UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended August 31, 1997
Commission File No. 0-24506
DELTA-OMEGA TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Colorado 84-1100774
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
119 Ida Road
Broussard, Louisiana 70518
(Address of principal executive offices) (Zip code)
(318) 837-3011
(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:
$.001 par value common stock
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark 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 the Company's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendments to the Form 10-KSB. [X]
Company's revenues for its most recent fiscal year. $1,456,522
As of October 31, 1997, 14,178,862 shares of common stock, $.001 par value,
were outstanding, and the aggregate market value of the common stock held by
non-affiliates of Delta-Omega Technologies, Inc. was approximately $10,191,057
on that date.
Documents incorporated by reference:
The definitive proxy statement for the annual meeting of shareholders which
will be filed with the Commission within 120 days after the close of the
fiscal year is incorporated by reference into Part III.
Please see item 13 for the exhibit index.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DELTA-OMEGA TECHNOLOGIES, INC.
Dated: November 26, 1997 By:/s/Marian A. Bourque
Marian A. Bourque
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signatures Titles Date
/s/Larry G. Schafran Chairman of the Board November 26, 1997
Larry G. Schafran
/s/James V. Janes, III Chief Executive Officer, November 26, 1997
James V. Janes, III President
/s/Marian A. Bourque Chief Financial Officer, November 26, 1997
Marian A. Bourque Secretary and Treasurer
/s/Richard A. Brown Director November 26, 1997
Richard A. Brown
/s/David H. Peipers Director November 26, 1997
David H. Peipers
/s/Donald P. Carlin Director November 26, 1997
Donald P. Carlin
<PAGE>
PART I.
Item 1. Business
GENERAL
Delta-Omega Technologies, Inc. (Delta-Omega) was organized under the laws of
the state of Colorado on December 22, 1988 as Barclay's West, Inc. In
November 1989, the Company acquired, via a share exchange agreement, all of
the outstanding securities of Delta-Omega Technologies, Ltd. and on December
22, 1989, changed its name from Barclay's West, Inc. to Delta-Omega
Technologies, Inc. to reflect the acquisition.
Prior to fiscal 1993, Delta-Omega was a development stage company whose main
objective was to conduct research and development. The Company has
essentially completed a majority of the research, development and testing of
its products and has now begun to market them. In September 1992, the Company
assumed an operating status, began operations in September 1993 and in
January of 1994 began to build its core staff of marketing, sales, financial
and administrative personnel.
SPECIALTY CHEMICALS
Delta-Omega Technologies, Ltd. is engaged in the development, manufacture and
marketing of environmentally safe specialty chemicals for use in a variety of
industrial and military applications. These products are deemed to be
environmentally safe because they are water-based, non-toxic and
biodegradable. These products replace hazardous, flammable, toxic and ozone
depleting chemicals in a broad range of cleaning and emergency response
applications. Delta-Omega is developing proprietary products and processes
that address large markets where there is limited environmentally safe
competition or few or no existing products that provide effective performance.
Solvent Replacement Products
DOT 111/113 TM is a water-based, non-toxic, biodegradable, patented cleaning
solution for use on metal and other hard surfaces. The product can replace
chlorinated solvents scheduled for elimination under the U.S. Clean Air Act
and other environmentally objectionable cleaning solvents in specific cleaning
applications. It is used to remove hydrocarbon and other organic residue as
well as inorganic material from surfaces and is non-corrosive to a wide array
of metals, plastics, rubber and other materials. DOT 111/113 TM conforms to
the requirements of MIL-C-87937B, Type II which establishes the requirements
for environmentally safe cleaning for aircraft and aerospace equipment for the
U.S. Air Force. It conforms to NASA test protocol for use in cleaning liquid
oxygen systems and is accepted by the U.S. Navy as a pre-cleaner for oxygen
systems. It is also used to clean outer surfaces of aircraft and bare metal
prior to painting among many other general uses.
In May 1996, the Company was awarded a one (1) year contract with a two (2)
year renewal option to supply an aircraft cleaning compound to the Defense
Supply Center - Richmond (DSC-R), a Department of Defense organization
which is headquartered in Richmond, Virginia. The contract is estimated to
generate revenues in excess of a half-million dollars annually. In April,
1997, the DSC-R exercised a one year renewal of the contract.
ATTAR TM is a newly developed series of water-based products designed to
address the needs of the metalworking and the aviation industries for a heavy-
duty, biodegradable, environmentally safe cleaner/degreaser. This product is
designed to complement the light to medium duty cleaner, DOT 111/113 TM, and
is designed to be a safe alternative to ozone-depleting chemicals and
<PAGE>
flammable, hazardous solvents used to remove heavy baked-on oils, synthetic
lubricants and carbon deposits. The product is non-corrosive to a wide variety
of metals, metal alloys, painted surfaces, plastics and other similar
materials. The base formulation is highly versatile and can be modified to
meet specific cleaning requirements.
Institutional and Industrial Products
Omni-Clean TM SD is a multi-use product that is water-based, non-toxic and
biodegradable and designed to address the specific needs of the institutional
and industrial markets. It creates no adverse health effects for users. Its
uses include cleaning pots and pans, floors, laundry as well as general
purpose cleaning. Omni-Clean TM SD can reduce chemical use hazards (including
associated liability) and increase safety and efficiency while reducing costs.
This product has been USDA accepted for certain uses and is presently being
sold to hotels, restaurants, fast food chains, laundry services, oilfield and
janitorial service companies.
Omni-Clean TM SD is also used by the barge and tank industry to clean various
residuals from storage vessels. It significantly reduces the amount of
washwater used in the cleaning process. Its unique cleaning properties
displace the contaminant from the vessel wall and phase separate them
allowing the waste to be skimmed from the surface and the product reused.
This product has no constituents reportable under federal guidelines.
Omni-Clean TM EC is a newly developed proprietary surfactant blend designed to
ensure efficient oil removal and rapid water-wetting of solids for a variety
of oil-wet solids. It can be used to clean petroleum industry oriented storage
vessels that are used to store or transport drilling muds, drill cuttings and
petroleum products.
EXCEL-95 TM was developed to compete with low-end oilfield cleaners and
degreasers. EXCEL-95 TM contains no reportable quantities of regulated
chemicals and does not produce oily residues that dissolve into water,
creating potential discharge problems. It is biodegradable, non-flammable and
has a high tolerance for metals usually found in oilfield production water.
It is clean-rinsing and is not harmful to personnel or equipment (painted or
unpainted). EXCEL-95 TM can be applied in a broad spectrum of oilfield and
maritime uses, including removal of API modified pipe dope used in drilling
operations. It is also effective as a cuttings washing compound for drilling
operations.
Firefighting and Spill Response
Vulcan TM is a foam concentrate product line used to combat flammable liquid
and petroleum fires. These products are non-toxic and non-corrosive and are
successful in mitigating the threat of fire and explosion while introducing no
new contaminants to the local environment. This is accomplished through the
formation of a lasting, stable, heat resistant foam blanket which excludes
oxygen from the burning flammable liquids. The products have a low surface
tension, which allows them to penetrate into cracks and crevices and cling to
surfaces, forming a thick foam blanket on vertical curved and horizontal
surfaces. These products can be used effectively on petroleum, alcohol, and
other flammable liquid fires. Many, if not all, of the commercially available
firefighting foams dissolve significant amounts of hydrocarbons into water,
thereby enhancing the spread of contaminants into the local environment which
must then be remediated at significant costs. Vulcan TM foams encapsulate
hydrocarbons thus preventing their spread. Most of the fire fighting foams
currently used today contain chemicals which are reportable under federal
guidelines, while the Vulcan TM products do not. Two (2) Vulcan TM
<PAGE>
firefighting foam concentrates earned Underwriters Laboratories listings in
December of 1995. These listings enable the Company to market the listed
products to customers who require qualified products.
