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, 1999
Commission File No. 0-24506
DELTA-OMEGA TECHNOLOGIES, INC.
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(Exact name of Registrant as specified in its charter)
Colorado 84-1100774
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
119 Ida Road
Broussard, Louisiana 70518
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(Address of principal executive offices) (Zip code)
(318) 837-3011
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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:
$.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. $1,451,754
As of November 30,1999, 15,918,319 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 $1,481,889 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>
PART I.
Item 1. Business
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GENERAL
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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. Commencing in fiscal 1993 the
Company had essentially completed a majority of the research, development and
testing of its primary products and commenced its marketing efforts. The Company
continues to incur research and development costs to further develop its primary
products into different markets.
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
consumer, 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.
SafeScience
-----------
On September 1, 1999, the Company and SafeScience entered into an exclusive
License Agreement concerning certain proprietary formulations developed by
the Company and produced exclusively for SafeScience. Terms of the License
Agreement provide for SafeScience to provide confidential access to these
formulations to third party manufacturers for the purpose of manufacturing
large volumes of finished goods for resale. This arrangement allows
SafeSciecne to outsource much greater product blending capacities than the
Company can provide with its existing facilities. A provision of the
License Agreement grants a royalty to the Company based upon net sales of
SafeScience products. Through this channel, the Company has developed a
consumer market for All Purpose, Bathroom, Floor, and Window Cleaners and a
dish washing liquid.
The SafeScience mission is to "Make Chemical Safety a Lifestyle Choice." To
achieve this goal, SafeScience leverages technology to comprehensively
address the issue of health and chemical safety, with safe and efficacious
commercial and consumer products. SafeScience consumer products are the
first cleaning products that combine high performance with chemical safety,
at competitive prices.
SafeScience cleaners offer effective, non-hazardous alternatives to
petroleum-distillate based, chlorinated, caustic and high-VOC content
products. Products benefits include non-hazardous for worker and client
safety, environmentally benign and biodegradable, non-flammable, generate
less wastewater and require no special disposal procedures.
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-PRF-87937C,
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.
1
<PAGE>
With the expiration on May 31, 1999 of the Company's three year contract
with the Defense Supply Center-Richmond, the United Air Force sent out a
request for quotations for a new three year supply contract. The Company
has qualified its aircraft cleaning compound to the upgraded performance
standards required in the bid solicitation and has submitted a formal bid
package to Richmond, the depot in charge of purchasing and distributing
cleaning products to Air Force installations worldwide. The Company feels
its bid was very competitive and is awaiting a decision by the U.S. Air
Force regarding the announcement of the successful bidder. Management
is hopeful the contract will be awarded in the next quarter. The previous
contract generated sales in excess of $700,000 during its term, with
$250,000 worth of product being delivered in the last three months 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 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.
Omni-Clean(TM)Renew is a product developed for cleaning concrete and marble
monuments, statues and building edifices. Omni-Clean(TM)Renew works like
the petroleum based or acid based products that it is designed to replace,
but is safe for use by cleaning personnel and is biodegradable. Early
indications from customers in the cemetery maintenance business are
positive and the Company expects this niche market to develop with more
exposure to this specialized cleaning segment. No revenue estimates are
possible at this stage of initial introduction.
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 to be
reused. This product has no constituents reportable under federal
guidelines.
DOT Degreaser was developed to compete with low-end oilfield cleaners and
degreasers. DOT Degreaser 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). DOT Degreaser can be applied in a broad spectrum of
oilfield and maritime uses, including removal of American Petroleum
Institute modified pipe dope used in drilling operations.
2
<PAGE>
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) firefighting foam
concentrates earned Underwriters Laboratories (UL) listings in December of
1995. In May of 1998, the Company earned UL listings for six (6) more
products in the Vulcan(TM) line. With the issuance of the new listings, the
Company now offers a complete selection of firefighting foam concentrates
to the emergency response community.
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 use 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 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.
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.
3
<PAGE>
SPECIAL SERVICES
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The Company supplies Petroleum Chemicals, Inc. (P.C.I.), a Gulf coast oil
industry supply company, with custom blending and packaging services. The
relationship began in fiscal year 1999 and generated over $75,000 in revenues.
Management feels that P.C.I. will continue to expand its presence in the active
drilling areas of coastal Louisiana and Texas, resulting in increased sales.
MARKET SEGMENT DATA
- -------------------
Total product sales for the year ended August 31, 1999 were $1,451,754 as
compared with total product sales for the year ended August 31, 1998 of
$1,177,505.
<TABLE>
<CAPTION>
Product Sales For the Fiscal Years Ended August, 1995 through 1999
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Solvents & Cleaners $ 633,921 $ 569,085 $1,243,657 $ 738,909 $ 307,769
Firefighting & Spill Response 385,022 779 203,276 106,688 82,099
Oilfield Products 254,857 328,641 9,589 1,594 36,309
SafeScience 177,954 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total $1,451,754 $1,177,505 $1,456,522 $ 847,191 $ 426,177
========== ========== ========== ========== ==========
</TABLE>
MARKETS
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Specialty Chemicals
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The Company's products are marketed as safe and economical replacements 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 distributors for sales to end-users.
4
<PAGE>
SafeScience
-----------
On September 1, 1999, the Company and SafeScience entered into an exclusive
License Agreement concerning certain proprietary formulations developed by
the Company and produced exclusively for SafeScience. Terms of the License
Agreement provide for SafeScience to provide confidential access to these
formulations to third party manufacturers for the purpose of manufacturing
large volumes of finished goods for resale. This arrangement allows
SafeSciecne to outsource much greater product blending capacities than the
Company can provide with its existing facilities. A provision of the
License Agreement grants a royalty to the Company based upon net sales of
SafeScience products. Through this channel, the Company has developed a
consumer market for All Purpose, Bathroom, Floor, and Window Cleaners and a
dish washing liquid.
The Company has been contracted to furnish products to a corporation,
SafeScience, Inc., that is entering the I&I and household goods markets.
With the installation of a high-speed bottling unit provided by SafeScience
in April 1999, immediate revenues totaling approximately $75,000 were
generated by sales to SafeScience. The Company has purchase orders to
furnish an additional $300,000 of products for the household goods and I&I
lines. The SafeScience product line now encompasses over twenty (20)
products for use in both marketplaces. The Company anticipates a steady
increase in the amount of revenues generated by this contract as
SafeScience, Inc. enters the industrial market in a focused manner, while
continuing to develop and expand existing consumer product distribution
accounts.
Oilfield Products
-----------------
The Company recently introduced a line of products to serve the needs of
the oil, gas exploration and production industries. This line of products
includes degreasers, paraffin cutters, downhole tubing and casing cleaners
and marine transportation storage vessel cleaning compounds. The
multi-functional properties of these products allow the customer greater
flexibility by reducing cleaning time, minimizing storage requirements,
enhancing worker safety and lessening environmental liabilities.
The Company furnishes specialized cleaning and treatment chemicals to
Environmental Concepts, Inc. (E.C.I.), a company that provides cleaning
equipment, products and services to the oil and gas industry. Initial sales
of the Company's products totaling approximately $30,000 have been made to
E.C.I., with increasing volumes anticipated when E.C.I. begins full service
cleaning, which is scheduled to begin in the next quarter.
Drilling Mud Recycling Process (MRP)
------------------------------------
The Company has successfully field tested a unique technology for
recovering barite and oil from spent drilling muds. 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, working on location in Colombia with M-I Drilling Fluids, L.L.C.,
has successfully completed the first phase of a version of its MRP process,
Base Fluid Upgrade (BFU). The process was able to retrieve high purity
diesel, 99.5% pure based on laboratory analysis, from spent oil based muds.
Conditions prevalent in the oil and gas industry have caused delays in the
implementation of advanced management practices involving spent drilling
muds. The Company anticipates additional business in South America and
other active drilling locations. No estimate of revenues is possible at
this stage of development because long term results of this technology have
yet to be commercially determined.
5
<PAGE>
DeMilitarization
----------------
The Company signed a License Agreement in December of 1997 with Gradient
Technology, Inc. (G.T.I.) for the development and construction of a mobile
system capable of producing higher order commercial products from ammonium
picrate, a form of explosive. The license agreement became the subject of
arbitration with both parties filing claims with the American Arbitration
Association relating to the amount of capital required to fulfill a U.S.
government contract and the timing of the fund raising.
On September 30, 1999, the Company and G.T.I. signed a Termination of
License Agreement and Notice of Dismissal of Arbitration Action so that
neither party retains any interest the other party may have conveyed to it
by the license agreement and neither has any financial obligations to the
other party under the license agreement. The Company and G.T.I. also agreed
to dismiss the underlying arbitration case described above and agreed to
terminate the relationship as it related to the U.S. government contract.
Industrial and Institutional Markets
------------------------------------
The Company continues to expand its industrial and institutional cleaning
market. Specifically, the Company has entered the fleet maintenance market
and is now supplying products to Ryder-ATE, Houston Metro, Nalco Fleet
Lines and TexGas. Also the Company entered the concrete cleaning and stone
restoration markets. These products have been accepted by FMB Property
Management Company, the Texas Medical Center and several cemetery
organizations. These materials are also being evaluated by other property
management companies as well as several international organizations and
cemetery conglomerates. The Company's materials offer safe, effective
alternatives to the solvent, caustic and acid based materials currently
being utilized in the marketplace.
RAW MATERIALS
- -------------
Basic raw materials used by the Company in the formulation of finished products
include a wide variety of surfactants, acids, alkalines, salts and solvents.
Approximately sixty compounds are purchased from manufacturers or distributors
that supply the chemical industry. All raw materials used by the Company are
available on a worldwide basis and are not subject to shortage. Raw materials
and finished products are typically transported via truck and rail.
BLENDING FACILITIES
- -------------------
The Company's blending facilities are located in a dedicated building, housing
raw material storage and blending tanks used in the mixing process. The blending
vessels are vats where the raw materials are pumped at the proper weights to
complete a blended compound. The Company presently has three blending units with
electric motor driven paddles. The largest unit is capable of blending 1,100
gallons at one time, and the other two are 660 gallon capacity. The blending
units and associated piping are common sizes used by many industries and are
relatively inexpensive to procure, install and operate. The Company performs
100% of its product blending, and no use of outside manufacturing service is
contemplated.
