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 December 31, 1997
Central Index Key # 856572
Commission File No. 33-31566
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
Exact name of Registrant as specified in its charter
Delaware 77-0219055
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification Number
10096 Sixth Street Units M-P
Rancho Cucamonga, California 91730
Address of principal executive offices Zip Code
Registrant's telephone number: (909) 466-0081
Securities registered under Section 12(b): None
Securities registered under Section 12(g): None
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
(for required Reports preceding this one; however, this Report is
non-timely, as will be the March 31, June 30, and September 30, 1998 Reports
on Form 10-QSB)
As of December 8, 1998, 19,907,261 shares of common stock, and, 19,076,751
Class A and 19,076,751 Class B common stock purchase warrants were
outstanding; and, the aggregate market value of the Registrant's common stock
held by nonaffiliates was approximately: $1,640,000 based on a market
valuation of $0.10.
Documents incorporated by reference: Please see Item 13.
Transitional Small Business Disclosure Format: Yes: No: X
Revenues for the most recent fiscal year (1997): $369,333
Disclosure in response to Item 405: Yes: No: X
This Form 10-KSB consists of __ pages.
Exhibits are indexed at page __.
PART I
Item 1. Business.
Business Development
Ultra Shield Products International, Inc., a Delaware corporation
(the "Registrant" or "USPI") engages in the development, manufacture and
marketing of (i) "environmentally preferred" (as such designation is used by
the U.S. Environmental Protection Agency), biodegradable products utilizing
cross-linking carbon molecular structures, and sold in easily dilutable
concentrated form to minimize shipping and packaging costs, for cleaning,
degreasing, sanitizing, dishwashing, coating and restoration applications in
commercial, industrial and retail consumer settings as well as for automotive
appearance enhancement; and, (ii) biological formulations designed for
environmentally responsible use in bio-remediation, agricultural enhancement
and water/sewage treatment applications.
USPI's offices are located at 10096 Sixth Street, Units M-P, Rancho
Cucamonga,California 91730-5750; (909) 466-0081.
Business of Issuer
Products
The Registrant's products are currently divided into four main
groups as follows:
Environmentally Preferred Cleaning Products
All of the Registrant's Environmentally Preferred Specialty
Chemical and Biological solutions are formulated with naturally occurring
organic cleaning agents. They contain no butyls, acids, solvents, phosphates,
ammonias, zylenes or excess alkalis, are non-toxic, non-corrosive,
non-polluting, non-flammable, and have, in their most concentrated form,
Volatile Organic Compound ("VOC's") levels well below the 1994 California EPA
maximum of 10%. For example, Ultra Clean Concentrate Cleaner has a VOC of
1.4% at maximum concentration.
Ultra Clean All Purpose Cleaner Concentrate: A 100% biodegradable
all purpose cleaner that safely penetrates surface films such as grease, soap
and oil.
Ultra Clean Gold Dishwasing Concentrate: A 100% biodegradable
dishwashing concentrate that safely and effectively cleans food service
implements in manual and mechanical settings.
High Foam Concentrate: A 100% biodegradable all purpose cleaner
that foams when sprayed through the included spray applicator and is designed
to safely penetrate surface films such as grease, soap and oil.
Cleaner Concentrate: The fully concentrated version of Ultra
Clean All Purpose Cleaner, yet 100% biodegradable and qualifying as an
"environmentally preferred" product as such designation is utilized by the
EPA.
USPI 921 10% Solution: A bactericide/virucide for post-cleaning
disinfecting, sanitizing and deodorizing in applications including, but not
limited to: hospitals, food processing plants, dairies, food and drink
service establishments and human and animal living quarters.
Graffiti B-Gone: A heavy-duty degreaser for problem cleaning
situations where chlorinated hydrocarbons and/or paint remover have been used
in the past. Graffiti B-Gone emulsifies (i.e. creates a liquid suspension of)
grease, oil and paint thereby allowing their easy removal from painted or
unpainted surfaces such as plastic, metal, finished and unfinished concrete,
brick, tile and even organic surfaces such as trees. Graffiti B-Gone will
allow the easy removal of most resins, adhesives, printing inks, decals,
rubber tire marks, tar, asphalts and most soils.
Industrial / Commercial
Aluminum New Coat: A periodic treatment to restore color and
lustre to faded bronze and anodized aluminum surfaces.
Delimer: A solution to allow easy removal of accumulated lime and
scale deposits from surfaces such as sinks and showers.