HazClean TM-ER is a patented formulation listed on the U.S. Environmental
Protection Agency's National Contingency Plan. It is accepted for use by the
Louisiana Department of Environmental Quality in responding to hydrocarbon
spills and contamination. The product mixes with hydrocarbons when applied
with water and suppresses dangerous vapors thus mitigating the threat of fire
and explosion. HazClean TM-ER enhances the bioremediation of contacted
hydrocarbon contaminants which is generally the most cost effective
remediation practice for the low levels of hydrocarbons typically encountered
in post spill scenarios. The uses of emergency response agents such as
HazClean TM-ER introduce no new contamination while promoting the natural
biological decay of hydrocarbons which lowers cleanup costs.
Soil Remediation Chemicals
CreoSolv TM is a newly developed, patent pending product designed to remove
polynuclear aromatic hydrocarbons (like creosote) and other similar
hydrocarbons from most surfaces, especially soil, and is used in conjunction
with a mechanical soil washing process. The CreoSolv TM solution is mixed with
the contaminated soil which solubilizes the contaminant into the liquid
solution. The liquid is separated from the soil and the contaminant is
recovered from the liquid solution by chemical and physical means for disposal
or in some cases recycling. The cleaned soil can be returned to the site.
In September 1994, the Company conducted extensive tests for a division of the
Environmental Protection Agency on an actual site contaminated with creosote.
This technology was evaluated as an option for the remediation of creosote and
similar hydrocarbon contaminants from soil. Independent laboratory results
showed the soil to be cleaned to levels at or below levels achieved using
incineration.
HazClean TM-SR can be used in conjunction with a mechanical soil washing
process or in land farming techniques. Currently, efforts to remediate
hydrocarbon contamination from soil include, among others, removal of
polluted materials to a "less sensitive" location and/or incineration. These
methods do not always eliminate pollution permanently, may not be cost
effective and may result in undesirable side effects and potential future
liability.
HazClean TM-SR can be applied directly to the ground or tilled soil. The
product encapsulates the hydrocarbons thus preventing their spread. The
product contains nutrients that enhance natural biodegradation. The Company's
process is designed for remediation of hydrocarbon contamination from soil,
limestone, gravel or other materials used in parking lots, access roads and
storage yards.
<PAGE>
SPECIAL SERVICES
In April of 1996, the Company signed a one (1) year contract with Allwaste
Environmental Services of Louisiana, a wholly-owned subsidiary of Allwaste,
Inc. which provides comprehensive solutions for industrial America, including
environmental, maintenance, container, energy and waste water services. The
initial term of the contract was for twelve (12) months with renewal options
for subsequent one year periods. On June 10, 1997, the Company was issued a
one year contract renewal with Allwaste. The contract is expected to generate
annual revenues in excess of $400,000. The Company will be the exclusive
supplier to this subsidiary of Allwaste, Inc. for its chemical cleaning
products.
MARKET SEGMENT DATA
Total product sales for the year ended August 31, 1997 were $1,456,522 as
compared with total product sales for the year ended August 31, 1996 of
$847,191.
Product Sales For the Fiscal Years Ended August, 1993 through 1997
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Solvents, Cleaners
& Degreasers $1,243,657 $738,809 $296,761 $293,019 $91,463
Firefighting &
Spill Response 203,276 106,688 82,099 175,728 32,127
Soil Remediation 9,589 1,594 36,309 35,070 -
Soil Washing (TVES)* - - 11,008 - -
---------- --------- ------- ------ --------
Total $1,456,522 $847,191 $426,177 $503,817 $123,590
</TABLE>
- - Letter of intent terminated on December 15, 1995.
MARKETS
Specialty Chemicals
The Company's products are marketed as a safe and economical replacement for
hazardous chemicals. Industries targeted are aviation, electronics,
automotive, marine, metal fabrication, food processing, janitorial, oilfield,
barge and tank cleaning, firefighting, hazardous spill response and soil
remediation.
The Company markets its products through regional or nationally recognized
distribution organizations, via private label arrangements and through direct
customer contact with its own sales force.
The Company prices its products competitively and, in some cases, below the
price of existing products and methods. The products are also promoted as
cost savers through the reduction of current and future environmental
liabilities and reducing, or in some cases eliminating the health hazards to
employees.
The Company's products have been gaining acceptance in markets where
governmental policy, public safety and economics are mandating changes from
presently used products and services. By gaining regulatory agency acceptance
for the use of the Company's products in specialized fields where available
products and technology are limited and sometimes costly, the Company's
products and their uses are becoming more attractive to end-users and to
<PAGE>
distributors for sales to end-users.
Soil Remediation Services
Soil washing is strictly a technological service performing pile to pile
soil remediation services. The Company will, on most projects, team up with
companies that perform all other aspects of the project such as excavation,
site preparation, sampling, analytical, and reclamation. This is done
through subcontracts or joint ventures. Most of the large contracts are
awarded to large engineering-consulting firms that manage all aspects of
the project. The Company markets its technology to these E-C firms either
on a subcontract or joint venture basis offering a price per ton of
material treated.
Types of sites eligible for soil washing include CERCLA (Superfund Sites),
RCRA (Corrective Action), Department of Defense Sites, Department of Energy
sites (Radionuclide Volume Reduction), Underground Storage Tank cleanup,
Dredge Spoils, Oilfield Drill Cuttings & NORM, Low Level Radioactive Sites
(Uranium Mining, etc.), PNAs, PCPs, PCBs, PAHs, etc., and Heavy Metals.
The Company lowered the earning potential of its Soil Remediation Service
division after assessing recent adverse charges in the environmental
consulting and remediation business. Consequently, the Company recorded an
asset impairment of its soil washing equipment because future undiscounted
cash flows from the equipment would be less than the carrying value.
Drilling Mud Recycling Process (MRP)
The Company has successfully field tested a unique technology for recovering
barite and oil from spent drilling muds. This process technology utilizes a
proprietary cleaning mixture which separates the oil from the barite within an
aqueous medium. The process recovers more than 95% of the barite at high
purity levels. This material can be reused as a constituent in the production
of water or oil based drilling muds. The synthetic oil recovered in this
process can be sold or reused in mud applications. The mud recycling process
(MRP) offers significant cost savings over current management practices
involving spent drilling muds. The market value of the recovered barite and
oils is expected to more than offset processing costs. The Company is
currently in contact with major drilling mud companies to optimize the MRP
technology to their specific needs and reuse markets.
Demilitarization
The Company expects to finalize in the second quarter, an exclusive worldwide
license agreement with Gradient Technology, Inc., for a leading edge portfolio
of patent pending demil "conversion" technologies to address the U.S.
Government's drive toward "resource recovery and reuse" in demilitarization
operations. Demilitarization or "demil" is a term used to describe the removal
of conventional munitions, including bombs, rockets, torpedoes and shells from
the inventory of stored ammunition. The blending of these licensed
technologies with the Company's highly advanced chemical process and
separation know-how should position the Company to offer cost effective
explosive conversion and/or recovery services to the U.S. Government.
RAW MATERIALS
There have proven to be ample supplies of the raw materials needed by the
Company to manufacture its products and the Company anticipates no raw
material supply shortages in the foreseeable future. Raw materials and
finished products are typically transported via truck and rail.
MAJOR CUSTOMERS
The majority of the Company's current product sales are dependent upon a few
customers. Sales to the U.S. Air Force for an aircraft cleaning compound
account for approximately 22% of total sales. Another 40% of the Company's
total sales are derived from customers that market oilfield related products
and services.