MAJOR CUSTOMERS
- ---------------
During fiscal years 1999 and 1998, one customer, the U.S. Air Force, accounted
for twenty-four percent (24%) and fourteen (14%) percent of the Company's net
sales, respectively. In addition, one customer accounted for sixteen (16%)
percent of the Company's fiscal 1999 net sales.
6
<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 adverse long term impact.
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.
7
<PAGE>
RESEARCH AND DEVELOPMENT
- ------------------------
In fiscal year 1999, the Company focused primarily on the development of a line
of products for SafeScience, Inc. The selection of household cleaning products
chosen by SAFS for introduction to the U.S. consumer market was identified,
products were custom formulated, performance testing was accomplished by
accepted testing labs and product safety was verified by toxicological experts.
This line of efficacious consumer products has been marketed on a regional basis
with positive results and consumer response indicates that the safe,
ready-to-use cleaners will achieve nationwide acceptance.
The Company also worked on development of an Institutional and Industrial (I&I)
product line for itself and SAFS. The heavy-duty cleaners and degreasers
designed for use by commercial industries and municipal government agencies have
attained initial success on a regional basis as evidenced by re-orders.
EMPLOYEES
- ---------
The Company currently has 11 full-time non-union employees at the corporate
headquarters in Broussard, Louisiana. The Company periodically 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.
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
Crossroads Investments, L.L.C. at $6,000 per month with an option to renew for
an additional five years at an increase of $1,200 per month.
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, 1998. Annual meetings of the shareholders of the
Company are held in accordance with Colorado law.
8
<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 "OTC Bulletin Board" maintained by
National Quotation Bureau, Inc. On October 31, 1999, there were 13 market makers
in the Company's securities and the closing bid quotation was $.110. The
following table sets forth the high and low bid quotations for the Company's
Shares, as reported in the "OTC Bulletin Board."
BID
-------------------------
QUARTER
ENDED LOW HIGH
----- --- ----
August 31, 1997 $ .51 $ .75
November 30, 1997 $ .66 $ .844
February 29, 1998 $ .375 $ .75
May 31, 1998 $ .4375 $ .75
August 31, 1998 $ .25 $ .51
November 30, 1998 $ .25 $ .4375
February 28, 1999 $ .18 $ .25
May 31, 1999 $ .29 $ .23
August 31, 1999 $ .24 $ .31
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, 1999, there were 242 registered holders and approximately 1,100
beneficial owners of the Company's common stock held in street name at brokerage
houses. As of October 31, 1999, there were 17 holders of the Company's series B
preferred stock and 22 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, 2001.
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.
9
<PAGE>
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 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, the ability of the Company to fund
continuing operations from cash flow or funds raised through loans or equity
financings, 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 1999 Compared to Fiscal 1998
- -----------------------------------
Net sales increased $274,249 or 23%, to $1,451,754 from $1,177,505. The increase
was due primarily to an increase in solvent replacement and cleaning product
sales relative to the U.S. Air Force contract. The U.S. Air Force Mil. Spec.
MIL-C-87937B, Type II to which the Company is qualified is being phased out and
replaced with MIL-PRF-87937C, Type IV, a product that qualifies to a more rigid
cleaning efficiency test. In Fiscal 1999, the Company developed a product that
conformed to the Mil. Spec. MIL-PRF-87937C, Type IV and was awarded contracts
relative to the Type IV cleaning compound. Currently, the Company has an
outstanding formal bid package to the U.S. Air Force for a new three year
aircraft cleaning supply contract.
Net sales generated from the Company's oilfield line of products decreased to
$254,857 from $328,641 due to the then depressed conditions of the oil and gas
industry. However, management expects due to increased production and
exploration activities in the Gulf Coast that future sales of its oilfield
cleaners, degreasers and specialized chemicals will increase over the next two
quarters.
Net sales of firefighting and spill response agents increased 38% to $385,022
from $279,779. The increase in sales is directly related to the introduction of
the Company's U.L. listed environmentally safe fire foam products to
distribution networks in the eastern United States.
Cost of sales increased $157,855 or 19%, from $850,109 to $1,007,964. As a
percentage of sales, cost of sales decreased from 72% to 69%. The decrease in
cost of sales as a percentage of sales relates directly to the increased amount
of sales being generated from the Company's higher gross margin products. The
19% increase in cost of sales was due primarily to the increase in the Company's
net sales for Fiscal 1999.
10
<PAGE>
Total operating expenses decreased from $1,121,353 to $866,927, or 23%. Total
operating expenses decreased due to eliminating outside consultants and
management's efforts to limit sales related expenses.
Research and Development costs decreased from $461,090 to $187,528. In fiscal
year 1999, the Company focused its efforts and funds on the development of a
line of products for SafeScience, Inc. All chemical development costs were borne
by the Company's technical staff, therefore no outside consultants, travel or
related expenses were necessary.
Net loss for fiscal 1999 was $646,087, a decrease of $729,445 from the net loss
of $1,375,532 incurred during fiscal 1998. The decreased net loss was due
primarily to the decrease in Research and Development costs and the commencement
of sales to SafeScience, Inc.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
The Company considers cash and cash equivalents as its principal measure of
liquidity. These items total $4,858 at August 31, 1999. The Company's short term
debt totals $223,444 with total debt being $434,606. 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 did not have sufficient working capital available
as of August 31, 1999, 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 sell 1 million
common shares at an undetermined price per share. These shares are remaining
from 2 million shares authorized for sale to accredited and sophisticated
investors by the Company's board of directors in January 1998. For immediate
capital requirements, the Company expects to negotiate loans from board of
director members and major shareholders until sufficient funds are generated
from operations or the financial instruments discussed above are implemented. As
of November 30, 1999, the Company had a cash balance of $3,100. The Company is
in the process of implementing a rights offering to raise approximately $600,000
to sustain operations until such time as sales generated revenues support
continuing operations.
During the last two years, the Company invested funds in a unique technology for
recovering barite and oil from spent drilling mud. The Company, working on
location in Colombia with M-I Overseas Limited, successfully completed the first
phase of its oil based mud processing application. "Base Fluid Destruction"
(BFD) is a version of MRP, a proprietary process for recovering barite and oil
from spent drilling muds. BFD was demonstrated for a major oil exploration and
production company. Based upon the success of this application, the Company was
requested to expand its process to include the treatment of the water/solids
phase that remains after initial processing. No estimate of revenues is possible
at this stage of development because the results of this technology have to be
commercially explored.
The Company's current acquisition of six (6) additional UL listings for its fire
foam products gives the Company an opportunity to gain a significant market
share in the municipal fire sector and airport fire fighting markets. The
Company also developed a Class "A" foam used for extinguishing wildland and
structural fires. The Company plans to obtain approval for use in the forestry
service market.
11
<PAGE>
The Company has been contracted to furnish products to a corporation,
SafeScience, Inc., that has entered the I&I and household goods markets. With
the installation of a high-speed bottling unit provided by SafeScience in April
1999, immediate revenues totaling approximately $75,000 were generated by sales
to SafeScience. The Company has received purchase orders to furnish an
additional $300,000 of products for the household goods and I&I lines. The
SafeScience product line now encompasses over twenty (20) products for use in
both marketplaces. The Company anticipates a steady increase in the amount of
revenues generated by this contract as SafeScience, Inc. enters the industrial
market in a focused manner, while continuing to develop and expand existing
consumer product distribution accounts.
On September 1, 1999, the Company and SafeScience entered into an exclusive
License Agreement concerning certain proprietary formulations developed by the
Company and produced exclusively for SafeScience. Terms of the License Agreement
provide for SafeScience to provide confidential access to these formulations to
third party manufacturers for the purpose of manufacturing large volumes of
finished goods for resale. This arrangement allows SafeSciecne to outsource much
greater product blending capacities than the Company can provide with its
existing facilities. A provision of the License Agreement grants a royalty to
the Company based upon net sales of SafeScience products.
Management believes that the sources of funds and anticipated increases in sales
volume discussed above will enable the Company to sustain its current operations
and meet its short term obligations in fiscal 2000. As sales volumes of the
Company's fire foam product line and industrial chemicals increase, the Company
expects cash flow from operations in fiscal 1999 to improve, although no
assurances can be made.
During 1998, the Company developed a plan to upgrade its primary information
systems to be Year 2000 compliant. The Company does not expect the cost of the
upgrade to be material to its financial condition or business operations.
Through August 31, 1999, the Company has not incurred significant costs
associated with the Year 2000. The Company anticipates that the necessary
upgrades will be in place by December 15, 1999.
The Company is in the process of evaluating compliance with the Year 2000 by its
primary suppliers and customers; however the Company does not believe its
business or operations would be adversely impacted if its suppliers or customers
were not Year 2000 compliant.
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
- --------------------
On November 8,1999, Delta-Omega Technologies, Ltd. (the "Company")engaged
Broussard, Poche, Lewis & Breaux, L.L.P. to replace Arthur Andersen LLP ("Arthur
Andersen") as the Company's independent accountants to audit the Company's
consolidated financial statements for the year ended August 31, 1999. Arthur
Andersen was dismissed as the Company's independent accountants on the same
date. The Company's Board of Directors approved the change in the Company's
independent accountants.
12
<PAGE>
The Arthur Andersen reports on the Company's financial statements for the two
fiscal years ended August 31, 1998 and 1997 were modified as to the uncertainty
of the Company's ability to continue as a going concern.
In connection with its audits for the two most recent fiscal years ended August
31, 1998 and 1997 and through November 8, 1999, there have been no disagreements
with Arthur Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen, would
have caused them to make reference thereto in their report on the financial
statements for the years ended August 31, 1998 and 1997.
During the Company's two most recent fiscal years ended August 31, 1998 and 1997
and through November 8, 1999, there have been no "reportable events" (as defined
in Regulation S-K Item 304(a)(1)(v)).
13
<PAGE>
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
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.
14
<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.
