metz Trust, the company proposes to settle this debt by
issuing 1% of its outstanding securities. The company is also in debt to
Friedlob Sanderson Paulson & Tourtillott, LLC ("FSPT"), in the amount of
22
<PAGE>
$38,835.74. After the proposed shareholders meeting, recapitalization and the
additional purchase of shares by Mr. Farley and the Metz Trust, the company
proposes to settle this debt by issuing 1/2 of 1% of its outstanding securities
to FSPT. FSPT is also legal counsel to Messrs. Farley and Metz. FSPT will
receive payment for the legal services to Messrs. Farley and Metz based upon the
normal hourly rates of the persons providing legal services.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits required to be filed are listed below and, except where
incorporated by reference, immediately follow the Financial Statements.
Number Description
------ -----------
3(i)(a) Articles of Incorporation, incorporated by reference to
Exhibit (3) to the Company's Registration Statement on Form
S-18 filed August 13, 1987, Registration No. 33-16535.
3(i)(b) Amended Articles of Incorporation, incorporated by reference
to Exhibit (3A) to the Company's Annual Report on Form 10-K,
for the year ended December 31, 1987, Commission File No.
0-16534.
3(ii) Bylaws, incorporated by reference to Exhibit (3.1) to the
Company's Registration Statement on Form S-18 filed August 13,
1987, Registration No. 33-16535.
(10.1) Stock Purchase Agreement Between the Company and Michael R.
Farley and Forrest L. Metz, dated April 20, 1999, incorporated
by reference to Exhibit (10.1) to the company's Annual Report
on Form 10-KSB for the period ending December 31, 1998.
27 Financial Data Schedule.
(b) Reports on Form 8-K
Date Item Numbers
- ---- ------------
August 31, 1999, as filed September 30, 1999 1
23
<PAGE>
DEUCALION RESEARCH, INC.
YEARS ENDED DECEMBER 31, 1999 AND 1998
CONTENTS
--------
Page
Independent auditors' report 1
Financial statements:
Balance sheet 2
Statements of operations 3
Statements of shareholders' equity deficiency 4
Statements of cash flows 5
Notes to financial statements 6-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Deucalion Research, Inc.
We have audited the accompanying balance sheet of Deucalion Research, Inc. as of
December 31, 1999, and the related statements of operations, shareholders'
equity deficiency and cash flows for each of the years in the two-year period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Deucalion Research, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, the Company
has suffered recurring losses, and has a working capital deficit and a
shareholders' equity deficiency which raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GELFOND HOCHSTADT PANGBURN, P.C.
April 12, 2000
Denver, Colorado
1
<PAGE>
DEUCALION RESEARCH, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Current assets:
Cash $ 20,022
-----------
Total current assets 20,022
-----------
Investments (Note 8):
Preferred stock, SiteScape 205,000
Advances to Rainbow, net 0
-----------
205,000
-----------
$ 225,022
===========
LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIENCY
Current liabilities:
Notes payable, related parties (Notes 7) $ 815,951
Accounts payable:
License agreements (Note 9) 205,000
Related parties 17,579
Other 88,528
Accrued management fees (Note 4) 93,412
Accrued interest expense, related parties 12,718
-----------
Total current liabilities 1,233,188
-----------
Notes payable, long-term (Notes 7 and 9) 40,000
-----------
Commitments (Notes 7, 9 and 10)
Shareholders' equity deficiency:
Common stock, $.0001 par value; authorized 1,500,000,000
shares; issued 1,499,610,127 shares 149,961
Capital in excess of par value 2,130,216
Accumulated deficit (3,328,343)
-----------
(1,048,166)
-----------
$ 225,022
===========
See notes to financial statements.
2
<PAGE>
DEUCALION RESEARCH, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
--------------- ---------------
Expenses:
Research and development (Note 8) $ 84,245
Marketing and advertising (Note 8) 236,000
General and administrative:
Related parties (Note 8) 200,000
Other (Note 9) 442,707 $ 1,192
--------------- ---------------
Operating loss (962,952) (1,192)
Interest expense:
Related parties (Note 7) 22,266
Other (1,782)
--------------- ---------------
Net loss $ (985,218) $ (2,974)
=============== ===============
Basic and diluted loss per common share $ * $ *
=============== ===============
Weighted average number of common shares
outstanding 1,002,849,676 501,610,127
=============== ===============
*Less than $.01 per share
See notes to financial statements.