<PAGE>
GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS
Any required government or military approvals related to principal products
have been submitted and obtained in accordance with written protocols.
PATENTS, TRADEMARKS AND LICENSES
The Company owns all rights to HazClean TM-EFFF for which U.S. Patent No.
5,061,383 was granted in October 1991. The Company owns all rights to DOT
111/113 TM for which U.S. Patent No. 5,308,550 was granted in May 1994.
The Company has filed two patents with the United States Patent and Trademark
Office, a base fluid upgrading (BFU) application (Serial No. 918,597) and a
mud recycling process (MRP) (Serial No. 788,993). Both patent pending
applications are for treating drilling fluids used in the oil and gas
industry.
The Company is also in the process of filing two more patents, a wellbore
chemical cleaner and a continuation-in-part of co-pending MRP application
Serial No. 788,993.
There are no ongoing royalty requirements borne by the Company in the
exploitation of its patents.
The Company maintains the formulations for its various products as a trade
secret and no one has access to the formulations who is not subject to a trade
secret and non-disclosure agreement.
REGULATION
Many chemicals used as solvents, cleaners and degreasers as well as
firefighting foams and spill response agents have been considered hazardous to
the environment by new federal and state guidelines. Regulations fueled by a
public awareness of the environment and the resulting political involvement
are causing most of these chemicals to be phased out.
The Company's chemical products are biodegradable, non-hazardous, and
therefore, non-reportable. Should the guidelines be amended to affect the
Company's products, Management believes the Company has the capability to
substitute the affected constituent. While this may temporarily affect the
"environmentally safe" marketing aspect of the affected product, Management
does not believe it will have any long term impact.
The soil washing operations are subject to permits from the appropriate state
environmental regulatory authorities for processing and reclaiming solid or
hazardous waste. The Company foresees no problems with obtaining these
permits.
COMPETITION
Competition in the specialty chemical industry is provided by numerous
companies. Most of these companies have substantially greater resources and
marketing capabilities than Delta-Omega. As a result, the Company's strategy
is not to compete directly in the marketplace against these large companies,
but to do so through distributors with large established markets. Other
competitive factors include price, performance and safety in use with which
the Company can effectively compete.
RESEARCH AND DEVELOPMENT
In fiscal year 1997, Delta-Omega has focused its research and development
efforts primarily on projects related to drilling, production and performance
chemical applications that are unique to the oil and gas industry. The Company
has developed and successfully tested a unique technology for recovering
<PAGE>
barite and oil from spent drilling muds. This process technology utilizes a
proprietary cleaning mixture which separates the oil from the barite within an
aqueous medium.
Other research and development projects on which the Company is focused are
the development of downhole chemicals used to clean tubing and casing in oil
and gas exploration, and a high performance product used for filter cake
reduction. The Company also is focusing on preparing two more of its fire foam
products to undergo testing to receive Underwriters Laboratories (UL)
listings. The tests to evaluate the two new candidate fire foam products are
scheduled for November, 1997. Upon successful listing, these two foam
concentrates will join the other two products that achieved UL listings in
December of 1995. The first two listings attained generated an increase of 82%
in revenues related to the Company's emergency response division.
In the first quarter of fiscal year 1997, the Company expanded its technical
staff by hiring two (2) additional personnel holding advanced chemical and
engineering degrees.
EMPLOYEES
The Company currently has 15 full-time non-union employees at the corporate
headquarters in Broussard, Louisiana. The Company also retains the services of
qualified consultants relative to marketing projects, technical support and
product development.
ENVIRONMENTAL COMPLIANCE AND ENVIRONMENTAL MATTERS
The Company's chemical business is subject to federal and state requirements
regulating the discharge of materials into the open environment. These
regulations affect the Company's competition as well. Few of the Company's raw
materials and none of the Company's finished products are reportable under
federal or state guidelines. The cost of compliance with these regulations is
not considered material and no capital expenditures are anticipated for
compliance with regulations.
The soil washing and MRP operations, in most cases, require sub-contract
services to separate contaminants from soil or drilling mud and do not provide
for the disposal of those contaminants. The Company is therefore not exposed
to liabilities with respect to hazardous waste handling or disposal.
Hazardous waste handling is usually handled by the prime contractor.
<PAGE>
Item 2. Properties
The Company's consolidated executive office, blending and warehouse
facilities are located at 119 Ida Road, Broussard, Louisiana 70518. The
Company leases approximately 16,000 square feet under a non-cancelable five
year lease from C&M Land Account at $6,000 per month with an option to renew
for an additional five years at an increase of $1,200 per month. Mr. Donald
P. Carlin, a director of the Company is an affiliate of C&M Land Account,
which is the lessor.
Item 3. Legal Proceedings.
There is no material, pending litigation significant to the business to which
the Company is a party or against any of its Officers or Directors as a result
of their capacities with the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of the Company during
the quarter ending August 31, 1997. Annual meetings of the shareholders of the
Company are held in accordance with Colorado law.
<PAGE>
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
PRINCIPAL MARKET OR MARKETS
The Company's common stock is quoted in the "Pink Sheets" maintained by
National Quotation Bureau, Inc. On October 31, 1997, there were 13 market
makers in the Company's securities and the closing bid quotation was $.72.
The following table sets forth the high and low bid quotations for the
Company's Shares, as reported in the "Pink Sheets."
<TABLE>
<CAPTION>
BID
QUARTER LOW HIGH
ENDED
<S> <C> <C>
August 31, 1995 $ 17/32 $ 1 3/4
November 30, 1995 $ 5/16 $ 1
February 29, 1996 $ 1/16 $ 17/32
May 31, 1996 $ 1/16 $ 3/4
August 31, 1996 $ 5/8 $ 1 1/32
November 30, 1996 $ 11/16 $ 9/16
February 28, 1997 $ 13/16 $ 11/16
May 31, 1997 $ 17/32 $ 1/2
August 31, 1997 $ 13/16 $ 23/32
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commissions and may not represent actual transactions.
APPROXIMATE NUMBER OF HOLDERS OF THE COMPANY'S SECURITIES
On October 31, 1997, there were 262 registered holders and approximately
1300, beneficial owners of the Company's common stock held in street name at
brokerage houses. As of October 31, 1997, there were 22 holders of the
Company's series B preferred stock and 23 holders of the Company's series C
preferred stock.
DIVIDENDS
Holders of common stock are entitled to receive dividends declared by the
Company's Board of Directors. The Company has not yet paid any dividends on
the Company's common stock and the Board of Directors of the Company presently
intend to pursue a policy of retaining earnings, if any, for use in the
Company's operations and to finance expansion of its business.
Holders of the Company's series B preferred stock are entitled to a dividend
of $.07 per share payable in cash or the Company's common stock payable on
June 30 of each year until June 30, 1999.
Holders of the Company's series C preferred stock are entitled to a dividend
of $.0525 per share payable in cash or the Company's common stock payable on
June 30 of each year until June 30, 2001.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Annual Report on Form 10-KSB includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of Section 27A of
<PAGE>
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, included in this Form 10-KSB that address activities, events
or developments that the Company expects, believes or anticipates will or may
occur in the future, including such matters as future capital, research and
development expenditures (including the amount and nature thereof), repayment
of debt, business strategies, expansion and growth to the Company's operations
and other such matters are forward-looking statements. These statements are
based on certain assumptions and analyses made, by the Company in light of its
experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in
the circumstances. Such statements are subject to a number of assumptions,
risks and uncertainties, including general economic and business opportunities
(or lack thereof) that may be presented to and pursued by the Company, changes
in laws or regulations and other factors, many of which are beyond the control
of the Company. Readers are cautioned that any such statements are not
guarantees of future performance and that actual results or developments may
differ materially from those projected in the forward-looking statements.