<TABLE>
<CAPTION>
Exhibit
No. Description Location
------- ----------- --------
<S> <C> <C>
3 Articles of Incorporation Incorporated by
and Bylaws reference to Exhibit
No. 3 to the Company's
Registration Statement
(No. 0-24506)
4.1 Designation of Series B Incorporated by Reference
Convertible Preferred Stock Ex. 4.2 to Registration
Statement S-2 (no. 33-90604)
4.2 Designation of Series C Filed herewith
Convertible Preferred Stock
10 SafeScience License Agreement Filed herewith
</TABLE>
(b) No Reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
15
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
---------------------------------------------
Index to Consolidated Financial Statements
Independent Auditors' Report.................................................F-2
Consolidated Balance Sheet, August 31, 1999..................................F-3
Consolidated Statements of Operations for the years
ended August 31, 1999 and 1998...............................................F-4
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
August 31,1999 and 1998......................................................F-5
Consolidated Statements of Cash Flows for the years
ended August 31, 1999 and 1998...............................................F-6
Notes to Consolidated Financial Statements...................................F-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Delta-Omega Technologies, Inc.:
We have audited the balance sheet of Delta-Omega Technologies, Inc. (a Colorado
corporation) and subsidiary as of August 31, 1999, and the related statements of
income, retained earnings and cash flows for each of the year then ended. 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 audit. The financial statements of Delta-Omega Technologies, Inc. as of
August 31, 1998, were audited by other auditors whose report dated October 22,
19998, on those statements included an explanatory paragraph that described the
going concern issues relative to recurring losses and negative cash flows which
have continued since commencement of operations discussed in Note A to the
financial statements.
We conducted our audit 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 1999 financial statements referred to above present fairly,
in all material respects, the financial position of Delta-Omega Technologies,
Inc. as of August 31, 1999, and the results of its operations and cash flows for
the year then ended 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, 1999, the Company
does not have adequate working capital in place to support its current level of
operations. Those conditions 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 that might result from the
outcome of this uncertainty.
Broussard, Poche, Lewis and Breaux LLP
/s/ Broussard, Poche, Lewis and Breaux LLP
Lafayette, Louisiana
November 21, 1999
F-2
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
---------------------------------------------
Consolidated Balance Sheet
ASSETS
------
August 31,
1999
------------
Current assets
Cash and equivalents $ 4,858
Accounts receivable
Trade, net of allowance for doubtful accounts 184,942
Accounts Receivable - factored 162,248
Employees 4,186
Inventories 223,693
Prepaid expenses 25,595
Total current assets 605,522
Property and equipment, net of accumulated depreciation 215,516
Intangible assets, net of accumulated amortization 98,956
Other assets 10,490
------------
Total assets $ 930,484
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable
Trade creditors 289,736
Others 19,996
Customer prepayments 32,046
Current maturities of long-term debt and leases 26,444
Advance from factor 226,619
Notes payable-board of director loans 197,000
Accrued expenses 35,126
------------
Total current liabilities 826,967
Long-term debt and leases, net of current maturities 211,162
Total liabilities 1,038,129
Shareholders' equity
Convertible, 7 percent cumulative,
non-participating preferred stock, $.001
par value, shares authorized, 40,000,000;
issued and outstanding 1,335,000 series B,
2,396,667 series C 3,732
Common stock, $.001 par value,
shares authorized, 100,000,000;
issued and outstanding, 15,918,319 15,918
Additional paid-in capital 11,804,875
Retained deficit (11,932,170)
------------
Total shareholders' equity (107,645)
------------
Total liabilities and shareholders' equity $ 930,484
============
See accompanying notes to consolidated financial statements
F-3
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
---------------------------------------------
Consolidated Statements of Operations
Years ended August 31,
----------------------------
1999 1998
------------ ------------
Net product sales $ 1,451,754 $ 1,177,505
Cost of sales 1,007,964 850,109
------------ ------------
Gross profit 443,790 327,396
Costs and expenses
Selling, general and administrative 866,927 1,121,353
Research and development 187,528 461,090
Impairment of Long-Lived Assets -0- 121,757
------------ ------------
1,054,455 1,704,200
------------ ------------
Operating loss (610,665) (1,376,804)
Other operating income, net 14,727 8,545
Interest expense (50,149) (7,273)
------------ ------------
Net loss (646,087) (1,375,532)
Preferred dividend declared (219,275) (234,112)
------------ ------------
Net loss available to common shareholders $ (865,362) $ (1,609,644)
============ ============
Weighted average shares outstanding 15,150,211 13,798,653
Basic and diluted earnings per common share $ (.06) $ (.12)
============ ============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Delta-Omega Technologies, Inc. and Subsidiary
---------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
Additional
Common Preferred Paid in Retained
Stock Stock Capital Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at September 1, 1997 $ 13,230 $ 4,062 $ 10,562,642 $ (9,457,164)
Issued dividend for Series B & C Preferred 376 -- 233,736 (234,112)
Issuance of common stock for services rendered 73 -- 45,318 --
Conversion of Convertible Preferred Stock 330 (330) -- --
Issuance of common stock for private 987 -- 738,826 (1,375,532)
placement memorandum
Net loss -- -- -- (1,375,532)
------------ ------------ ------------ ------------
Balance at August 31, 1998 14,996 3,732 11,580,522 (11,066,808)
Issuance of stock options for services rendered -- -- 6,000 --
Issued dividend for Series B & C Preferred 922 -- 218,353 (219,275)
Net loss -- -- -- (646,087)
------------ ------------ ------------ ------------
Balance at August 31, 1999 $ 15,918 $ 3,732 $ 11,804,875 $(11,932,170)
============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-5
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
---------------------------------------------
Consolidated Statements of Cash Flows
Years Ended August 31,
---------------------------------
1999 1998
----------- ----------
Cash flows from operating activities:
Net loss $ (646,087) $(1,375,532)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 111,204 201,880
(Gain)/Loss on sale and disposal of property & equipment (13,130) 1,408
Bad debt expense -0- 1,318
Issuance of common stock for services 6,000 45,391
Asset impairment -0- 121,757
(Increase) decrease in:
Accounts receivable (232,418) 204,320
Inventories (13,691) 8,974
Prepaid expenses 843 (1,451)
Other receivables 6,814 4,041
Other assets 128 (175)
Increase (decrease) in:
Accounts payable 237,513 (88,623)
Accrued liabilities 64 (10,265)
Other liabilities (101,570) (63,121)
----------- -----------
Total adjustments 1,757 425,454
----------- -----------
Net cash used in operating activities (644,330) (950,078)
Cash flows from investing activities:
Property acquisitions (50,832) (53,333)
Patent costs (2,024) (2,000)
Proceeds from sale of property and equipment 15,850 2,500
----------- -----------
Net cash used in investing activities (37,006) (52,833)
Cash flows from financing activities: (63,896) 63,896
Bank overdraft 470,654 21,650
Proceeds from borrowing (24,857) (18,348)
Principal payments of long-term debt and capital leases -0- 739,813
Proceeds from issuance of preferred stock (73,000) -0-
Proceeds from factoring ----------- -----------
Principal payments on related party notes 535,520 807,011
Net cash (used in) provided by financing activities (145,816) (195,900)
----------- -----------
Net increase (decrease) in cash and cash equivalents 150,674 346,574
----------- -----------
Cash and cash equivalents, beginning of period $ 4,858 $ 150,674
=========== ===========
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
Delta-Omega Technologies, Inc. and Subsidiary
---------------------------------------------
Notes to Consolidated Financial Statements
August 31, 1999
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.
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, 1999, 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, the Company has the option to sell 1
million common shares at an undetermined price per share. These shares
are remaining from 2 million shares authorized for sale to accredited
and sophisticated investors by the Company's board of directors in
January 1998. For immediate capital requirements, the Company expects
to negotiate loans from board of director members until sufficient
funds are generated from operations or the financial instruments
discussed above are implemented. As of November 30, 1999, the Company
had a cash balance of $3,100. The Company is in the process of
implementing a rights offering to raise approximately $600,000 to
sustain operations until such time as sales generated revenues support
continuing operations.
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
F-7
<PAGE>
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 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.
Credit concentration
--------------------
During fiscal years 1999 and 1998, one customer, the U.S. Air Force,
accounted for twenty-four percent (24%) and fourteen (14%) percent of
the Company's net sales, respectively. In addition, one customer
accounted for sixteen (16%) percent of the Company's fiscal 1999 net
sales
Reclassifications
-----------------
Certain prior year balances have been reclassified to conform with
current year presentation.
Accounting pronouncement
------------------------
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," SFAS No. 129, "Disclosure of Information about Capital
Structure," SFAS No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 128, which is effective for reporting periods
ending after December 15, 1997, has been adopted by the Company and
the impact on the Company s earnings per share was not material. SFAS
No. 129, SFAS No. 130 and SFAS No. 131, which are effective for
reporting periods ending after December 15, 1997, have been adopted,
and all required disclosures are presented in the Company's
consolidated financial statements included herein. However, the
Company had no comprehensive income during the year presented in these
financial statements.
Note B: Related party transactions
--------------------------
Accrued Expenses
----------------
Accrued Expenses includes a $15,000 balance due to the Chairman of the
Board for expenses incurred during fund raising efforts in fiscal
1997. The $15,000 balance due will be paid in the form of common
F-8
<PAGE>
shares. The number of common shares to be issued will be calculated
using the average stock price during the time that the expenses were
incurred. The expenses incurred are reflected in the selling, general
and administrative section in the accompanying consolidated statements
of operations. ' Notes payable-Board of Director loans
During fiscal year 1999, the Company negotiated nine (9) promissory
notes totaling $270,000 with related parties, of which $225,000 were
with members of the board of directors, in order to maintain its
current level of operations. Each promissory note bears an interest
rate of 8.25% per annum. These notes are short-term and were due
during the fiscal year 1999. Extensions were negotiated on these notes
which are included as current liabilities in the balance sheet.
Related party notes totaled $197,000 as of August 31, 1999.
The Company expects to repay these loans with funds generated from
continuing operations or proceeds from the sale of common stock
previously authorized by the board of directors; however these
directors may elect to convert the debt into equity.
Note C: Accounts and notes receivable
-----------------------------
In February 1999, the Company entered into a factoring agreement with
Texas Capital Funding, Inc. ("TCF"). The Company agreed to sell,
assign, transfer, convey and deliver submitted accounts receivable
with recourse to TCF and TCF agreed to purchase and accept delivery
from the Company. TCF agreed to transfer funds to the Company equal to
80% of the invoice amount submitted. The remaining 20% is retained by
TCF until the submitted invoices are collected in full. Fees for the
service rendered by TCF are based upon the collection period of each
submitted invoice. Based upon the collection of submitted accounts
receivable, fees incurred averaged between 3% and 20% of the invoiced
amount with an average of 5% as of August 31, 1999. Fees incurred are
classified as interest expense and reflected in the consolidated
statements of operations. Interest expense related to the factoring of
accounts receivable for the current fiscal year totaled $30,725.