3
<PAGE>
DEUCALION RESEARCH, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY DEFICIENCY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common stock Capital in Treasury stock
------------------------- excess Accumulated -------------------------
Shares Amount of par deficit Shares Amount Total
------------- ---------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 517,859,353 $ 51,786 $ 2,384,509 $ (2,340,151) 16,249,226 $ (256,118) $ (159,974)
Net loss (2,974) (2,974)
------------- ---------- ----------- ------------ ------------ ----------- ------------
Balances, December 31, 1998 517,859,353 51,786 2,384,509 (2,343,125) 16,249,226 (256,118) (162,948)
Retirement of treasury shares (16,249,226) (1,625) (254,493) (16,249,226) 256,118
Issuance of common shares
(Note 2) 998,000,000 99,800 200 100,000
Net loss (985,218) (985,218)
------------- ---------- ----------- ------------ ------------ ----------- ------------
Balances, December 31, 1999 1,499,610,127 $ 149,961 $ 2,130,216 $ (3,328,343) $ (1,048,166)
============= ========== =========== ============ ============ =========== ============
</TABLE>
4
<PAGE>
DEUCALION RESEARCH, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $(985,218) $ (2,974)
--------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash expenses in connection with license
agreements (Note 9) 250,000
Non-cash expense in connection with Site-
Scape option (Note 8) 200,000
Non-cash expense in connection with
investments (Note 8) 320,245
Provision for uncollectible receivables 20
Change in operating liabilities:
Decrease in prepaid expense 4,500
Increase in accounts payable and accrued
expenses 39,274 2,747
--------- ---------
Total adjustments 814,019 2,767
--------- ---------
Net cash used in operating activities (171,199) (207)
--------- ---------
Cash flows from investing activities:
Investment in preferred stock (Note 8) (100,000)
Advances to Rainbow (Note 8) (25,245)
--------- ---------
Net cash used in investing activities (125,245)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable, related parties
(Note 7) 285,000
Repayments of notes payable, related parties
(Note 7) (74,049)
Proceeds from the issuance of common stock 100,000
--------- ---------
Net cash provided by financing activities 310,951
--------- ---------
Increase (decrease) in cash 14,507 (207)
Cash, beginning 5,515 5,722
--------- ---------
Cash, ending $ 20,022 $ 5,515
========= =========
During 1999, $9,462 was paid for interest. No cash was paid for interest during
1998.
Supplemental schedule of non-cash financing activities:
The Company entered into a $400,000 note payable with Farley & Associates
for the purchase of its preferred stock investment in SiteScape, Inc.
(Note 7).
See notes to financial statements.
5
<PAGE>
DEUCALION RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1. Summary of significant accounting policies and business of the Company:
Business of the Company:
Deucalion Research, Inc. (the Company) was organized on May 3, 1983, and at
December 31, 1999, the Company is engaged primarily in providing capital,
management and marketing resources for early stage technology companies and
concepts. The Company had no significant operations from 1992 through
August 1999.
Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents. At December 31, 1999, the Company held no cash
equivalents.
Research and development:
Research and development costs are expensed as incurred. During 1999, the
Company incurred approximately $84,200 of research and development expenses
related to its investments (Note 8).
Marketing and advertising:
Marketing and advertising costs are expensed as incurred. During 1999, the
Company incurred approximately $236,000 of marketing and advertising
expenses related to its investments (Note 8).
Comprehensive income:
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income establishes requirements for disclosures of
comprehensive income which includes certain items previously not included
in the statements of operations, including minimum pension liability
adjustments and foreign currency translations adjustments, among others.
For the years ended December 31, 1999 and 1998, the Company did not have
any components of comprehensive income to report.
6
<PAGE>
DEUCALION RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 1999 AND 1998
1. Summary of significant accounting policies and business of the Company
(continued):
Recently issued accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No.