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Net sales increased $609,331 or 72%, from $847,191 to $1,456,522. Net sales of
the Company's solvents, cleaners and degreasers increased to $1,244,463 from
$738,909. The increase in sales of these products was due primarily to the
Company's introduction of its new oilfield product line. Taking advantage of
the current growth trend in the oilfield, the Company introduced a series of
chemicals and processes that have gained acceptance due to their performance,
worker safety advantages and reduction of waste by-products. Solvent
replacement product sales are expected to continue increasing with
notification that the U.S. Air Force contract extension option was exercised
for one year. Net sales of firefighting and spill response agents increased
82% to $194,676 from $106,688. Sales of firefighting products are expected to
continue increasing with the Company's establishment of marketing networks
through distributors in twenty-six (26) states in the continental United
States. The Company is also in the process of gaining three (3) additional
Underwriters Laboratories listings by the first quarter of fiscal 1998. These
listings are expected to generate additional firefighting and spill response
sales by allowing the Company to pursue sales in market segments heretofore
unavailable without these listings.
Cost of sales increased $373,000 or 65%, from $574,000 to $947,000. As a
percentage of sales, cost of sales decreased from 68% to 65%. This decrease
is attributable to improved efficiencies in the Company's manufacturing
facility and increased unit volume of products manufactured during the current
fiscal year. As the production volume continues to increase and approaches
near full capacity, the Company expects cost of sales as a percentage of sales
to decrease in fiscal 1998 and 1999.
Total operating expenses increased from $1,304,667 to $1,640,853. As a
percentage of sales, operating expenses decreased 25% as management was able
to maintain a lower rate of increase in operating expenses relative to sales
growth. Research and Development costs accounted for 58% of the increase in
operating expenses. In fiscal year 1997, the Company focused its efforts and
funds on the development of an unique technology for recovering barite and oil
from spent drilling muds. The Company has already successfully tested this
technology and is currently in contact with major drilling mud companies to
market the process and chemicals.
<PAGE>
The number of sales employees increased with the addition of a Vice President
of Sales and Marketing. The related salaries, wages and benefits of this
position accounted for 20% of the increase in operating expenses. Consulting
fees increased from $20,000 to $90,000 due to the Company contracting the
services of a special consultant to the Board of Directors. The remaining 10%
of the increase in operating expenses was due to the $70,000 impairment write
down of the Company's soil washing equipment and $12,000 of associated
capitalized patent costs reflected in amortization expense in the accompanying
Consolidated Statements of Operations.
Net loss for fiscal 1997 was $1,106,149, a 5% increase from the net loss of
$1,051,632 incurred during fiscal 1996. The increased net loss was due
primarily to the increase in Research and Development costs directly related
to the Company's Drilling Mud Recycling Process.
CAPITAL RESOURCES AND LIQUIDITY
The Company considers cash and cash equivalents as its principal measure of
liquidity. These items total $346,574 at August 31, 1997. The Company's
short term debt totals $17,685 with total debt being $58,507 or 5% of equity.
The Company's primary cash requirements are for operating expenses,
particularly Research and Development expenses, raw material purchases and
capital expenditures. Since the Company commenced operations, it has incurred
recurring losses and negative cash flows from operations. The Company does
not have sufficient working capital available as of August 31, 1997, to
maintain operations at their current levels. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon obtaining
additional capital investments or generation of adequate sales revenue and
profitability from operations.
To obtain additional capital, the Company has the option to call the Class E
Common Stock Purchase Warrants with 30 days written notice to the holders. If
the Class E Warrants are called by the Company, the amount of funds generated
from exercise of the warrants is undeterminable due to the material difference
between the call price and the current trading price of the common stock. The
Company is also considering the initiation of a private offering of Series D
Convertible Preferred Stock solely to accredited investors in the second
quarter of fiscal 1998. For immediate capital requirements, the Company
expects to negotiate loans from board of director members until sufficient
funds are generated from operations or successful completion of the above
mentioned sources occurs.
During the third quarter of fiscal year 1996, the Company enhanced its
liquidity by completing a private offering of Series C Preferred Stock solely
to accredited investors and raised approximately $1.8 million. Proceeds from
this offering were used to fund the recurring losses and negative cash flows
and to expand the Company's technical capabilities in the oilfield service
sector.
The Company has successfully demonstrated a new technology (MRP) for
recovering barite and oil from spent drilling muds. This unique technology
has commercial potential for the oil and gas exploration business.
Negotiations are underway with leading service companies to form an alliance
consisting of their equipment combined with the Company's product, specialized
equipment and technical support. The Company expects to have an alliance
structured and operational in fiscal year 1998. No estimate of revenues are
possible in this early stage of development because the results of this
technology have to be commercially explored. A positive indicator of sales
potential as these key new technologies enter commercialization was achieved
<PAGE>
in July 1997, the first profitable month in the Company's history. The
Company recognized a pre-tax profit of $60,000 on sales of $335,000 in July
1997; the majority of which was directly attributable to the chemical sales
portion of the MRP technology. Management believes projections of chemical
consumption based upon process capabilities indicate that similar revenues
are achievable on a recurring monthly basis.
Recurring sales from the Company's solvents, industrial cleaners and
firefighting and spill response products are expected to continue increasing.
Sales from a contract awarded to the Company in April 1996 by a specialized
cleaning company could exceed $400,000 in fiscal year 1998. Sales from the
U.S. Air Force contract for furnishing an aircraft cleaning compound will
continue in fiscal 1998 subsequent to official notification that the first one
(1) year contract extension option was exercised. This contract has the
potential to generate approximately $500,000 in sales in fiscal year 1998.
Firefighting and spill response product sales are anticipated to increase as
the Company pursues the industrial fire foam and airport fire fighting
markets. The Company has an opportunity for significant growth in these
markets because of the name recognition acquired by virtue of the products'
performance in actual emergency incidents. Historically, the Company focused
its firefighting and spill response sales efforts in the municipal fire sector
in accordance with the existing Underwriters Laboratories (U.L.) listings.
Three (3) additional fire foam products are scheduled for U.L. listing in
fiscal 1998. Successful acquisition of these listings, in conjunction with
the geographical expansion of a distributor network, will position the Company
to gain a significant market share in the industrial fire foam and airport
fire fighting markets.
Management believes, although no assurances can be made, sales will continue
to increase and cash flows from operations will improve in fiscal year 1998.
Item 7. Financial Statements and Supplementary Data.
The financial statements and schedules are filed as part of this annual report
beginning on page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In connection with the audits of the fiscal years ended August 31, 1990
through August 31, 1997, there were no disagreements with its auditors on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons of the
Company
Information concerning the Directors and Executive Officers of the Company is
hereby incorporated by reference to the Company's definitive proxy statement
which will be filed with the Commission within 120 days after the close of the
fiscal year.
Item 10. Executive Compensation
Information concerning management remuneration is hereby incorporated by
<PAGE>
reference to the Company's definitive proxy statement which will be filed with
the Commission within 120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Information concerning security ownership of certain beneficial owners and
management is hereby incorporated by reference to the Company's definitive
proxy statement which will be filed with the Commission within 120 days after
the close of the fiscal year.
Item 12. Certain Relationships and Related Party Transactions
Information concerning certain relationships and related party transactions is
hereby incorporated by reference to the Company's definitive proxy statement
which will be filed with the Commission within 120 days after the close of the
fiscal year.
<PAGE>
PART IV
Item 13. Exhibits
(a) The following documents are filed as part of this report:
1. Financial Statements
The consolidated financial statements filed as part of this report
are as listed in the Index to Financial Statements on page F-1
which immediately precedes such statements.