Repayment of any advances is guaranteed by two of the Company's
directors.
Accounts and Notes Receivable at the end of August 31, 1999 consists
of the following:
Accounts Receivable, Trade $194,942
Accounts Receivable, Factored 162,248
Allowance for Doubtful Accounts (10,000)
--------
Total $347,190
========
Trade receivables are shown net of an allowance for doubtful accounts
of $10,000.
Note D: Inventories
-----------
Inventories at August 31, 1999 consisted of the following:
Raw materials $132,394
Finished goods 50,227
Containers 14,754
Consigned inventory 26,318
--------
Total $223,693
========
F-9
<PAGE>
Note E: Property and equipment
----------------------
Major classes of property and equipment at August 31, 1999 consisted
of:
Furniture and equipment $ 637,749
Leasehold improvements 29,292
----------
Total property and equipment 667,041
Less: accumulated depreciation (451,525)
----------
$ 251,516
==========
Depreciation expense was $102,284 and $168,957 for years ended August
31, 1999 and 1998, respectively.
During fiscal year ended August 31, 1998, the Company recorded a
$121,757 impairment write-down of its soil washing equipment and fines
treatment unit in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121. The Company wrote-down these pieces of
equipment since they appeared to have no revenue generating potential
based upon recent significant adverse changes in the environmental
consulting and remediation business. Therefore, the Company estimated
no future undiscounted cash flows from the soil washing equipment and
fines treatment unit. Thus, as prescribed by SFAS 121, the carrying
value of these pieces of equipment was reduced to the estimated
discounted future cash flows which is zero.
The charge for impairment is included in the selling, general and
administrative expense section in the fiscal year 1998 accompanying
consolidated statements of operations.
Note F: Intangible assets
-----------------
Intangible assets at August 31, 1999 consisted of the following:
Patent costs $ 143,318
Less: accumulated amortization (44,362)
----------
Net Intangible assets $ 98,956
==========
Amortization expense was $8,920 and $33,265 for the years ended August
31, 1999 and 1998, respectively. Fiscal year 1998 amortization expense
includes $22,556 of capitalized patent costs written off that relate
to the Company's soil washing process.
Note G: Long-term debt and lease obligations
------------------------------------
Long-term debt at August 31, 1999, consisted of the following:
Note payable to a corporation; principal
due two years from the effective date of
May 14, 1999; interest due in quarterly
installments at an interest rate of 8.25% $150,000
Note payable to a bank; principal and interest
due in monthly installments at interest
rates varying from 7.75% to 9.95% 32,615
Notes and capital leases payable to a
corporation; principal and interest due in
monthly installments at interest rates
varying from 8.70 % to 14.00% 54,991
--------
Total debt 237,606
Less: current portion (26,444)
--------
Long-term debt $211,162
========
F-10
<PAGE>
Principal repayments on notes payable and capital leases required for
the next five years are as follows:
2000 $ 26,444
2001 179,185
2002 21,119
2003 7,248
2004 3,610
---------
Total debt $ 237,606
=========
As of August 31, 1999, equipment under capital lease and the related
accumulated amortization totaled $77,624 and $25,339, respectively.
Amortization of assets recorded is included in depreciation and
amortization expense.
During the end of the third quarter of Fiscal 1999, the Company
negotiated a $150,000 loan agreement with SafeScience, Inc. (SFAS).
The note bears interest at a rate of 8.25% per annum on the
outstanding principal amount of the note, and the interest shall be
payable quarterly in arrears commencing three months after the date of
the first of twelve semi-monthly advances. The principal sum of the
note shall be due and payable two years from the effective date of May
14, 1999.
Collateral on this note is grant of the right and license to the
exclusive access and use of the Product Formulas to SFAS for the sole
purpose of satisfying SAFS' production demand as set forth in the
Supply & Distribution Agreement between the Company and SFAS.
Interest expense as of August 31, 1999 totaled $50,149.
Note H: Shareholders' equity
--------------------
In April 1999, the board of directors authorized an extension for the
Preferred "B" stock of the Company from June 30, 1999 to June 30,
2001.
In the first quarter of fiscal 1998, the Company issued Baer &
Company, L.L.C. 39,996 shares of $.001 par value common stock for
expenses incurred from July 1996 through November 1997 while raising
funds on behalf of the Company. 27,370 shares were issued at a price
of $.43775 per share. The remaining 12,626 shares were issued at a
price of $.6661 per share. The prices per share are based on the
average of the bid and last trade value of the Company's stock during
the period in which the fund raising expenses were incurred. Expenses
for the fair value of the services provided were expensed as incurred.
In January 1998, the Company's board of directors authorized selling
up to 2 million shares of common stock at the best negotiated price.
In March 1998, the Company sold 986,413 shares of the common stock
through a special private placement solely to accredited and
sophisticated investors at an offering price of $.75 per share. The
remaining balance of the common shares, 1,013,587, were outstanding at
August 31, 1999.
The Company issued 33,333 shares of common stock at the special
private placement offering price of $.75 per share to Global Strategy
& Associates, James A. Wylie, Jr. in lieu of cash for consulting
services rendered during the months of January, February and March,
1998.
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.
F-11
<PAGE>
The Company's policy is to grant options to purchase common stock to
directors, officers or key employees as part of an incentive program.
In addition to the grants under this program, the Company grants
options to purchase common stock 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.
The following table summarizes the activity related to stock options:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Number Number of Range of Weighted
of Options Options Issued Exercise Average
Issued under outside Prices Exercise
the Plan The Plan Price
- ---------------------------------------------------------------------------------------------------------------
Outstanding at
<S> <C> <C> <C> <C> <C>
August 31, 1997 509,000 1,739,371 $ .34 - $3.00 $0.89
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- (102,619) $2.10 - $3.00 $2.46
-------- ---------
Outstanding at
August 31, 1998 509,000 1,636,752 $ .34 - $2.50 $0.80
Granted -- 25,000 $2.00 $2.00
Exercised -- -- -- --
Forfeited -- (200,888) $ .75 - $1.00 $0.98
-------- ---------
Outstanding at
August 31, 1999 509,000 1,460,864 $ .34 - $2.50 $0.85
- --------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at August 31, 1999:
- ---------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------
Wgtd. Avg. Wgtd. Avg.
Range of Number Remaining Exercise Number Wgtd. Avg.
Exercise Outstanding Contractual Price Exercisable Exercise
Prices At 8/31/99 Life at 8/31/99 Price
------ ---------- ---- ---------- ------------ ---------
$0.34 - $0.99 1,625,567 1.5 years $0.59 1,450,567 $0.58
$1.00 - $1.99 105,630 1.0 years $1.19 105,630 $1.19
$2.00 - $2.50 238,667 1.2 years $2.11 238,667 $2.12
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The options exercisable at August 31, 1999 and 1998, respectively,
were 1,794,864 and 1,970,752 with weighted-average exercises prices of
$.81 and $.82, respectively.
Stock Options Granted, Exercised and Forfeited
----------------------------------------------
1999
----
During fiscal year 1999, 200,888 stock options outside of the
Company's Stock Option Plan expired. The exercise prices for these
options range from $.75 to $1.00 per share. Additionally, the Company
granted 25,000 stock options outside the Company's Stock Option Plan
for consulting services rendered. The exercise price for these options
is $2.00 per share.
F-12
<PAGE>
The Company's Board of Directors extended the expiration dates for
7,500 stock options at $1.00 per share and 103,667 stock options at
$2.00 per share for an additional three years from the original option
expiration date.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1999: a) no dividend
yield, b) risk-free interest rate of 4.63%, c) expected contractual
life of 3.4 years, d) expected volatility of 100%.
Based on the above assumptions, the weighted-average grant-date fair
value of each option granted during fiscal 1999 was $0.088.
No employee options were granted in fiscal year 1999.
1998
----
During fiscal year 1998, 102,619 stock options outside of the
Company's Stock Option Plan expired. The exercise prices for these
options ranged from $2.10 to $3.00 per share.
In December 1997, the Company's Board of Directors extended the
expiration date for 40,000 stock options granted in April 1991 to a
financial consultant for services rendered. The exercise period was
extended for an additional three (3) years from the expiration date.
No assumptions were necessary in fiscal year 1998 to calculate the
fair value of each option grant as no options were granted.
No employee options were granted in fiscal year 1998.
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 and each employee.
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.
F-13
<PAGE>
No compensation expense was recorded upon 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. None of the milestones in
accordance with the terms of the agreement were achieved in fiscal
1998. 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.
The Company will continue to use stock option arrangements when
possible to conserve its cash. The compensation costs for the related
awards have been recognized in the period for which they were granted.
Accordingly, since no instruments were issued, there is no pro forma
information below.
Had compensation cost for the Company's 1997 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:
1997
-------------------------------------------------------------------
As Reported Pro forma
----------- ---------
Net loss $(1,106,149) $(1,169,793)
Net loss applicable to
common share owners $(1,345,197) $(1,408,841)
Net loss per common share $ (.10) $ (.11)
-------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997: a) no dividend
yield, b) risk-free interest rate of 6.39%, c) expected contractual
life of 3.4 years, d) expected volatility of 101%. No assumptions were
necessary in 1998 as no options were granted.
Based on the above assumptions, the weighted-average grant-date fair
value of each option granted during fiscal 1997 was $.40.
1996
----
The Company granted 757,555 common stock options with exercise prices
that exceeds the market price of the stock on the grant date. 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
forfeited to the Company's 1991 non-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
1996 because the exercise prices exceeded the market prices of the
Company's common shares on the measurement date.
F-14
<PAGE>
1995
----
The Company granted 497,000 common stock options with exercise prices
that exceeds the market price of the stock on the grant date. These
options were issued in accordance with terms of agreements entered by
the Company and the Company's 1991 non qualified stock option plan.
The Company granted an affiliate, controlled by a member of the
Company's Board of Directors, options to purchase 137,000 shares of
common stock at an exercise price of $2.00 per share in lieu cash for
the first two (2) years of a lease for the Company's facility. In
another agreement the Company granted options to purchase 155,000
shares of common stock at exercise prices ranging from $.65 to $2.00
per share in lieu of cash compensation for professional consulting
services rendered. The Company also granted 205,000 stock options with
exercise prices ranging from $.65 to $2.00 in accordance with the
Company's 1991 Stock Option Plan. There was no compensation expense
recorded upon issuance of these options in fiscal 1995 because the
exercise prices exceeded the market prices of the Company's common
shares on the measurement date.