133). This statement is effective for fiscal years beginning after June 15,
2000. Currently, the Company does not have any derivative financial
instruments and does not participate in hedging activities, therefore
management believes SFAS No. 133 will not impact the Company's financial
statements.
Net loss per share of common stock:
Basic loss per share is computed by dividing loss applicable to common
shareholders by the weighted-average number of common shares outstanding
for the year. Diluted loss per share reflects the potential dilution that
could occur if dilutive securities and other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company,
unless the effect is to reduce a loss or increase earnings per share. The
Company had no potential common stock instruments which would result in
diluted loss per share in 1999 and 1998.
Income taxes:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Under this method, deferred tax liabilities and
assets are measured using enacted tax rates in effect in the years in which
the differences are expected to reverse.
Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the
best information available at the time the estimates are made; however,
actual results could differ materially from these estimates.
7
<PAGE>
DEUCALION RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 1999 AND 1998
2. Stock purchase agreement:
Effective August 31, 1999, the Company completed a transaction whereby the
Company sold approximately 67% of the post transaction voting common stock
for an aggregate purchase price of $110,000. Also, effective August 31,
1999 ("the Initial Closing Date"), the directors and officers of the
Company resigned and the purchasers were elected as directors and officers
of the Company.
Pursuant to the terms of the transaction, the purchasers paid the Company
$100,000 of the purchase price in exchange for 998,000,000 shares of the
Company's common stock. Upon obtaining shareholder approval, the Company
plans to effect a recapitalization of the Company, which may include a
reverse stock split, change the name of the Company to Digital Fuel, Inc.,
and change the domicile of the Company to Delaware. After the reverse stock
split and recapitalization, the purchasers have agreed to pay the remaining
$10,000 purchase price in exchange for shares of the Company's common stock
which will result in the purchasers owning 95% of the Company.
The stock purchase agreement also provided for the settlement of certain
Company liabilities, including $38,836 owed for legal fees and $93,412 owed
for management service fees (Note 4). The Company intends to settle these
liabilities through the issuance of common stock equal to 1/2% and 1%,
respectively, of the total outstanding common stock of the Company after
completion of the proposed transaction.
3. Going concern:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred net
losses in 1999 and 1998 and has a working capital deficiency of $1,213,166
and a shareholders' equity deficiency of $1,048,166 at December 31, 1999.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of
liabilities that may result from the outcome of these uncertainties.
Managements plans in regard to these matters include:
a. Settling certain Company liabilities, including $38,836 owed to
the Company's former legal counsel and $93,412 owed for
management service fees, through the issuance of common stock.
3. Going concern (continued):
8
<PAGE>
DEUCALION RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
b. Continued financing of certain operating transactions through the
use of related party debt (Notes 7 and 9).
c. Seeking additional working capital through debt and/or equity
offerings, which will be used to further market and develop its
licensing agreements and/or other potential investments
opportunities.
4. Accrued management fees:
Prior to January 1, 1997, the Company had a management service agreement
with an entity owned by a former officer of the Company that provided for
management services and office space. No management fees were incurred
during the two years ended December 31, 1999 and 1998.
5. Income taxes:
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $2,000,000 which are available to offset future taxable
income, if any, through 2019. Based on statutory rates, the Company's
expected tax benefit arising from the net operating loss carryforward would
be approximately $700,000. A valuation allowance has been provided to
reduce the deferred tax asset, as realization of the asset is not assured.
In addition, the Company's net operating loss carryforwards may be subject
to annual limitations which could reduce or defer the utilization of the
losses due to the Company's ownership changes that occurred in 1999.
6. Fair value of financial instruments:
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires the Company to disclose estimated fair values for its financial
instruments, for which it is practicable to estimate. The fair value of the
Company's notes and accounts payables to related parties are not
practicable to estimate due to the related party nature of the underlying
transactions. Management believes that the carrying amounts of the
Company's other financial instruments approximates their fair values
primarily because of the short-term maturity of these instruments.