2. Listing of Exhibits.
Exhibit
No. Description Location
________ ___________ _________
3 Articles of Incorporation Incorporated by
and Bylaws reference to Exhibit
No. 3 to the Company's
Registration Statement
(No. 0-24506)
4 Designation of Series Incorporated by
B and C Convertible reference to Exhibit 4
Preferred Stock To Report on Form 10-
KSB for period ended
August 31, 1995
27 Financial Data Schedule Filed herewith
(b) No Reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Index to Consolidated Financial Statements
Independent Auditors' Report F-2
Consolidated Balance Sheet, August 31, 1997 F-3
Consolidated Statements of Operations for the years
ended August 31, 1997 and 1996 F-4
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
August 31,1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years
ended August 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Delta-Omega Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of Delta-Omega
Technologies, Inc. (a Colorado corporation) and subsidiary as of August 31,
1997, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the two years ended in the
period ended August 31, 1997. 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 Delta-Omega Technologies,
Inc. as of August 31, 1997, and the results of its operations and cash flows
for each of the two years in the period ended August 31, 1997 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 A to the
financial statements the Company has experienced recurring losses and
negative cash flows since commencement of operations. As of August 31, 1997,
the Company does not have adequate working capital in place to support its
current level of operations. These factors raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans to
secure additional working capital and improve operating results are also
described in Note A. The financial statements do not include any adjustments
relating to the recoverability of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable
to continue as a going concern.
Arthur Anderson LLP
New Orleans, Louisiana
October 3, 1997
F-2
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Consolidated Balance Sheet
ASSETS
<TABLE>
<CAPTION>
August 31,
1997
__________
<S> <C>
Current assets
Cash and equivalents $ 346,574
Accounts receivable
Trade, net of allowance
for doubtful accounts 241,882
Employees 15,041
Inventories 218,976
Prepaid expenses 24,987
_________
Total current assets 847,460
Property and equipment,
net of accumulated depreciation 510,636
Intangible assets, net of
accumulated amortization 137,117
Other assets 10,443
-------------
Total assets $ 1,505,656
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable
Trade creditors $ 268,638
Others 10,414
Current maturities of long-term
debt and leases 17,685
Accrued expenses 45,327
----------
Total current liabilities 342,064
Long-term debt and leases,
net of current maturities 40,822
----------
Total liabilities 382,886
==========
Shareholders' equity
Convertible, 7 percent cumulative,
non-participating preferred
stock, $.001 par value, shares
authorized, 40,000,000; issued and
outstanding 1,590,700 series B,
2,471,667 series C 4,062
Common stock, $.001 par value,
shares authorized, 100,000,000;
issued and outstanding, 13,230,235 13,230
Additional paid-in capital 10,562,642
Retained deficit (9,457,164)
------------
Total shareholders' equity 1,122,770
------------
Total liabilities and
shareholders' equity $ 1,505,656
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended August 31,
1996 1997
------- --------
<S> <C> <C>
Net product sales $ 1,456,522 $ 847,191
Cost of sales 947,665 575,423
------------ ----------
Gross profit 508,857 271,768
Costs and expenses
selling, general and administrative 1,323,938 1,198,122
Provision for doubtful accounts 45,029 30,000
Research and development 271,886 76,545
------------ ----------
1,640,853 1,304,667
------------ ----------
Operating loss (1,131,996) (1,032,899)
Other operating income (loss), net 33,270 (12,775)
Interest expense (7,423) (5,958)
------------ ----------
Net loss (1,106,149) (1,051,632)
Preferred dividend declared (239,048) (112,700)
------------ ------------
Net loss available to common
shareholders $(1,345,197) $(1,164,332)
============ =============
Weighted average shares outstanding 12,831,353 12,514,503
Loss per common share $ (.10) $ (.09)
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Additional
Common Preferred Paid in Retained
Stock Stock Capital Deficit
<S> <C> <C> <C> <C>
Balance at September 1, 1995 $ 12,329 $ 1,610 $ 8,218,201 $(6,857,802)
Issued dividend for Series
B Preferred 90 - 89,743 (89,833)
Issuance of common stock
for services rendered 128 - 95,872 -
Issued dividend for Series
B Preferred 158 - 112,542 (112,700)
Issuance of Series C Preferred - 2,472 1,795,153 -
Net loss - - - (1,051,632)
--------- -------- ------------ ----------
Balance at August 31, 1996 12,705 4,082 10,311,511 (8,111,967)
Issuance of common stock
for services rendered 40 - 12,548 -
Conversion of Series B
Convertible Preferred
Stock 20 (20) - -
Issued dividend for Series
B & C Preferred 465 - 238,583 (239,048)
Net loss - - - (1,106,149)
--------- ---------- ---------- ------------
Balance at August 31, 1997 $13,230 $4,062 $10,562,642 $(9,457,164)
========= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended August 31,
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,106,149) $(1,051,632)
Adjustment to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 173,891 183,298
Loss on disposal of property
and equipment - 25,123
Loss on sale of property and
equipment 792 1,732
Bad debt expense 45,029 30,000
Issuance of common stock for services 12,589 96,000
Asset impairment 70,000 -
(Increase) decrease in:
Accounts receivable (147,297) 36,507
Inventories (116,284) (16,966)
Prepaid expenses (17,579) 5,128
Other receivables (14,790) (86,310)
Other assets (1,103) 8,479
Increase (decrease) in:
Accounts payable 163,431 38,815
Accrued liabilities (6,175) (49,746)
Other liabilities 6,218 861
----------- ----------
Total adjustments 168,722 272,921
----------- ----------
Net cash used in operating activities (937,427) (778,711)
Cash flows from investing activities:
Property acquisitions (210,862) (104,569)
Patent costs (40,217) (8,800)
Proceeds from sale of property
and equipment 800 10,000
Deposits - 480
----------- ----------
Net cash used in investing activities (250,279) (102,889)
Cash flows from financing activities:
Proceeds from borrowing 23,094 42,500
Capital lease payments and
other notes (16,291) (10,155)
Principal payments of bank
notes payable (8,675) (636)
Proceeds from issuance of
preferred stock - 1,818,750
Offering costs - (21,125)
----------- -----------
Net cash (used in) provided by
financing activities (1,872) 1,829,334
Net increase (decrease) in cash
and cash equivalents (1,189,578) 947,734
Cash and cash equivalents,
beginning of period 1,536,152 588,418
------------ ------------
Cash and cash equivalents,
end of period $ 346,574 $1,536,152
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Delta Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
Note A:
Summary of Significant Accounting Policies
Nature of organization
The Company is involved in developing, manufacturing and marketing
environmentally safe specialty chemicals for a variety of industrial and
military uses. These patented, patent pending or proprietary products
are deemed to be environmentally safe because they are biodegradable and
formulated without chemicals considered hazardous under federal
regulations. The Company's products replace hazardous, flammable, toxic
and ozone-depleting chemicals in a broad range of applications serving
Industrial, Institutional, Emergency Response and Soil Remediation
markets. The Company recently added a patent pending product line of
downhole chemicals for the cleaning of tubing and casing required in the
drilling of oil and natural gas wells. The Company's sales are primarily
concentrated in the southeastern United States. During fiscal 1997, the
Company demonstrated a unique drilling mud recycling technology at a
Louisiana based mud facility. As a result of this demonstration, the Company
was afforded the opportunity to use a derivative process on a specific
project for an affiliate of the Louisiana company in South America.
Basis of presentation
Since the Company commenced operations, it has incurred recurring losses
and negative cash flows from operations. The Company does not have
sufficient working capital available as of August 31, 1997, to maintain
operations at their current levels. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon
obtaining additional capital investments or generation of adequate sales
revenue and profitability from operations. The financial statements do
not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be
unable to continue as a going concern.