1994, 1993, 1992 and 1991
-------------------------
The Company granted 1,333,452 common stock options with exercise
prices that exceeds the market price of the stock on the grant date.
These options were issued in accordance with terms of agreements
entered by the Company and the Company's 1991 non qualified stock
option plan. The Company granted options to purchase 333,452 shares of
common stock at exercise prices ranging from $.90 to $3.00 per share
in lieu cash compensation for professional consulting services
rendered. The Company also granted 1,000,000 stock options with an
exercise price of $.75 per share in accordance with the Company's 1991
Stock Option Plan. There was no compensation expense recorded upon
issuance of these options because the exercise prices exceeded the
market prices of the Company's common shares on the measurement date.
Common Stock Purchase Warrants
------------------------------
In the fourth quarter of Fiscal 1999, the Company issued warrants to
purchase 380,000 shares of common stock at an exercise price ranging
from $.25 to $.75 per share. The warrants were issued in connection
with loan agreements negotiated by the Company in order to meet
immediate cash requirements. The holders of these loan agreements were
issued four warrants for each dollar loaned to the Company. The
warrants expire three years from the effective date of the loan
agreement.
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
were 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. On January 8, 1998, the Company's board
of directors authorized lowering the exercise price of the Class "E"
Warrants to $.75 per share, and that a Warrant call be issued
effective immediately. The holders had 30 days to respond and if the
holders did not convert, the warrants expired after the 30 day period.
None of the Class "E" Warrants were exercised during the conversion
period, and the warrants expired on February 14, 1998.
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
F-15
<PAGE>
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. 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.
In January 1996, the Company issued a Warrant to purchase 600,000
shares of common stock to the Chairman of the Board as remuneration
for services rendered while holding that position. This Warrant may be
exercised any time on or after January 2, 1996 but prior to the
earlier to occur of (I) December 31, 2000, or (ii) a sale of
substantially all of the stock or assets of the Company in a
transaction in which it is not the surviving corporation. The exercise
price is $2.00per share of common stock.
The Company assigns no value to the Common Stock Purchase Warrants in
the consolidated financial statements due to the immaterial value
associated 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
------------
At August 31, 1999, deferred taxes consisted of the following:
Deferred tax assets, net operating
loss carry forward $3,647,665
Deferred tax liabilities, excess
of book over tax depreciation 558
Valuation allowance 3,648,223
----------
Net deferred taxes $ 0
==========
The valuation allowance for deferred tax assets as of September 1,
1998 was $3,404,964. The net change in the valuation allowance for the
year ended August 31, 1999 was an increase of $243,259. The Company
has net operating loss carryforwards of $10,708,379 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. A valuation allowance of 100% of net
operating loss carryforwards is maintained due to uncertainty in the
Company's ability to generate income.
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, 1999, no bonuses had been paid
under this plan.
F-16
<PAGE>
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 February 28, 2001 with a renewal option for five
additional years at $7,200 per month. The facility is rented from a
company controlled by a former member of the Company's board of
directors. 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:
Year ending Payable in
August 31, Cash
---------- ----
2000 $ 72,000
2001* 36,000
--------
$108,000
========
*The term of the operating lease expires February 28, 2001.
Rent expense under this agreement during the fiscal year ended 1999
totaled $72,000.
Note L: Contingencies
-------------
The Company signed a License Agreement in December of 1997 with
Gradient Technology, Inc. (G.T.I.) for the development and
construction of a mobile system capable of producing higher order
commercial products from ammonium picrate, a form of explosive. The
license agreement became the subject of arbitration with both parties
filing claims with the American Arbitration Association relating to
the amount of capital required to fulfill a U.S. government contract
and the timing of the fund raising.
On September 30, 1999, the Company and G.T.I. signed a Termination of
License Agreement and Notice of Dismissal of Arbitration Action so
that neither party retains any interest the other party may have
conveyed to it by the license agreement and neither has any financial
obligations to the other party under the license agreement. The
Company and G.T.I. also agreed to dismiss the underlying arbitration
case described above and agreed to terminate the relationship as it
related to the U.S. government contract.
Note M: Disclosures about Reportable Segments
-------------------------------------
Delta-Omega Technologies, Ltd. has four reportable segments: solvents
and cleaners, firefighting and spill response, oilfield and
SafeScience. The solvents and cleaners division produce products to
serve the aviation market and institutional and industrial markets.
The firefighting and spill response division produce U.L. listed fire
foam products that are non-toxic, non-hazardous and non-reportable.
The oilfield division product products that cater to the needs of the
oil and gas industry. The SafeScience line of products serves the
consumer with products that are defined exclusively for safety-for
human health and the environment.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
Delta-Omega Technologies evaluates performance base on profit or loss
from operations before income taxes and interest expense not including
nonrecurring gains and losses.
Delta-Omega Technologies' reportable segments are business units that
offer different products. Each reportable segment is allocated a
percentage of administrative costs not attributable to a particular
segment according to the percentage of gallons sold by the segment.
The reportable segments are managed separately because each business
unit requires different technology and marketing strategies.
F-17
<PAGE>
<TABLE>
<CAPTION>
Delta-Omega Technologies, Inc.
Disclosure of Reported Segment Profit or Loss, and Segmented Assets
Fiscal Year Ended August 31, 1999
Solvents & Firefighting & Oilfield SafeScience All
Cleaners Spill Response Other
<S> <C> <C> <C> <C> <C>
Revenues from external
Customers $ 633,921 $ 385,022 $ 254,857 $ 177,954 $ --
Intersegment revenues -- -- -- -- --
Interest Revenue -- -- -- -- 851
Interest expense -- -- -- -- 50,149
Depreciation and
Amortization 33,995 20,555 14,130 10,277 23,326
Segment Profit 11,708 (32,593) (72,700) (57,922) (494,582)
Segment Assets -- -- -- -- 930,484
Expenditures for segment
Assets -- -- -- -- 50,832
Delta-Omega Technologies, Inc.
Disclosure of Reported Segment Profit or Loss, and Segmented Assets
Fiscal Year Ended August 31, 1998
Solvents & Firefighting & Oilfield SafeScience All
Cleaners Spill Response Other
Revenues from external
Customers $ 419,085 $ 279,779 $ 328,641 $ -- $ 150,000
Intersegment revenues -- -- -- -- --
Interest Revenue -- -- -- -- 9,953
Interest expense -- -- -- -- 7,273
Depreciation and
Amortization 59,135 40,550 54,066 -- 15,206
Segment Profit (111,313) (216,007) (66,527) -- (860,227)
Segment Assets -- -- -- -- 899,044
Expenditures for segment
Assets -- -- -- -- 53,333
F-18
</TABLE>
<PAGE>
Delta-Omega Technologies, Inc.
Reconciliations of Reportable Segment Revenues
Profit or Loss, and Assets
Fiscal Year Fiscal Year
1999 1998
Revenues
Total revenues for reportable segments $ 1,451,754 $ 1,177,505
-----------
Profit or Loss
Total profit or loss for reportable segments ($ 151,507) ($ 393,847)
Other profit or loss (494,582) (860,227)
----------- -----------
Income before income taxes and extraordinary items ($ 646,089) ($1,254,074
=========== ===========
Assets
Other assets $ 930,484 $ 899,044
Total assets for reportable segments -- --
----------- -----------
Consolidated total $ 930,484 $ 899,044
=========== ===========
Other significant Items
Research and Development Expenses $ 153,081 $ 369,757
Depreciation Expense-R&D Equipment 35,519 36,681
*Research and Development expenses not directly accounted for in the totals of a
specific reporting segment is included in the classification "All Other" for
fiscal year 1999 and 1998.
Delta-Omega Technologies, Inc. - Disclosures of Geographic Information and
Major Customers
- --------------------------------------------------------------------------------
Products sales for each reportable segment are concentrated in the continental
United States. Revenues from one customer of the Delta-Omega Technologies'
solvents and cleaners segment represents approximately twenty-four (24%) percent
and fourteen (14%) of the Company's total consolidated revenues for fiscal 1999
and 1998, respectively.
F-19
<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: December 13, 1999 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 December 13, 1999
- ---------------------------
Larry G. Schafran
/s/ James V. Janes, III Chief Executive Officer, December 13 1999
- --------------------------- President
James V. Janes, III
/s/ Marian A. Bourque Chief Financial Officer, December 13, 1999
- --------------------------- Secretary and Treasurer
Marian A. Bourque
/s/ Richard A. Brown Director December 13, 1999
- ---------------------------
Richard A. Brown
/s/ David H. Peipers Director December 13, 1999
- ---------------------------
David H. Peipers
Exhibit 4.2
Exhibit A
DELTA-OMEGA TECHNOLOGIES, INC.
DESIGNATION OF RIGHTS AND PREFERENCES
Series C Convertible Voting Preferred Stock
1. Designation; Number of Shares.
------------------------------
3,000,000 shares of the Preferred Stock of Delta-Omega Technologies, Inc.
(hereafter called the "Corporation") shall be designated "Series C Convertible
Voting Preferred Stock" (hereinafter called "Series C"). The right, preferences,
privileges, restrictions and other matters relating to the Series C shares are
as follows:
2. Dividends.
----------
The annual dividend rate on the shares of this Series shall be $.0525 (7%
of the liquidation preference) per annum per share. Dividends shall be payable,
when and as declared by the Board of Directors, on June 30 of each year,
commencing June 30, 1997 (each such date being hereinafter individually a
"Dividend Payment Date") except that if such date is a Saturday, Sunday or legal
holiday then such dividend shall be payable on the first immediately preceding
calendar day which is not a Saturday, Sunday or legal holiday, to holders of
record on such respective dates as may be determined by the Board of Directors
in advance of the payment of each particular dividend. Dividends may be paid out
of surplus, in cash or shares of the Corporation's $.001 par value Common Stock
(hereafter called the "Stock Dividend"), at the discretion of the Board of
Directors. Unpaid cash dividends shall be cumulative and shall accumulate from
the original Dividend Payment Date. The number of shares of Common Stock to be
distributed in the event of a Stock Dividend shall be calculated based on the
average bid quotation for the 30 days preceding the Dividend Payment Date as
reported (a) in the "Pink Sheets" maintained by the National Quotations Bureau;
(b) on the Bulletin Board maintained by the National Association of Securities
Dealers, Inc.; (c) by the National Association of Securities Dealers Automated
Quotation System (NASDAQ); or (d) if no such quotations are available, the fair
market price as determined by the Corporation (whose determination shall be
conclusive). Dividends in arrears may be declared and paid at any time, without
reference to any regular Dividend Payment Date, to holders of record on such
date as may be fixed by the Board of Directors of the Corporation.