Floor Stripper: A product that allows easy removal of floor
coatings such as wax, grease, oil and water-based sealers from floors
consisting of wood, concrete, vinyl, ceramic tile, metal, rubber or brick.
Sign D-Ox Cleaner: A treatment that allows easy removal from sign
surfaces of the chalky and/or yellowed oxidized matter, as well as rust, oil
and various pollutants.
Sign Restorer: A product developed specifically for rejuvenating
faded and chalky plastic and acrylic surfaces such as those found on signs,
outdoor furniture and other plastic and acrylic surfaces that are exposed to
natural elements.
Paint Restorer: A solution that restores original color and gloss
to surfaces whose outermost layer is a coating of paint.
Press-To-Clean: A 100% biodegradable product developed to
directly compete with and/or replace cleaning solutions consisting of
petroleum hydrocarbon based solvents which have historically been utilized in
printing, high-tech and aeronautic settings.
USPI 921 10% Solution: See product description under the previous
heading.
Graffiti B-Gone: See product description under the previous
heading.
Automotive Care Products
The Registrant's Automotive Care Products are formulated without
the use of silicone, a substance that, while used in the products of many of
the Registrant's competitors, Management believes, based on their own
experience in comparison usage, to be potentially detrimental to the surfaces
to which such competitors designed and market such products to be applied.
Automotive Cleaner: A 100% biodegradable, non-toxic,
multi-purpose cleaner that allows easy removal of surface films, oxidation,
grease and food from those surfaces typically found in vehicles such as vinyl,
leather, fabric, plastic and metal.
Brake Parts Cleaner: A treatment that exceeds the standards set
by the Southern California Air Quality Management District and the California
EPA and designed for use in cleaning asbestos residue and brake fluid from
vehicular brake and clutch assemblies without damaging the rubber, plastic or
metal components of such assemblies.
Carburetor and Parts Dip Cleaner: A 100% biodegradable product
that is less than 10% VOC by volume and intended for use in cleaning
hydraulic, power steering, transmission and brake fluids as well as grease,
oil, varnished gasoline and carbon deposits from the surfaces of carburetors
and other parts, including plastic and rubber, upon which such substances have
accumulated.
Fenderwell Dressing: A product that is designed for use in
restoring the painted surfaces of a vehicle's fenderwells, undercarriage,
chassis and engine compartment, while adding a moisture barrier to inhibit
rust and oxidation.
Pre-Polish Cleaner: A concentrated version of Automotive Cleaner
for use in preparing painted surfaces for polishing by removing oxidation and
other contaminants to the painting process.
Polish and Paint Sealant: A solution consisting of cross-linking
polymers for use on painted surfaces with Pre-Polish Cleaner to create a
treatment that will resist detergents, oxidation and other contaminants.
Tire Dressing: A non-silicone based product that will clean,
improve the appearance of, and protect a vehicle's rubber components such as
tires and bumpers. By avoiding the use of silicone, which is found in most
rubber component rejuvenators, Tire Dressing does not interfere with the
inherent elasticity of rubber compounds, thereby extending the life of such
components as compared to similar components treated with a silicone based
product.
Tar & Gum Remover: A product formulated to allow easy removal
from painted and unpainted surfaces of not only grease, oil, tar, asphalt,
insects and gum, but potentially damaging silicone based products as well.
Vinyl Coat: A non-silicone based vinyl rejuvenator product that
does not interfere with the natural elasticity of vinyl and rubber.
Wheel & Tire Cleaner Foam: A foaming cleaner that will cling to
painted and unpainted surfaces allowing the active cleaning ingredients to
react with grease, oil, wax, brake dust, road films, salts, insects and
asphalt allowing for their easy removal.
Biologic Formulations
The Registrant's Biological Formulations consist of mixtures of
non-harmful, naturally occurring (i.e. not genetically or biologically
altered) microorganisms that eliminate and/or evacuate greases, food
particulates and other organic waste materials, including fecal materials, as
well as associated odors by breaking down such materials, via digestion, into
water and carbon dioxide.
Eco-Tech Animal Waste Odor Control: A formulation designed for
odor control in commercial bovine, equine, swine, poultry, feline and canine
operations via the neutralization of offensive and/or hazardous components of
associated odorous gases produced by anaerobic bacteria metabolism in animal
waste.
Eco-Tech Algae Stop: A formulation designed to clear algae, as
well as offensive and/or hazardous components of odorous gases, from an
afflicted body of water such as a pond or lake without affecting the body of
water's fish or other inhabitants.