To obtain additional capital investment, the Company has the option to
call the Class E Common Stock Purchase Warrants upon 30 days written
notice to the holders. If all the Class E Warrants are called by the Company
the amount of funds generated from exercise of the warrants is undeterminable
due to the material difference between the call price and the current trading
price of the common stock. The Company is also considering initiation of a
private offering of Series D Convertible Preferred Stock solely to accredited
investors. For immediate capital requirements, the Company expects to
negotiate loans from board of director members until sufficient funds are
generated from operations or successful completion of the above mentioned
occurs. Proceeds obtained from these sources of funds are expected to be used
primarily to fund operations, construct equipment for the Mud Recycling
Operations (MRP) operations, and enhance the marketing efforts related to
specialty chemical products.
The Company anticipates improvements in cash flow from operations from
increasing sales of solvent replacement products after the Company received
notification that the U.S. Air Force contract extension option was exercised
for one year. Industrial and institutional sales are expected to increase
because of the regional opportunities that have arisen in oil exploration and
production chemical markets.
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
Management believes that the sources of funds discussed above will enable
the Company to sustain its operations and meet its obligations, although
there can be no assurance that this will be done.
Revenue recognition
Revenue for sales of specialty chemicals is recognized when title to the
finished product has passed and billing for the product has occurred.
Inventories
Inventories consist of raw materials, finished goods and containers and
are stated at the lower of cost or market using the first-in, first-out
(FIFO) method of accounting.
Property, equipment and depreciation
Property and equipment is stated at cost and depreciated using the
straight-line method over their useful lives which is 3 to 7 years for
furniture and equipment and 5 years for vehicles.
Intangible assets and amortization
The Company's policy is to amortize its licensing rights to its
patented products over a 5-year period. Patent costs are capitalized
and amortized over the life of the patent when granted. The Company
periodically assesses the recoverability of the unamortized balance based on
expected future profitability and undiscounted future cash flows related to
the patents and their contribution to overall operations of the Company.
Income taxes
Income taxes are accounted for in accordance with the provisions of SFAS
No. 109 "Accounting for Income Taxes". Under this statement, deferred
income taxes are provided for by the asset and liability method.
Loss per common share
The net loss per common share has been computed on the basis of the
weighted average number of shares outstanding during each period. Common
stock equivalents outstanding were not considered in the computation of loss
per share because their effect would be antidilutive.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Shares issued for non-cash consideration
Stock and stock options issued for services are valued at the vendor's
regular billing rates or at the value of the stock issued, whichever is more
clearly determinable at the date of issuance. Stock issued for property is
valued at the fair market value of the stock issued or the fair market value
of the property, whichever is more readily determinable.
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
Credit concentration
During fiscal years 1997 and 1996, one customer accounted for twenty-
eight percent (28%) and twelve (12%) percent of the Company's net sales
respectively. In addition, the U.S. Air Force contract to supply an aircraft
cleaning compound accounted for twenty-two (22%) percent of the Company's
fiscal 1997 net sales and a contract to supply oilfield related products
accounted for twelve (12%) of the Company's fiscal 1997 net sales.
Reclassifications
Certain prior year balances have been reclassified to conform with
current year presentation.
Accounting pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which is required to be adopted by the Company no later than the
fiscal year ended August 31, 1998. In management's opinion, the effect of
adopting SFAS No. 128 will not have a material effect on the Company's
loss per share.
Note B:
Related party transactions
1997
The Company is leasing its present facilities from an affiliate for five
years at $6,000 per month that commencing on March 1, 1996 with a renewal
option for five additional years at $7,200 per month. This agreement
supersedes the October 1, 1993 lease agreement for five years at $4,000
per month with a renewal option for five additional years at $4,400 per
month. The terms of the October 1, 1993 agreement were amended and
transferred when the Company's facilities were relocated. In a separate
agreement, the Company issued 64,000 shares of common stock per year in
lieu of cash for the first two years rent under the October 1, 1993 lease
term. The 64,000 shares of common stock issued for the first two years of
this lease agreement were recorded at $96,000, the fair market value of the
consideration received. The remaining term of the October 1, 1993, lease
agreement was paid in cash. The affiliate is controlled by a member of the
Company's board of directors.
1996
The Company had an affiliate construct storage tanks for its facility at
a charge of $12,000. The Company negotiated a short term promissory note
with the affiliate for the $12,000. The promissory note bears an interest
rate of 7% per annum. The cost of the construction is reflected in
property, plant and equipment in the accompanying consolidated financial
statements. The note payable was paid in full in fiscal year 1997. The
affiliate is owned by a director of the Company.
The Company received an advance of $125,000 from two (2) members of its
board of directors. The Company converted substantially all of the
$125,000 to units of the private placement (See Note H). The amount not
converted to units of the private placement was paid in full in fiscal
year 1997.
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
The Company entered into an agreement on January 12, 1996 with its
Chairman of the Board granting him options to purchase 600,000 shares of
common stock and warrants to purchase 600,000 shares of common stock in
lieu of cash compensation for services to be rendered. The warrants
allow the acquisition of 600,000 shares of the Company's common stock at
an exercise price of $2.00 per share. Each option allows the acquisition
of one share of the Company's common stock at an exercise price of $.34
which represented the underlying stock price on the date of issuance of
the options. In connection with these grants, two directors returned a
total of 686,000 options previously outstanding, which had been issued with an
exercise price that exceeded the market price of the Company's common shares
on the measurement date. Therefore, since there was no compensation expense
associated with these options (i.e. no compensation expense to be reversed
upon return of the options to the Company), the Company properly provided no
accounting recognition.
Note C:
Accounts and notes receivable
A note receivable in the amount of $90,000 from Tuboscope Vetco
International Environmental Services, Inc. (TVIES) was recorded in fiscal
year 1996 for the capital expenditures incurred during the construction
of a "fines treatment unit." During the fourth quarter of fiscal 1997,
the Company negotiated with TVIES for the recovery of the "fines
treatment unit" in exchange for the note receivable. A mutual release of
all claims between the two parties was signed and the Company has taken
possession of the major components of the "fines treatment unit" valued
at $30,000. This amount is reflected in the property and equipment
section in the accompanying financial statements. Trade receivables are
shown net of an allowance for doubtful accounts of $10,000.
Note D:
Inventories
<TABLE>
<CAPTION>
Inventories at August 31, 1997 consisted of the following:
<S> <C>
Raw materials $ 86,006
Finished Goods 80,557
Containers and labels 21,887
Consigned inventory 30,526
----------
Total 218,976
==========
</TABLE>
Note E:
Property and equipment
<TABLE>
<CAPTION>
Major classes of property and equipment at August 31, 1997 consisted of:
<S> <C>
Furniture and equipment $ 607,890
Machinery and equipment 413,256
Leasehold improvements 23,870
-------------
Total property and equipment 1,045,016
Less: accumulated depreciation (534,380)
--------------
$ 510,636
==============
</TABLE>
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
Depreciation expense was $156,537 and $138,546 for years ended August 31,
1997 and 1996, respectively.
During fiscal year ended August 31, 1997, the Company recorded a $70,000
impairment write-down of its soil washing equipment in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121. The Company
lowered the soil washing equipment's revenue generating potential based upon
recent significant adverse changes in the environmental consulting and
remediation business.
Based on the Company's assessment of recent adverse changes in the
environmental consulting and remediation business, the Company estimated that
future undiscounted cash flows from the soil washing equipment would be less
than the carrying amount of the asset. Thus, as prescribed by SFAS No. 121,
the carrying value of the soil washing equipment was reduced to the estimated
discounted future cash flows (using a 8.5% discount rate) that the equipment
is expected to generate.