3. Redemption.
-----------
The shares of this Series may not be redeemed prior to June 30, 1999. On
and after June 30, 1999, the Corporation, at its sole option, may redeem Series
C shares, in whole or in part, at any time or from time to time, at the
redemption price of $.75 plus in each case accumulated dividends thereon to the
date fixed for redemption provided it gives not less than 30 days and not more
than 60 days notice of its intent to redeem during which call period the holder
of any Series C Preferred may exercise his conversion privilege or the Series C
Preferred will expire upon receipt of the redemption price.
<PAGE>
In the case of the redemption of a part only of the shares of this Series
at the time outstanding, the shares of this Series to be so redeemed shall be
selected by lot.
4. Conversion.
-----------
(a) The holder of any shares of this Series at his option may at any time
until June 30, 2001 (except that if any such share shall have been called for
redemption, then, as to such share, such right shall terminate at the close of
business on the date fixed for such redemption, unless default shall be made by
the Corporation in providing money for the payment of the redemption price of
the shares called for redemption) convert each share of this Series C into one
(1) share of fully paid and non-assessable $.001 par value Common Stock. Such
right of conversion shall be exercised by the surrender of the Series C shares
so to be converted to the Corporation at any time during normal business hours
at the office or agency then maintained by it for payment of dividends on the
shares of this Series C (the "Payment Office"), accompanied by written notice of
such holder's election to convert and (if so required by the Corporation or any
conversion agent) by instruments of transfer, in form satisfactory to the
Corporation and to any conversion agent, duly executed by the registered holder
or by his duly authorized attorney, and transfer tax stamps or funds therefor,
if required.
(b) As promptly as practicable after the surrender for conversion of any
shares of this Series in the manner provided in subparagraph (a) of this
paragraph 4 and the payment in cash of any amount required by the provisions of
subparagraph (a) of this paragraph 4, the Corporation will deliver or cause to
be delivered at the Payment Office to or upon the written order of the holder of
such shares, certificates representing the number of full shares of Common Stock
issuable upon such conversion, issued in such name or names as such holder may
direct. Such conversion shall be deemed to have been made immediately prior to
the close of business on the date of such surrender of the shares, and all
rights of the holder of such shares shall cease as such and the person or
persons in whose name or names the certificates for such shares of Common Stock
are to be issued shall be treated for all purposes as having become the record
holder or holders thereof at such time provided, however, that any such
surrender and payment on any date when the stock transfer books of the
Corporation shall be closed shall constitute the person or persons in whose name
or names the certificates for such shares of Common Stock are to be issued as
the record holder or holders thereof for all purposes immediately prior to the
close of business on the next succeeding day on which such stock transfer books
are opened and such conversion shall be at the conversion rate in effect at such
time on such succeeding day.
If the last day for the exercise of the conversion right shall be other
than a business day, then such conversion right may be exercised on the next
succeeding business day.
(c) No adjustments in respect of or payments of dividends on shares
surrendered for conversion or any dividend on the Common Stock issued upon
conversion shall be made upon the conversion of any shares of this Series C;
provided, however, that if any shares shall be converted subsequent to the
record date preceding a Dividend Payment Date but on or prior to such Dividend
Payment Date (except shares called for redemption between such record date and
Dividend Payment Date) the registered holder of such shares at the close of
business on such record date shall be entitled to receive the dividend payable
on such shares on such Dividend Payment Date notwithstanding the conversion
thereof or the Corporation's default in payment of the dividend due on such
Dividend Payment Date.
2
<PAGE>
(d) The conversion rate shall be subject to adjustments as follows:
(i) In case the Corporation shall (A) pay a dividend or make a
distribution in shares of its capital stock (whether shares of Common Stock or
of capital stock of any other class) (B) subdivide its outstanding shares of
Common Stock, (C) combine its outstanding shares or Common Stock into a smaller
number of shares or (D) issue by reclassification of its shares of Common Stock
any shares of capital stock of the Corporation, the conversion privilege and the
conversion rate in effect immediately prior to such action shall be adjusted so
that the holder of any shares of this Series C thereafter surrendered for
conversion shall be entitled to receive the number of shares of capital stock of
the Corporation which he would have owned immediately following such action had
such share been converted immediately prior thereto. An adjustment made pursuant
to this subparagraph (d)(i) shall become effective retroactively immediately
after the record date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or reclassification. If, as a result of an adjustment made pursuant
to this subparagraph (d)(i), the holder of any shares thereafter surrendered for
conversion shall become entitled to receive shares of two or more classes of
capital stock of the Corporation, the Board of Directors (whose determination
shall be conclusive) shall determine the allocation of the adjusted conversion
rate between or among shares of such classes of capital stock.
(ii) In any case in which this subparagraph (d) shall require that an
adjustment be made retroactively immediately following a record date, the
Corporation may elect to defer (but only until five business days following the
mailing by the Corporation of the certificate of independent public accountants
described in subparagraph (d)(iv) below) issuing to the holder of any shares
converted after such record date (x) the shares of Common Stock and other
capital stock of the Corporation issuable upon such conversion over and above
(y) the shares of Common Stock and other capital stock of the Corporation
issuable upon such conversion only on the basis of the conversion rate prior to
adjustment.
(iii) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease of at least 1% in such
rate; provided, however, that any adjustments which by reason of this
subparagraph (d)(iii) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment; and, provided, further, that
adjustment shall be required and made in accordance with the provisions of this
paragraph 4 (other than this subparagraph (d)(iii)) not later than such time as
may be required in order to preserve the tax-free nature of a distribution to
the holders of shares of Common Stock. All calculations under this paragraph 4
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be. Anything in this paragraph 4 to the contrary notwithstanding
the Corporation shall be entitled to make such reductions in the conversion rate
in addition to those required by this subparagraph (d) as it in its discretion
shall determine to be advisable in order that any stock dividends, subdivision
of shares, distribution of rights to purchase stock or securities, or
distribution of securities convertible into or exchangeable for stock hereafter
made by the Corporation to its stockholders shall not be taxable.
(iv) Whenever the conversion rate is adjusted as herein provided, the
Corporation shall promptly (x) file with each conversion agent a certificate of
a firm of independent public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Corporation) setting forth the
conversion rate after such adjustment and setting forth a brief statement of the
3
<PAGE>
requiring such adjustment, which certificate shall be conclusive evidence of the
correctness of such adjustment, and (y) mail or cause to be mailed a notice of
such adjustment to the holders of shares of this Series at their last addresses
as they shall appear upon the books of the Corporation.
(e) No fractional shares of stock shall be issued upon the conversion of
any share or shares of this Series. If any fractional interest in a share of
Common Stock would, except for the provisions of this subparagraph (e), be
deliverable upon the conversion of any share or shares, the Corporation shall in
lieu of delivering the fractional share therefor, adjust such fractional
interest by payment to the holder of such surrendered share or shares of any
amount in cash equal (computed to the nearest cent) to the fraction multiplied
by the conversion rate in effect on the date of conversion.
(f) If either of the following shall occur, namely: (i) any consolidation
or merger to which the Corporation is a party, other than a consolidation or a
merger in which consolidation or merger the Corporation is a continuing
corporation and which does not result in any reclassification of, or change
(other than a change in par value or from par value to no par value or from no
par value to par value, or as a result of a subdivision or combination) in,
outstanding shares of the Common Stock, or (ii) any sale or conveyance to
another corporation of the property of the Corporation as an entirety or
substantially as an entirety, then the holder of each share then outstanding
shall have the right to convert such share into the kind and amount of shares of
stock and other securities and property receivable upon such consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
issuable upon conversion of such share immediately prior to such consolidation,
merger, sale or conveyance, subject to adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
paragraph 4. The provisions of this subparagraph (g) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(g) The Corporation covenants that it will at all times reserve and keep
available, solely for the purpose of issue upon conversion of the shares of this
Series C, such number of shares of Common Stock as shall be issuable upon the
conversion of all such outstanding shares, provided, that nothing contained
herein shall be construed to preclude the Corporation from satisfying its
obligations in respect of the conversion of the shares by delivery of purchased
shares of Common Stock which are held in the treasury of the Corporation. For
the purpose of this subparagraph (h), the full number of shares of Common Stock
issuable upon the conversion of all outstanding shares of this Series C shall be
computed as if at the time of computation of such number of shares of Common
Stock all outstanding shares of this Series C were held by a single holder.
(h) Before taking any action which would cause an adjustment reducing the
conversion rate below the then par value of the Common Stock, the Corporation
will take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Corporation may validly and legally issue fully paid
and non-assessable shares of Common Stock at the conversion rate as so adjusted.
If as a result of conversion of the shares of this Series it becomes necessary
to authorize additional shares of Common Stock, the Corporation covenants that
it will take such action at such time as is necessary to amend the Certificate
of Incorporation.
(i) The issuance of certificates for shares of Common Stock upon conversion
shall be made without charge. However, if any such certificate is to be issued
in a name other than that of the holder of the share or shares converted, the
4
<PAGE>
person or persons requesting the issuance thereof shall pay to the Corporation
the amount of any tax which may be payable in respect of any transfer involved
in such issuance or shall establish to the satisfaction of the Corporation that
such tax has been paid.
(j) Notwithstanding anything elsewhere contained in this Certificate, any
funds which at any time shall have been deposited by the Corporation or on its
behalf with any paying agent for the purpose of paying dividends on or the
redemption price of any of the shares of this Series and which shall not be
required for such purposes because of the conversion of such shares, as provided
in this paragraph 4, shall be, upon delivery to the paying agent of evidence
satisfactory to it of such conversion, after such conversion be repaid to the
Corporation by the paying agent.
(k) The Corporation shall use its best efforts to register the common
shares subject to this right of conversion with the Securities and Exchange
Commission and as necessary with various states in which holders of this Series
reside. Failure to complete any registration in good faith shall not subject the
Corporation to any liability or handicap.