Eco-Tech Agricultural & Farming Blend: A formulation developed to
enhance the plant growth capability of soil by increasing nutrient
availability and water retaining pore space; decreasing sodium stress and ph
levels; accelerating organic breakdown and root growth; and, converting clay
and other impervious layers, via breakup, into usable soil.
Eco-Tech Turf & Sod Blend: A mixture of micronutrients that will
enhance the action of naturally occurring micro-organisms responsible for the
decay of organic matter such as grass clippings, thatch, straw and other
post-harvest organic matter.
Eco Tabs Septic Tank Activator: A product, consisting of
microorganisms and micronutrients in tablet form, that enhances the action of
naturally occurring microbiological flora responsible for the decay/
liquification of excrement and cellulose in septic tank situations where
offensive and/or hazardous components of odorous gases emanating from sink
drains or toilets and/or septic tank overflow indicate an insufficient level
of microorganism activity. Such insufficiencies may result from the system
experiencing excessive dilution and/or overloading of organic matter,
detergents or bactericides such as chlorinated products.
Eco Tabs Grease Trap & Drain Opener: An Eco Tab formulation
designed to evacuate grease and food particulates from grease traps and
drains, especially in commercial food industry settings, where buildups of
such materials may not only interfere with or completely obstruct the
necessary operation of grease traps and drains, but attract insects and
rodents.
Research and Development
In the past two fiscal years, the Registrant's research and
development activities have included the development of a number of new
products including: two different graffiti removers, a graffiti protectant, an
"environmentally preferred" printing press cleaner, an aircraft cleaner, an
enhanced cleaner known as "Ultra Scrub", a lime remover, an oven cleaner, a
plexiglass and lexan cleaner, a one step polish and various biological
formulations designed for environmentally responsible use in bio-remediation,
agricultural enhancement and water treatment applications. The Registrant has
further developed 4 and 5 button miniature products blend centers as well as a
new product dispenser referred to as a "dial a blend". During the fiscal
years 1996 and 1997, approximately $80,000 and $17,000, respectively, has been
spent on research and development activities.
Distribution Methods/Marketing
Currently, the Registrant's distribution methods and marketing
program consists of evaluating existing and potential arrangements for markets
on a national and international basis. The Registrant's products, which are
primarily manufactured at the facilities of independent contractors, are
transported by independent rail, ship and truck to the Registrant's customers.
Distribution of the Registrant's products is effected indirectly, via
independent warehouse distributors, who then distribute the products to
independent jobber/wholesalers; as well as directly to independent
representatives for entities such as mass merchandisers, jobber/wholesalers,
retailers and end users where such distribution does not conflict with the
Registrant's aforementioned arrangements with warehouse distributors.
The principal intended markets targeted by the Registrant include
some of the world's largest markets such as those represented by the
fast-food, lodging, automotive, industrial and commercial industries.
Marketing, which is administered by Management, includes "point of
sale" advertising, such as continuous video loop presentations, brochures and
other print media such as campaigns in various specialty publications at
industry, sales representative and consumer levels; participation in trade
shows. The Registrant also engaged in the sponsorship of various aspects of
auto racing and other sporting events such as golf tournaments until the end
of the Registrant's third quarter (i.e. through September 30) in fiscal 1998.
However, commencing with the fourth quarter of fiscal 1998 (i.e. October 1,
1998), Management curtailed the Registrant's involvement in auto and truck
related racing activities, as well as golf tournaments, due to what it
perceives to be an insufficient return on the Registrant's investments in
those areas. Also in 1997, the Registrant embarked on an editorial marketing
effort, through and independent marketing firm, as an additional means of
achieving success in these markets. This effort was terminated in mid-1998
for lack of results.
With respect to auto racing, the Registrant had paid to have its
name appear on high profile racing vehicles and, in some cases, in exchange
for customer orders, the Registrant arranged for the pertinent customer's name
to appear on the same vehicle. This technique is known as "back end, or
reverse, sponsorship". Registrant product brochures and samples were also
included in event programs. In 1997, the Registrant had expanded its
involvement in auto racing to include a Registrant sponsored and administered
series of truck racing events known as "The Ultra Shield Speed Truck
Challenge". However, present Management does not intend to pursue this
activity in the future.
With respect to sponsorship of sporting events, Registrant product
samples and brochures were distributed to event participants, who, by design,
were thought to typically be influential individuals within certain
industries, trade organizations and consumer groups. These individuals, who
were usually invited to more than one Registrant sponsored event, were
approached on an ongoing, follow-up basis in an attempt to build a network of
influential useful contacts and sources of potential product demand. Present
Management is redirecting its efforts towards building the Registrant's
customer base without engaging in the sponsorship of, or involvement in,
sporting events.