Estimates are not necessarily indicative of the amounts which could be
realized or would be paid in a current market exchange. The effect of using
different market assumptions and/or estimation methodologies may be
material to the estimated fair value amounts.
7. Notes payable, related parties:
Notes payable, related parties consist of the following:
9
<PAGE>
DEUCALION RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
Short term:
Note payable, Farley Family Partnership 9%, unsecured,
due on demand $ 200,000
Multiple advance promissory note, Farley & Associates,
Inc., maximum borrowings of $800,000, 9%, unsecured,
due on demand 535,951
Multiple advance promissory note, Metz Trust, maximum
borrowings of $150,000, 9%, unsecured, due on demand 80,000
-----------
815,951
Long term:
Promissory note, Email Catalogue, LLC, 8%, unsecured,
due October 2001 25,000
-----------
$ 840,951
===========
The Farley Family Partnership note, entered into on September 30, 1999,
provided the Company with working capital. The Farley & Associates, Inc.
(F&A) note was entered into in connection with the Company's investment
activities (Notes 8 and 9). Farley Family Partnership and F&A are entities
controlled by Michael R. Farley, who is also an officer and major
shareholder of the Company. The Metz Trust note, entered into on October
28, 1999, provided the Company with $80,000 for working capital. The Email
Catalogue, LLC note was entered into in connection with the license
agreements (Note 9). The Metz Trust and Email Catalogue, LLC are entities
controlled by Forrest L. Metz, who is also a member of the board of
directors and a major shareholder of the Company.
As described in Note 2, the Company plans to effect a recapitalization,
which may include a reverse stock split, change the name of the Company to
Digital Fuels, Inc., and authorize the issuance of preferred stock. The
terms of the multiple advance promissory and the Farley Family Partnership
notes provide that, upon completion of the recapitalization, each
noteholder will receive a defined number of shares of the Company's post
recapitalization common stock. Management believes that these shares have
nominal market value based on various factors including the Company's
financial position and the fact that there is no current market for the
Company's stock. Additionally, each of the three note holders may convert,
through December 31, 2000, all or part of any outstanding principal to post
recapitalization shares.
8. Investments:
Preferred stock, SiteScape:
10
<PAGE>
DEUCALION RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
Effective September 1, 1999, the Company completed an agreement with F & A
whereby the Company acquired from F & A an option to purchase 516,667
shares of SiteScape, Inc.'s (SiteScape) Series A Convertible Preferred
Stock (the "Preferred Stock"). The Company acquired this option in exchange
for reimbursement of travel and other direct expenses incurred by F & A in
connection with their negotiations with SiteScape and also a fee for F &
A's services, in the amount of $200,000. The $200,000 has been recorded as
general and administrative expense in the accompanying statement of
operations and was funded by a draw on the F&A multiple advance promissory
note. The option to purchase the SiteScape preferred stock was originally
agreed to through negotiations between F & A and SiteScape and allowed F &
A (or its designee) to purchase 516,667 shares of SiteScape Preferred Stock
at an exercise price of $1.9354 per share.
Effective November 5, 1999, the Company exercised one-half of the SiteScape
option shares and purchased 258,334 shares of Preferred Stock at a total
cost of $500,000. The Company paid $100,000 cash directly to SiteScape, and
F&A advanced the remaining $400,000 to SiteScape on behalf of the Company
in exchange for a $400,000 draw on the multiple advance promissory note. In
February 2000, the Company exercised the remaining one-half of the
SiteScape option shares and purchased an additional 258,333 shares of
Preferred Stock for $500,000.
The Preferred Stock has, among other rights, voting rights, the ability of
a 1:1 conversion into Class A Voting Common Stock of SiteScape, dividend
participation with common shares, and the right to elect two members to the
board of directors of SiteScape. At December 31, 1999, the Company controls
approximately 10% of the voting stock of SiteScape and Michael R. Farley
had been appointed to the board of directors of SiteScape. The Preferred
Stock is to be automatically converted to common stock if SiteScape
completes an initial public offering and realizes at least $20,000,000.