(l) The Corporation covenants that if any shares of Common Stock, required
to be reserved for purposes of conversion of the shares of this Series, require
registration with or approval of any governmental authority under any Federal or
state law before such shares may be issued upon conversion, the Corporation will
cause such shares to be duly registered or approved, as the case may be. The
Corporation may not call the Series C shares for redemption unless and until a
registration statement covering the Common Shares issuable on conversion has
been declared effective by the Securities and Exchange Commission and any state
administrator where registration may be deemed necessary.
The Corporation covenants that all shares of Common Stock which shall be
issued upon conversion of the shares will upon issue be fully paid and
non-assessable and not subject to any preemptive rights.
(m) In case:
(i) the Corporation shall take any action which would require an
adjustment in the conversion rate pursuant to subparagraph (d) or (e) of this
paragraph 4; or
(ii) the Corporation shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase any shares
of stock of any class or of any other rights and notice thereof shall be given
to holders of Common Stock; or
(iii) there shall be any capital reorganization or reclassification of
the Common Stock (other than a subdivision or combination of the outstanding
Common Stock and other than a change in par value or from par value to no par
value or from no par value to par value of the Common Stock), or any
consolidation or merger to which the Corporation is a party and for which
approval of any stockholders of the Corporation is required, or any sale or
transfer of all or substantially all of the assets of the Corporation; or
5
<PAGE>
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed with any conversion agent, and
shall cause to be given to the holders of the shares of this Series at least ten
days prior to the applicable date hereinafter specified, a notice setting forth
(x) the date on which a record is to be taken for the purpose of any
distribution or grant to holders of Common Stock, or, if a record is not to be
taken, the date as of which the Holders of Commons stock of record to be
entitled to such distribution or grant are to be determined or (y) the date on
which such reorganization, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up. Failure to give such notice or any defect therein
shall not affect the legality or validity of the proceedings described in
clauses (i) through (iv) of this subparagraph (m).
5. Voting.
-------
Each share of this Series shall have the same voting powers, both general
and special, as each share of the Corporation's Common Stock in all elections
regarding all matters and shall vote as a class only regarding matters relating
to the amendment of rights and preferences granted hereby. Any amendment to the
Rights and Preferences shall require a vote of two-thirds of the outstanding
shares of the Series.
6. Liquidation Rights.
-------------------
Upon the dissolution, liquidation or winding up of the Corporation, whether
voluntary or involuntary, the holders of the shares of this Series C shall be
entitled to receive out of the assets of the Corporation available for
distribution to stockholders, or proceeds thereof, before any payment or
distribution shall be made on the Common Stock or on any other class of stock
ranking junior to the shares of this Series upon liquidation, the amount of $.75
per share, plus a sum equal to all dividends on such shares accumulated thereon
to the date of final distribution. This Series C at the time of issue is junior
only to the Series B Preferred remaining outstanding.
7. No Purchase, Retirement or Sinking Fund
---------------------------------------
The shares of this Series shall not be subject to the operation of any
purchase, retirement or sinking fund.
6
<PAGE>
IN WITNESS WHEREOF, Delta-Omega Technologies, Inc. has caused its corporate
seal to be hereunto set and this Designation of Rights and Preferences to be
signed by its President, James V. Janes, III, and attested by its Secretary,
Edward Friloux, this 8th day of March, 1991.
DELTA OMEGA TECHNOLOGIES, INC.
[Corporate Seal] By: /s/ James V. Janes, III
-------------------------------
James V. Janes, III
President
Attest:
/s/ Marian A. Bourgue
- -------------------------------
Secretary
7
Exhibit 10
EXCLUSIVE LICENSE AGREEMENT
EXCLUSIVE LICENSE AGREEMENT, dated as of this 10th day of August, 1999 by
and between SafeScience, Inc., a Nevada corporation with its offices in Boston,
MA ("SafeScience") and Delta-Omega Technologies, Inc., a Colorado corporation
(the "Company") with its offices in Broussard, LA.
WHEREAS, the Company has developed certain proprietary formulations for
cleaning products listed in Appendix A, has produced the same for conversion
into finished goods and has produced pilot production quantities of finished
goods exclusively for SafeScience; and
WHEREAS, the parties are interested in establishing an exclusive
arrangement whereby the Company provides SafeScience with these formulations;
and
WHEREAS, SafeScience wishes to contract for the production of certain
finished products utilizing these formulations; and
WHEREAS, SafeScience has developed certain markets for resale of these
products; and
WHEREAS, SafeScience wishes to provide confidential access to these
formulations to third party manufacturers for the purpose of manufacturing large
volumes of finished goods for resale; and
WHEREAS, SafeScience is willing to make license payments to the Company in
consideration of its development of these formulations and its grant of a
license hereunder; and
WHEREAS, the Company is willing to grant to SafeScience exclusive use of
these proprietary formulations, as well as any future formulations for cleaning
products that may from time to time be developed for SafeScience; and
WHEREAS, SafeScience is willing to assume the responsibility of protecting
these proprietary formulations via confidentiality agreements with its third
party manufacturers;
NOW THEREFORE, in consideration of the foregoing, the parties agree as
follows:
1. Grant of License; Exclusivity. The Company grants SafeScience an exclusive
worldwide license to make, manufacture, sell and distribute each of the cleaning
products listed in Appendix A, as such Appendix may be amended to add future
cleaning products developed by the Company, including products presently in
development (all the products listed on such Appendix A at any time are referred
to as the "Products"). Under the terms of such exclusive license, the Company
will not sell or distribute Products, nor will the Company grant to any third
party any license to make, manufacture, sell or distribute any Products. Such
exclusivity will be subject to SafeScience's maintaining, during each year of
the term of this Agreement, the minimum annual purchase levels set forth in
Section III of the Supply and Distribution Agreement between the parties dated
July 8, 1998 (the "1998 Agreement"); provided, however, that all net sales of
Products (as defined in Section 6) under this Agreement will be credited to the
minimum purchase requirements of the 1998 Agreement.
<PAGE>
2. Improvements to Products; Other Existing Products; Products in Development.
(i) During the term of this Agreement, the Company will continue to develop
improvements on the Products. Any improvements on Products shall also be
considered Products for the purposes of this Agreement, shall be added to
Appendix A and shall be subject to all the provisions hereof.
(ii) The Company presently manufactures other products which are purchased from
the Company by SafeScience. In the event that, as a result of the high volume of
demand for any such product or quality control concerns with respect to any such
product, SafeScience determines in good faith to seek a third party manufacturer
for any such product, such product shall be considered a Product for the
purposes of this Agreement, shall be added to Appendix A and shall be subject to
all the provisions hereof.
(iii) The Company is presently developing other products for SafeScience, in
addition to the Products and to the other products described in clause (ii)
above. In the event any such product(s) become commercialized, the Company may
initially manufacture such products for sale to SafeScience. However, in the
event that, as a result of the high volume of demand for any such product or
quality control concerns with respect to any such product, SafeScience
determines in good faith to seek a third party manufacturer for any such
product, such product shall be considered a Product for the purposes of this
Agreement, shall be added to Appendix A and shall be subject to all the
provisions hereof.
3. Product Formulas. The Company agrees to provide SafeScience, simultaneously
with execution of this Agreement, with all the formulas and other information
necessary for manufacture of the Products (the "Product Formulas"). Upon
addition of any new Product to Appendix A, the Company shall promptly provide
all the formulas and other information necessary for manufacture thereof to
SafeScience.
4. Term of License. The license shall commence on the date hereof and be
perpetual unless terminated pursuant to Section 11.
5. Limitations on License. The rights granted SafeScience under this Agreement
shall not be directly or indirectly assignable or transferable in any manner
whatsoever, nor shall SafeScience have the right to grant any sublicenses,
except for the sole purpose of the production of Products by third parties. Any
unauthorized assignment, transfer or sublicense by SafeScience shall be null and
void and of no legal effect whatsoever.
6. License Fee. During the term of this Agreement, SafeScience shall pay license
fees to the Company in an amount equal to two percent (2%) of net sales for all
Products listed in Appendix A. Net sales are defined as gross sales actually
invoiced, less returns, cash discounts and trade allowances, and less separately
invoiced amounts such as taxes, shipping and insurance. In the event additional
Products are added to Appendix A, the parties shall negotiate in good faith to
determine the license fees payable with respect to such additional Products,
which shall in no event exceed 2% of net sales. If the parties are unable to
agree upon the amount of license fees, the parties agree that the amount of the
fees shall be submitted to arbitration pursuant to Section 12(c), and during the
pendency of such arbitration the license shall be in full force and effect
subject to SafeScience's obligation to pay such license fees when they are so
determined.
<PAGE>
7. Right to Audit. SafeScience shall at all times during the term of the license
granted hereunder keep true and correct books of account and maintain documents
which show the license fee to which the Company is entitled, and the total
amount of Product produced by SafeScience using the Product Formulas. The books
of account and documentation shall be retained by SafeScience for not less than
two (2) years after any termination of the license and shall be open to
inspection by an authorized representative of the Company, and at the Company's
expense, during the term of the license and for a period of two (2) years after
termination of the license. Such inspections shall be carried out no more than
twice per year, during usual business hours of SafeScience by the Company or its
assigns, successors or representatives upon five (5) business days prior notice.
8. Confidentiality and Non-Disclosure of Information.
(i) As used in this Agreement, the term "Confidential Information" means the
Product Formulas and any other confidential or proprietary technical or business
information furnished by one party to the other party in connection with the
license granted hereunder, regardless of whether such information is in written,
oral, electronic, or other tangible form. Such Confidential Information may
include, without limitation, trade secrets, know-how, inventions, technical data
or specifications, testing methods, business or financial information, research
and development activities, product and marketing plans, and customer and
supplier information.
(ii) Each party shall maintain the other party's Confidential Information in
confidence and shall not disclose such Confidential Information to any third
party without the prior written consent of the disclosing party. The foregoing
shall not apply to information that (1) is or hereafter becomes generally
available to the public other than by reason of any default with respect to
confidentiality under this Agreement; (2) is disclosed to such party by a third
party who is not in default of any confidentiality obligation to the other
party; (3) is developed by or on behalf of such party, without reliance on
confidential information acquired from the other party; (4) is required to be
disclosed in compliance with applicable laws or regulations or order by a court
of competent jurisdiction, provided that reasonable measures shall be taken to
assure confidential treatment of such information; or (5) is provided by such
party under appropriate terms and conditions, including confidentiality
provisions equivalent to those in this Agreement, to third parties for
consulting, accounting, legal and similar purposes.