The Registrant also markets its products by direct mail efforts
through publications distributed by certain chambers of commerce in the
Southern California region and by catalog organizations on a national scale.
Raw Materials
The Registrant does not rely on raw materials which are not
readily obtainable from numerous local open market sources.
Patents, Trademarks, Licenses, Franchises and Concessions.
While the name "Ultra Shield" is registered in California and
nationally as a Registrant trademark, USPI does not own or utilize any
patents, licenses, franchises or concessions.
The Registrant believes that its proprietary formulae are not
capable of being reverse engineered and thus, it has taken the view that it is
in its best interests not to disclose any aspect of the process or ingredients
concerning such formulae in an application for intellectual property rights.
Dependence on Customers
The Registrant does not depend on one or a few major customers.
Competitive Conditions
The Registrant has substantial competition in the development,
manufacture and sale of its various products such that the Registrant, as of
the date of this Report and since such date, occupies an insignificant
competitive position in its industry. The Registrant's primary competitive
methodology is based on the premise that the Registrant's products offer
superior characteristics in the areas of performance, pricing and safety. The
Registrant's products offer a proprietary technology as compared to
competitors' products in that the Registrant's products have associated with
them an "environmentally preferred" status (as such designation is used by the
U.S. Environmental Protection Agency), while performing equal or superior to
competitors' products.
Management believes that the aforementioned character-istics of
the Registrant's products, in conjunction with competitive pricing, gives the
Registrant's products a significant competitive advantage. However, most, if
not all, of the Registrant's principal competitors have sufficiently greater
financial and personnel resources than the Registrant such that the
aforementioned perceived competitive advantages may be negated.
Government Regulation / Approval - Environmental Compliance
There are numerous federal and state laws and regulations related
to environmental protection which have direct application to the manufacture
and marketing of the Registrant's products. The most significant of these
laws deal with use of volatile organic compounds in product offerings. Due to
the composition of the Registrant's products, even in their most concentrated
form of distribution, such products fall well below the established maximum
allowable levels under the aforementioned regulations. The Registrant has
received a Clean Air Solvent Certificate from the Southern California Air
Quality Management District as one of only eight entities to meet SCAQMD
standard and the only entity to qualify for clean air, water and soil
standards. On an ongoing basis, the Registrant estimates that the cost of
environmental compliance will, at a maximum, amount to approximately 2.5% of
the Registrant's gross revenues and that the Registrant will not experience
material difficulty in achieving compliance.
Employees
The Registrant employed up to 24 persons in 1997, however, as of
December, 1998, employs 5 persons (including Management), all of whom are
employed on a full time basis. During 1997, the Registrant utilized the
services of approximately 25 additional individuals on an independent
contractor basis with respect to various necessary services. As of November,
1998, this number has decreased to 5. There are no collective bargaining
agreements with the aforementioned employees and Management deems relations
with such employees to be good.
Item 2. Properties.
The Registrant currently conducts its administrative, managerial
and sales functions in approximately 19,000 square feet of office space
located at 10096 Sixth Street, Units M-P, Rancho Cucamonga, California
91730-5750 pursuant to a lease with an unaffiliated third party. Management is
presently aggressively seeking a release with respect to up to 11,000 square
feet of this space by obtaining a new lessee for such space. The telephone
number at this location is (909) 466-0081. The lease agreement for the space
ends in August, 1999. The rent for the facility is approximately $5,800 per
month. As a cost cutting measure, Management is presently working to reduce
the amount of space leased by the Company, either via sublease, or,
renegotiation with the Registrant's landlord. With the majority of product
manufacturing now being conducted off-site, current Management believes that
the Registrant requires only approximately 10,000 of the current 19,000 square
feet of space.
During the year ended December 31, 1996, the Registrant purchased,
for a total of $185,655, three residential real property units located near
Big Timber, Montana which the Registrant expressed an intent to utilize as a
corporate retreat, for incentive purposes and to generate rental income from
unaffiliated parties. The property was improved at an approximate cost of
$67,000 and was to be managed by a professional property management firm
located in Big Timber, Montana. However, as of the date of this Report, and
through November, 1998, the property had only been used by the Registrant's
former President/CEO. In line with current efforts to effect a "turn around"
of the Registrant's history of operating losses, present Management deeded
such properties to Sun Merchant Group, a lending group, in exchange for
cancellation of the Registrant's promissory note held by Sun Merchant Group.