The charge for impairment is included in the selling, general and
administrative expense section in the fiscal year 1997 accompanying
consolidated statements of operations.
Note F:
Intangible assets
<TABLE>
<CAPTION>
Intangible assets at August 31, 1997 consisted of the following:
<S> <C>
Patent costs $ 161,849
Less: accumulated amortization (24,732)
------------
Net Intangible assets 137,117
=============
</TABLE>
Amortization expense was $17,354 and $44,752 for the years ended August
31, 1997 and 1996, respectively. Fiscal year 1997 amortization expense
includes $12,000 of capitalized patent costs written down that relate to
the Company's soil washing process. Approximately $37,878 of the 1996
amortization expense is related to capitalized foreign patents that the
Company will not prosecute, and associated costs were written off.
Note G:
<TABLE>
<CAPTION>
Long-term debt and lease obligations
Long-term debt at August 31, 1997,
consisted of the following:
<S> <C>
Note payable to a bank; principal
and interest due in monthly
installments at an interest rate
of 7.75% $ 19,776
Notes and capital leases payable
to a corporation; principal
and interest due in monthly
installments at interest rates
varying from 8.70 % to 15.00% 38,731
--------
Total debt 58,507
Less: current portion (17,685)
--------
Long-term debt $ 40,822
========
</TABLE>
<PAGE>
Principal repayments on notes payable and capital leases required for the
next five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 17,685
1999 19,285
2000 9,264
2001 10,361
2002 1,912
----------
Total debt $ 58,507
==========
</TABLE>
As of August 31, 1997, equipment under capital lease and the related
accumulated amortization totaled $23,094 and $2,998, respectively.
Amortization of assets recorded is included in depreciation and
amortization expense.
Note H:
Shareholders' equity
Stock-based Incentive Compensation Plans
In October 1995, Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock Based Compensation," was issued effective in
fiscal year 1997 for the Company. Under SFAS 123, companies could either adopt
a "fair valued based method" of accounting for stock-based incentive
compensation plans, as defined, or may continue to use accounting methods as
prescribed by APB Opinion No. 25. The Company has elected to continue
accounting for its plan under APB Opinion No. 25.
The Company's policy is to grant options to purchase common stock to
directors, officers or key employees as part of an incentive program or to
individuals as compensation for services rendered in lieu of cash. On January
17, 1991, the Company established a non-qualified stock option plan (the 1991
Plan) under which 1 million options to purchase common stock were made
available. In fiscal year 1994, the Company amended the 1991 non-
qualified stock option plan to authorize the issuance of an additional
600,000 options. All options are non-compensatory and are issued at or
above the market price on the date the option is granted.
The Company's Compensation and Options Committee determines the term of each
grant and when it becomes exercisable. No compensation expense has been
recorded in connection with stock options as the exercise price of all options
granted exceeded market price of the shares on the dates of the grants. The
options expire three years from the date of grant.
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
The following table summarizes the activity related to stock options:
<TABLE>
<CAPTION>
Number of Number of Weighted
Options Options Range of Average
Issued Under Issued outside Exercise Exercise
the Plan the Plan Prices Price
<S> <C> <C> <C> <C>
Outstanding at
August 31, 1995 1,205,000 685,452 $.65-$3.00 $1.15
Granted - 757,555 $.34-$1.00 $0.53
Exercised - - - -
Forfeited (696,000) - $.75-$2.00 $1.02
___________ _______ ___________ ______
Outstanding at
August 31, 1996 509,000 1,443,007 $0.34-$3.00 $0.95
Granted - 329,697 $0.51-$1.00 $0.70
Exercised - - - -
Forfeited - (33,333) $2.00 $2.00
________ ________ _________ _______
_________________________________________________________________________
Outstanding at
August 31, 1997 509,000 1,739,371 $0.34-$3.00 $0.90
_________________________________________________________________________
</TABLE>
The following table summarizes information about stock options outstanding at
August 31, 1997:
<TABLE>
<CAPTION>
____________________________________________________________________________
Options Outstanding Options Exercisable
____________________________________________________________________________
Wgtd. Avg. Wgtd.
Range of Number Remaining Avg. Number Wgtd. Avg.
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 8/31/97 Life Price At 8/31/97 Price
_________ ___________ __________ ________ ___________ __________
<S> <C> <C> <C> <C> <C>
$0.34-$0.99 1,645,567 3.4 years $0.61 1,470,567 $0.60
$1.00-$1.99 286,518 1.3 years $1.07 286,518 $1.07
$2.00-$3.00 316,286 1.6 years $2.23 316,286 $2.23
</TABLE>
The options exercisable at August 31, 1997 and 1996, respectively, were
2,073,371 and 1,952,007 with weighted-average exercises prices of $0.92 and
$0.95, respectively.
Stock Options Granted, Exercised and Forfeited
1997
The Company granted to employees 158,130 common stock options with exercise
prices equal to or greater than the market price of the stock on the grant
date. These options were issued in accordance with agreements entered into by
the Company.
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
The Company granted 53,130 stock options currently exercisable with an
exercise price of $1.00 per share for technical services rendered during the
period May 1, 1996 through June 30, 1997. These options expire during the
period from January 31, 2000 through June 30, 2000.
The Company granted 5,000 stock options currently exercisable with an exercise
price of $1.00 per share in accordance with the terms of certain employment
agreements. These options expire March 10, 2000.
The Company granted 100,000 stock options not currently exercisable with an
exercise price of $0.75 per share in accordance with the terms of certain
employment agreements. The stock options become exercisable when certain
performance parameters are met. The options expire June 30, 2001.
No compensation expense was recorded upon the issuance of the 158,130 options
to employees in fiscal 1997 because the exercise price exceeded the market
prices of the Company's common stock on the measurement date.
The Company granted to non-employees 171,567 common stock options with
exercise prices equal to or greater than the market price of the stock on the
grant date.
The Company granted 100,000 stock options, of which 25,000 are currently
exercisable, with an exercise price of $0.51 per share pursuant to the terms
of a consulting agreement. The 75,000 stock options currently non-exercisable
become exercisable when certain performance milestones are achieved. These
options expire June 30, 2001.
The Company granted 66,667 stock options currently exercisable with an
exercise price of $0.65 in lieu of cash for consulting services rendered in
accordance with the terms of a settlement agreement dated April 10, 1997. In
connection with this grant, one director forfeited 33,333 options with an
exercise price of $2.00 per share previously granted to him. The options
expire July 28, 2000.
The Company granted 4,900 stock options currently exercisable with an
exercise price of $0.75 in lieu of cash for marketing services rendered. The
options expire January 31, 2000.
No compensation expense was recorded upon issuance of the 171,567 options to
non-employees in fiscal 1997 as the value of the options issued, as determined
by the value of the consideration received to the value of the options
granted, was not material. The Company will continue to use stock option
arrangements when possible to conserve its cash.
1996
The Company granted 757,555 common stock options with exercise prices that
exceeds the market price of the stock on the grant date. The weighted-average
fair value of these options was $169,449, with a weighted-average price of
$.48 per share. These options were issued in accordance with terms of three
agreements entered into by the Company. The first of these agreements granted
the Company's Chairman of the Board a option to purchase 600,000 shares of
common stock at an exercise price of $.34 per share in lieu cash compensation
for services to be rendered. In connection with this agreement, 536,000
options with an exercise price of $.75 per share and 160,000 options with an
exercise price of $2.00 per share were returned to the Company's 1991 non-
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
qualified stock option plan. Another option agreement granted 150,055 stock
options with an exercise price of $1.00 per share for technical consulting
services rendered in lieu of cash compensation. The third option agreement
granted 7,500 stock options with an exercise price of $1.00 per share in
accordance with the terms an employment agreement. There was no compensation
expense recorded upon issuance of these options in fiscal 1997 because the
exercise prices exceeded the market prices of the Company's common shares on
the measurement date.