The preferred stock is also entitled to receive dividends if, and when
declared by SiteScape's board of directors at the cumulative rate of 8% per
year compounded annually. Dividends are due only if declared by the board
of directors and the tangible net worth of SiteScape exceeds $25 million.
11
<PAGE>
DEUCALION RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. Investments (continued):
Preferred stock, SiteScape (continued):
SiteScape is an internet based start up company that acquired AltaVista
FORUM from Compaq Computer in April 1999. FORUM is a collaboration software
which provides ways to communicate, share resources, and collaborate with
groups of people within a company or across organizations. SiteScape is
currently engaged in research and development and marketing and advertising
efforts to expand and grow its customer base. The Company has and will
continue to regularly review the assumptions underlying the operation
performance and cash flow forecasts of SiteScape to assess the investment's
recoverability. Although SiteScape has recorded revenues, it has operated
at a loss. There are no assurances that SiteScape will complete its
development efforts or ultimately offer products that are commercially
acceptable, achieve profitability or that its existing cash balances and
cash flows from future operations will be sufficient to meet its working
capital requirements. SiteScape continues to consume cash as it executes
its business plan. Because of these circumstances management determined
that the Company should charge a portion of SiteScape's research and
development and marketing and advertising expenses against the carrying
value of its preferred stock investment. Therefore, at December 31, 1999,
the Company recorded a charge of $59,000 for research and development
expenses and a charge of $236,000 for marketing and advertising expenses.
Advances to Rainbow:
In 1999, the Company advanced $25,245 to Rainbow Country, Inc. (Rainbow).
Rainbow is a startup entity engaged in the investigation of delivery of
potable water in Tucson, Arizona. The funds advanced to Rainbow by the
Company were used by Rainbow for research and development activities,
including a feasibility study.
Based on the preliminary results of Rainbow's research and development
activities, the delivery of potable water to Tucson, Arizona was deemed
cost prohibitive. Because of these circumstances management determined that
the Company should charge a portion of Rainbow's research and development
expenses against the carrying value of its investment. Therefore, the
Company has charged off the entire advance of $25,245 as research and
development expenses. The Company is currently negotiating with Rainbow to
convert the advances to equity or promissory notes.
12
<PAGE>
DEUCALION RESEARCH, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
9. License agreements:
In 1999, the Company entered into four software license agreements in
exchange for initial fees of $250,000. The licenses relate to an
"electronic envelope" technology used for the secure distribution and
selling of goods and services via the Internet. The technology was
developed by and the licensor is M2DIRECT, Inc. The Company obtained the
license agreements from the original parties who had negotiated the terms
with M2DIRECT, Inc. Two of these parties are entities controlled by the
majority shareholders and management of the Company. The other two parties
are unrelated entities. The initial fees and the continuing license fees to
be paid by the Company are equivalent to the fees negotiated between
M2DIRECT, Inc. and each of the parties. The initial fees of $250,000 are
included in general and administrative expense. Of the total, $40,000 was
financed through long-term notes payable ($25,000 due to related parties)
which bear interest at 8%, are unsecured, and are due October 2001; $5,000
was financed through the F&A multiple advance note; and the remaining
balance of $205,000 ($145,000 due to related parties) has been accrued and
is due through June 2000.
The license agreements are for a term of three years and may be renewed
thereafter for any number of successive terms of one year each by the
Company. The license agreements require the Company to pay continuing fees
based on defined percentages of revenues and transactions with minimum
royalty fees as follows:
2001 $ 225,000
2002 550,000
2003 605,000
-------------
$ 1,380,000
=============
Through December 31, 1999, no revenues have been generated from the license
agreements.
10. Office lease:
The Company subleases office space, on a month to month basis, from F&A.
During 1999, total rent expense was $2,260.
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DEUCALION RESEARCH, INC.
Date: April 14, 2000 By: /s/ Michael R. Farley
-------------------------------
Michael R. Farley, Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Forrest L. Metz Director April 14, 2000
- ----------------------------
Forrest L. Metz, Chairman, President,
Chief Financial Officer and Director
/s/ Michael R. Farley Director April 14, 2000
- --------------------------
Michael R. Farley, Chief Executive
Officer and Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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