(iii) Each party shall limit access to the other party's Confidential
Information to those of its directors, officers, agents, employees, consultants
and advisors who have a need to know and who have been informed in writing of
the obligations of confidentiality imposed by this Agreement. Each party shall
allow its directors, officers, agents, employees, consultants, and advisors to
reproduce the Confidential Information only to the extent necessary to effect
the purposes set forth in this Agreement, with all such reproductions being
considered Confidential Information. The receiving party shall cause its
directors, officers, agents, employees, consultants and advisors to keep in
confidence the Confidential Information consistent with this Agreement and shall
be responsible for any disclosures by such persons not permitted hereunder.
(iv) SafeScience shall not use the Company's Product Formulas for any purpose
other than to produce Products.
<PAGE>
9. Infringement.
(i) In the event that SafeScience learns of any infringement or unauthorized use
of the Product Formulas, it shall promptly notify the Company. The Company shall
have the sole initial right to bring infringement actions or other similar
proceedings against third parties in order to protect the Product Formulas. If
requested to do so, SafeScience shall reasonably cooperate with the Company in
any such action, including but not limited to joining the action as a party if
necessary to maintain standing, at the Company's expense.
(ii) If the Company determines not to take any such action, then SafeScience may
take such action in its own name. The Company may cooperate with SafeScience or
join such action at its sole discretion. The license fee payable under Section 6
shall be reduced by the amount of any costs incurred by SafeScience in pursuing
such actions.
(iii) Any award recovered by the Company or SafeScience in any action or
proceeding commenced by it as under this section 9 shall be divided between the
parties as follows: first, to both parties of their respective, actual
out-of-pocket costs (which amount shall be allocated pro rata if the amount
recovered is less than the total amount of such costs); second, any amounts
awarded in respect of lost sales or profits shall be allocated so as to
approximate, to the best of the parties' ability, to the Company the portion
thereof that represents the license fees that would have been payable with
respect to such lost sales or profits, and to SafeScience the balance of the
amount so awarded; and third, any remaining amount of any recovery (including
recovery representing punitive or statutory damages ) shall be split evenly
between the parties.
10. Indemnification.
(i) The Company agrees and covenants to hold harmless and indemnify and defend
SafeScience, its subsidiaries, affiliates, officers, directors, employees,
agents and assigns, from and against any suits, actions, claims, losses,
demands, liabilities, costs and expenses of any kind, including costs and
attorneys' fees for defending the same, which may arise or result from any
claims or infringement or piracy of the Product Formulas, except to the extent
caused by SafeScience's misuse.
(ii) SafeScience agrees and covenants to hold harmless and indemnify and defend
the Company, its subsidiaries, affiliates, officers, directors, employees,
agents and assigns, from and against any suits, actions, claims, losses,
demands, damages, liabilities, costs and expenses of any kind, including costs
and attorneys' fees for defending the same, which may arise or result from
SafeScience's use of the Product Formulas licensed hereunder, to the extent
SafeScience's actions constitute negligence or willful misconduct.
11. Termination. Notwithstanding anything otherwise contained in this Agreement,
The Company shall have the right to terminate the rights and license granted to
SafeScience hereunder upon thirty (30) days written notice to SafeScience
(unless a longer period is set forth hereinbelow), upon the happening of any one
or more of the following events; provided, however, (1) if SafeScience, within
said notice period, cures or otherwise terminates any of said events, said right
and license shall continue on in force as if said notice had not been given, or
(2) if SafeScience, within said notice period, contests the veracity of any of
said events, said right and license shall continue on in force until such time
as the veracity of said events shall be established by a final trier of fact,
from which no further appeal may be taken:
<PAGE>
(i) if SafeScience fails or refuses to pay promptly any amount payable under
Section 6 when and as same shall become due and payable, and such default shall
continue for a period of sixty (60) days after written notice thereof has been
given by the Company to SafeScience;
(ii) if SafeScience should fail to comply with any other material requirement or
obligation of the license granted hereunder and such default shall not be cured
within sixty (60) days after receipt of written notice of default from the
Company, or if SafeScience does not take and diligently pursue reasonable steps
to cure such default if such default is of such a nature that a period of more
than sixty (60) days is required to cure;
(iii) SafeScience may terminate this license at any time, for any reason, upon
thirty (30) days' notice thereof to the Company.
12. Effect of Termination. Upon the termination of the license granted
hereunder, all rights of SafeScience under the license shall cease forthwith and
shall immediately be null and void and thereafter SafeScience shall cease using
the Product Formulas. Each party shall forwith deliver to the other party all
forms, procedures, documents, copies of formulations, and other Confidential
Information of the other party. Upon such termination, SafeScience shall remain
obligated to pay any outstanding license fees due under Section 6.
13. General Provisions.
(a) Relationship of Parties. No partnership, joint venture, employment, agency
or other relationship is formed, intended, or to be inferred under this
Agreement. Neither party to this Agreement shall make or authorize any
representation to the contrary.
(b) Survival of Remedies. During and after the term of this Agreement, each
party shall be entitled to all rights, remedies and protections available at law
and in equity. The parties recognize that irreparable injury may result to its
business and property if the other party breaches any of the terms of this
Agreement, and each party agrees that if it engages in any act in violation of
this Agreement, the other party shall be entitled, in addition to such other
remedies and damages as may be available, to seek equitable relief including
injunction prohibiting the breaching party from engaging in such act and
specific performance. Without limiting the generality of the foregoing, the
indemnification provisions of Section 10 of this Agreement shall survive any
termination of this Agreement.
(c) Disputes. Should a dispute arise relative to the terms or conditions of this
Agreement, the parties shall submit the dispute to binding arbitration in
Boston, Massachusetts pursuant to the rules then prevailing of the American
Arbitration Association. Any award made through the arbitration shall be
enforceable in any court of competent jurisdiction pursuant to uniform laws
regarding arbitration and the award may include an award of attorney's fees and
costs to the prevailing party.
(d) Waiver. The failure of either party to take any action under this Agreement,
or the waiver of a breach of this Agreement, shall not affect that party's
rights to require performance hereunder or constitute a waiver of any subsequent
breach.
<PAGE>
(e) Notice. All notices required or permitted to be given or made under this
Agreement must be made in writing and delivered by certified mail, return
receipt requested. Mailed notices shall be addressed to the parties as their
addresses appear below, except that in the event written notice of a change of
address is made in accordance with this section, then such mailed notices shall
be addressed to the party in question at such new address.
If to Delta-Omega Technologies, Inc.:
119 Ida Road
Broussard, LA 70518
Attn:___________________
Telephone: (318) 837-3011
Fax: (318) 837-3037
With copies to:
Roger V. Davidson, Esq.
Ballard Spahr Andrews & Ingersoll, LLP
1225 17th Street, Suite 2300
Denver, CO 80202-5596
Telephone: (303) 299-7307
Fax: (303) 296-3956
If to SafeScience, Inc.:
31 St. James Avenue, Suite 52
Boston, MA 02116
Attn: Bradley J. Carver, President
Telephone: (617) 422-0674
Fax: (617) 422-0675
With copies to:
B. David Sandberg, Esq.
31 Vineyard Street
Cambridge, MA 02138
Telephone: (617) 492-1027
Fax: (617) 441-9757
(f) Interpretation. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Massachusetts. The headings herein are
for reference only and shall not define or limit the provisions hereof.
(g) Entire Agreement. The recitals hereto are a part of this Agreement which
constitutes the entire agreement between the parties with respect to the subject
matter addressed herein, and all prior and contemporaneous agreements, whether
written or oral, as may relate to the same, are hereby superseded by this
Agreement.
(h) Modification. This Agreement may not be altered, modified, amended or
changed, in whole or in part, except by a writing executed by the parties.
(i) Successors. This Agreement shall be binding upon the parties and their
permitted assigns, corporate successors and representatives.
<PAGE>
(j) Attorneys' Fees. In the event of any dispute which results in a suit or
other legal proceeding to construe or enforce any provision of this Agreement or
because of an alleged breach, default or misrepresentation in connection with
any of the provisions of this Agreement, the parties agree that the prevailing
party or parties (in addition to all other amounts and relied to with such party
or parties may be entitled) shall be entitled to recover reasonable attorneys'
fees and other costs incurred in any action or proceeding.
(k) Previous Agreement. This Agreement shall not be deemed to supersede the 1998
Agreement (as defined in Section 1) except in the case of a direct conflict
between the terms of this Agreement and the terms of the 1998 Agreement.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as
of the date first above written.
SAFESCIENCE, INC. DELTA-OMEGA TECHNOLOGIES, INC.
By:_____________________________ By:_____________________________
Title:____________________________ Title:____________________________
<PAGE>
APPENDIX A
Products included in royalty agreement between Delta Omega, Inc. and
SafeScience, Inc. and dated August __, 1999.
Agreed Product List
All Purpose Cleaner
Kitchen Cleaner
Shower Cleaner
Dish Detergent
Floor Cleaner
Window Cleaner
Bathroom Cleaner
Laundry Cleaner
Auto Dishwashing Gel
Outdoor Cleaner
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 4,858
<SECURITIES> 0
<RECEIVABLES> 361,376
<ALLOWANCES> (10,000)
<INVENTORY> 223,693
<CURRENT-ASSETS> 605,522
<PP&E> 667,041
<DEPRECIATION> (451,525)
<TOTAL-ASSETS> 930,484
<CURRENT-LIABILITIES> 826,967
<BONDS> 211,162
0
3,732
<COMMON> 15,918
<OTHER-SE> (127,295)
<TOTAL-LIABILITY-AND-EQUITY> 930,484
<SALES> 1,451,754
<TOTAL-REVENUES> 1,451,754
<CGS> 1,007,964
<TOTAL-COSTS> 1,007,964
<OTHER-EXPENSES> 1,054,455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,149
<INCOME-PRETAX> (646,087)
<INCOME-TAX> 0
<INCOME-CONTINUING> (646,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (646,087)
<EPS-BASIC> (.06)
<EPS-DILUTED> 0
</TABLE>