Had compensation cost for the Company's 1997 and 1996 grants for stock-based
employee compensation plans been determined consistent with SFAS 123, the
Company's net loss, net loss applicable to common share owners, and net loss
per common share for 1997 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
1997 1996
As Reported Pro forma As Reported Pro forma
<S> <C> <C> <C> <C>
Net Income (loss) $(1,106,149) $(1,169,793) $(1,051,632) $(1,308,266)
Net Income (loss)
Applicable to
Common Share
Owners $(1,345,197) $(1,408,841) $(1,164,332) $(1,420,966)
Net (loss) Income
per common share $ (.10) $ (.11) $ (.09) $ (.11)
____________________________________________________________________________
</TABLE>
The fair value of each option grant is estimated on the date using the Black-
Scholes option-pricing model with the following weighted-average assumptions
used for grants on 1997 and 1996: a) no dividend yield, b) risk-free interest
rate of 6.39% and 6.33% in 1997 and 1996, respectively, c) expected
contractual life of 3.4 and 3.0 years in 1997 and 1996, respectively, d)
expected volatility of 101% and 98% in 1997 and 1996, respectively.
Based on the above assumptions, the weighted-average grant-date fair value of
each option granted during 1997 and 1996 were $0.40 and $0.34, respectively.
Common Stock Purchase Warrants
The Company's Class D Common Stock Purchase Warrants expired on December 15,
1993. The Company issued Class E Common Stock Purchase Warrants for every two
Class D warrants that were outstanding on December 15, 1993. 1,062,917 Class
E Common Stock Purchase Warrants are outstanding at August 31, 1997, each
exercisable at $1.50 into one share of Common Stock until June 15, 1999. The
Class E Common Stock Purchase Warrants are callable by the Company upon 30
days written notice to the holders.
The Company issued 100,000 Placement Agent Common Stock Purchase Warrants to
Gilford Securities, Inc. and 100,000 Placement Agent Common Stock Purchase
Warrants to FBB Corp pursuant to Warrant Agreements dated December 2, 1994.
Each Placement Agent Common Stock Purchase Warrant entitles the holder to
purchase one share of the Company's common stock at the price of $1.00 per
share, at any time until October 15, 1999. There is no provision for the call
or redemption of the Placement Agent Common Stock Purchase Warrants.
The Company issued Class Z Common Stock Purchase Warrants on September 11,
1996 as part of the June 1996 private stock offering made solely to accredited
investors. 2,471,667 Class Z warrants are outstanding at August 31, 1997, each
exercisable at $.75 into one share of $.001 Common Stock until June 30, 2001.
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
The Class Z Common Stock Purchase Warrants are callable by the company upon
thirty days written notice at any time on or after July 1, 2000 and at any
time, notwithstanding the date, that the common stock of the company has a
closing bid price on ten consecutive trading days of $2.00 per share or more.
The Company assigns no value to the Common Stock Purchase warrants in the
consolidated financial statements due to the immaterial value assigned
therewith.
Stock Dividends - Series B and C
The Series B and C Convertible Exchangeable Preferred Stock $.001 par per
share has an established declared dividend of $.07 per annum per share, due on
the 30th day of June of each year. The dividend accumulates if not paid when
due. The dividend may be paid in cash or in stock at the sole discretion of
the Board of Directors. If paid in stock, the common shares issued will be
valued at the average bid price for the 30 days preceding the June 30 payment
date. Once the price per share of common stock is determined, a number of
common shares equal to the dollar value of the dividend which was to be paid
on June 30, will be issued with any fractional shares of the common stock
dividend rounded up.
Note I: Income taxes
<TABLE>
<CAPTION>
At August 31, 1997, deferred taxes consisted of the following:
<S> <C>
Deferred tax assets, net operating loss carry forward $ 2,960,314
Deferred tax liabilities, excess of tax over book
depreciation (31,727)
Valuation allowance (2,928,587)
____________
Net deferred taxes $ 0
</TABLE>
The valuation allowance for deferred tax assets as of September 1, 1996 was
$2,549,733. The net change in the valuation allowance for the year ended
August 31, 1997 was an increase of $378,854. The Company has net operating
loss carryforwards of $8,706,657 available for federal income tax purposes
which are available to offset taxable income through 2011. The Company has
alternative minimum tax net operating loss credit carryforwards of
approximately $4 million available for future periods.
Note J: Employee compensation plan
The Company presently offers no post-employment/post-retirement benefits which
would be required to be reflected in its financial statements by SFAS No. 112
and SFAS No. 106, respectively.
The Board of Directors has approved a management bonus pool which is based
upon 12 percent of gross profits before taxes in excess of $500,000 annually.
Bonuses are to be paid to persons filling designated positions. As of August
31, 1997, no bonuses had been paid under this plan.
Note K: Commitments
The Company is committed to renting its office space under a non-cancelable
operating lease until February 28, 2001. Rental expense for the leased
premise is $6,000 per month payable in cash from March 1, 1996 through
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
Notes to Consolidated Financial Statements
August 31, 1997
February 28, 2001. The space is rented from an affiliate of the Company.
This rental agreement supersedes the original agreement dated October 1, 1993
that was amended November 19, 1993 and October 15, 1994.
Future minimum rental payments, payable in cash, under the lease are as
follows:
<TABLE>
<CAPTION>
Year ending August 31, Payable in
Cash
<S> <C>
1998 $ 72,000
1999 72,000
2000 72,000
________
$216,000
========
</TABLE>
The Company is committed to an agreement to reimburse FBB Corp for expenses
incurred during fund raising efforts. The expenses may be paid in cash or in
stock at the sole discretion of the Board of Directors. If paid in stock, the
common shares will be valued at the average bid price for the period during
which the expenses were incurred. The following table summarizes expenses
incurred and the equivalent common shares:
<TABLE>
<CAPTION>
Fiscal Year Ended
1996 1997
<S> <C> <C>
Total expenses incurred $12,589 $11,981
Average stock price per share
during period covered $.312 $.43775
Number of common shares 40,340 27,370
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DELTA-OMEGA TECHNOLOGIES, INC.
Dated: November 26, 1997 By:/s/ Marian A. Bourque
Marian A. Bourque
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this Report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signatures Titles Date
/s/ Larry G. Schafran Chairman of the Board November 26, 1997
Larry G. Schafran
/s/ James V. Janes, III Chief Executive Officer, November 26, 1997
James V. Janes, III President
/s/ Marian A. Bourque Chief Financial Officer, November 26, 1997
Marian A. Bourque Secretary and Treasurer
/s/ Richard A. Brown Director November 26, 1997
Richard A. Brown
/s/ David H. Peipers Director November 26, 1997
David H. Peipers
/s/ Donald P. Carlin Director November 26, 1997
Donald P. Carlin
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 346,574
<SECURITIES> 0
<RECEIVABLES> 251,882
<ALLOWANCES> (10,000)
<INVENTORY> 218,976
<CURRENT-ASSETS> 847,460
<PP&E> 1,045,016
<DEPRECIATION> (534,380)
<TOTAL-ASSETS> 1,505,656
<CURRENT-LIABILITIES> 342,064
<BONDS> 40,822
0
4,062
<COMMON> 13,230
<OTHER-SE> 1,105,478
<TOTAL-LIABILITY-AND-EQUITY> 1,505,656
<SALES> 847,191
<TOTAL-REVENUES> 847,191
<CGS> 575,423
<TOTAL-COSTS> 575,423
<OTHER-EXPENSES> 1,287,442
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 5,958
<INCOME-PRETAX> (1,051,632)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,051,632)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,051,632)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