The Registrant's equity in such properties was approximately equal to the
amount due under the note, which note was due and payable December 3, 1998.
The note had certain provisions for conversion into Registrant equity
securities, beginning December 3, 1998, in amounts and on terms that current
Management deemed to be predatory in nature, thus the decision to proceed as
described above.
Item 3. Legal Proceedings.
The Registrant has been involved in legal proceedings reportable
under this item as described below.
Upon Mr. Hodges' resignation from his positions as an officer and
director, he entered into an independent agent contract with the Registrant,
receiving a loan and pledging his shares as security for such loan. Mr.
Hodges defaulted on the loan and the Registrant, through legal counsel, is in
the process of preparing to prove up and cancel Mr. Hodges' shares. The
Registrant believes, upon advice of counsel, that cancellation will follow
without hindrance.
In March, 1997, the Registrant filed a legal action in San
Bernardino County District Court against George A. Money, a former officer and
director, seeking to cancel the 659,931 shares of Registrant's common stock
currently held by Mr. Money. The Registrant contended in its complaint that
Mr. Money did not give the promised consideration underlying the issuance of
such shares. That consideration was to consist of certain real property,
fixtures and equipment located in Iowa as well as certain chemical formulae.
Mr. Money did not file any responsive pleading; and, on March 17, 1998, the
Court entered a default judgment order canceling the shares and allowing the
Registrant to recover its costs of the suit.
On June 22, 1995, Charles Jamgotchian commenced a legal action
against the Registrant, J.W. Rutherford, George A. Money, Key Kavoussi, Harold
P. Kavoussi, Greater Pacific H.M.O. (an entity with respect to which Harold P.
Kavoussi is affiliated), Innovative Technologies, Inc. and Money Manufacturing
(entities with respect to which Mr. Money is affiliated) and Robert Tierney.
The lawsuit was filed in San Bernardino Superior Court at the Rancho
Cucamonga, California branch.
In the amended complaint, Mr. Jamgotchian alleged that he made a
$100,000.00 loan to Ultra Shield Products International, Inc. a California
corporation that is a subsidiary of the Registrant. He also alleged that he
was defrauded in that he did not receive promised security for the loan
consisting of certain securities certificates or a security interest in
certain real property. The complaint further alleged that Messrs. Tierney and
Rutherford breached certain guarantee agreements.
The Registrant denied that it was a party to the loan agreement.
It also denied the allegation that the other defendants acted as its agents
and that it had any liability to Mr. Jamgotchian. The Registrant filed a
cross-complaint against Mr. Jamgotchian and sought to cancel certain
securities issued in connection with the loan and to have the transaction
declared by the court as not binding upon the Registrant and as a usurious
loan transaction. The Registrant also sought to impose liability against Mr.
Jamgotchian for his failure to perform certain duties owing the Registrant in
connection with his agreement to supervise the Registrant's marketing efforts.
The court issued a temporary protective order against the
Registrant preventing it from selling its assets outside the normal course of
business. The defendants contended that they did not have any liability to
Mr. Jamgotchian and in the case of the Registrant, it contended that its claim
for damages exceeded the claim for damages asserted by Mr. Jamgotchian. The
dispute was settled on January 29, 1997 by the execution of a mutual release;
Ultra Shield's payment to Mr. Jamgotchian in the amount of $125,000; and, Mr.
Jamgotchian's return to Ultra Shield of 162,000 shares of common stock and
137,000 each of Class A and B common stock purchase warrants.
On November 17, 1994, the Registrant commenced a lawsuit against
American Venture Group, Inc., Charles Mugrdechian, Jr., John K. Freeland,
Ararat International Administrators, Inc. and Consolidated Equity Partners,
Inc. in San Bernardino County Superior Court at the Rancho Cucamonga branch.
The corporate defendants filed a cross-complaint against the Registrant
seeking, among other things, repayment of a $60,000.00 loan on which the
Registrant made payments at a usurious rate of interest. The court issued a
judgment in favor of the Registrant on May 14, 1996 awarding the Registrant
$16,500.00 representing the difference between the $60,000.00 loan and treble
the usurious interest payments made by the Registrant. The court also
canceled 511,656 shares (and related Class A and B warrants) in connection
with the usurious loan made to the Registrant. The Registrant was also
awarded more than $75,000.00 in costs and attorney's fees. Two of the five
defendants and cross-complainants filed an appeal of the decision. The Court
of Appeal subsequently affirmed the lower court's rulings in the Registrant's
favor and the Registrant intends to pursue the balance of its attorney's fees.
On June 27, 1991, Starbound Management, Inc. filed a lawsuit in
the 20th Judicial District Chancery Court in the State of Tennessee against
the Registrant's California corporate subsidiary and obtained a default
judgment against it in the amount of $286,895.65. A sister-state judgment was
entered against the California corporate subsidiary in California. The
plaintiff recently attempted to discover the bank records from the Registrant
which filed a motion to quash the subpoena served upon it on the grounds,
among other things, that the court did not have jurisdiction over it because
it was not a party to the Tennessee or sister-state proceedings. The court
agreed and issued an order quashing service of the subpoena and also issued a
protective order against the discovery of the Registrant's bank records.
Management does not believe that the sister-state judgment applies to the
Registrant.
However, based on the Tennessee judgment, Starbound filed a levy
and froze the Registrant's assets at one of its financial institutions. The
Court subsequently found no jurisdiction with respect to the Delaware
corporation and the levy was released. Management continues to believe, based
upon the advice of counsel, that the Delaware corporation has no liability for
the aforementioned Tennessee judgment.
Through legal counsel, Management is currently involved in
discussions and negotiations with J.W. Rutherford relative to certain issues
which have arisen from the circumstances surrounding, and activities
underlying, Mr. Rutherford's termination as President of the Registrant.
Other than as described below, neither party has commenced litigation over
these issues, though the possibility remains that the Registrant could become
involved in litigation regarding the resolution of these issues.
On December 4, 1998, the Registrant was served with a lawsuit
commenced by J.W. Rutherford as Plaintiff on November 23, 1998 in the Montana
Sixth Judicial District Court, Park County, Montana. In the complaint, the
Plaintiff claims to be the sole and rightful owner of the Montana properties
described under Item 2., above, and claims that such properties were purchased
with Mr. Rutherford's money for his sole and exclusive use.
The complaint alleges, among other things, (i) that the properties
were purchased by Mr. Rutherford because his wife, Carol Rutherford, is from
Montana and her mother lives near the properties; (ii) that the Registrant
owes Mr. Rutherford in excess of $500,000 from unpaid wages and personal loans
he made to the Registrant; (iii) that it had been agreed between Mr.
Rutherford and the Registrant that the properties were being purchased for Mr.
Rutherford's exclusive and perpetual ownership, possession, control and quiet
enjoyment in consideration for his performance, unpaid wages and unpaid loans
to the Registrant.
The complaint also seeks compensatory and special damages and
attorneys' fees. The Registrant is preparing an answer denying these claims
as part of its ongoing, vigorous efforts to resolve all of the Registrant's
issues with Mr. Rutherford.
The Registrant is also involved in certain legal proceedings and
claims that arise in the normal course of business. Management does not
believe that the outcome of these matters will have a material adverse effect
on the Registrant's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders of the
Registrant during the quarter ending December 31, 1997. The Registrant
intends to hold, and is diligently preparing for, and trying to hold an annual
meeting of shareholders in December, 1998 or January, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) Principal Market or Markets. The Registrant's Units are
traded on the over-the-counter market. Each Unit consisted of one share of
the Registrant's no par value common stock, one (1) Class A common stock
purchase warrant and one (1) Class B common stock purchase warrant. Each A
and B Warrant entitles the holder to purchase, at a price of $4.00 and $7.00,
respectively, one share of common stock until February 6, 1999. The
Registrant has the right to redeem the A and B Warrants upon 30 days written
notice at a price of $.01 per Warrant.
During 1994, a small, hostile group of holders of a significant
percentage of the Registrant's voting securities claimed control of the
Registrant. During their short and disputed possession of the Registrant's
offices, books and records, these individuals conducted an informal exchange
of Registrant securities, in the form of units identical to those traded
publicly, for the remaining shares of the California entity (which shares
represented approximately 5%, of the California subsidiary then outstanding).
Such units currently held by the former remaining USPIC shareholders have not
been registered pursuant to the Securities Act of 1933, as amended.
While the Registrant realizes that it may have exposure to
rescission liability relative to the aforementioned informal, unregistered
exchange, it believes that, in the best interests of all of its securities
holders, such a rescission should not occur for the following reasons: (i)
there is no market for the California entity's securities; (ii) such entity
has no operations or assets and is, in fact, a suspended entity; (iii) the
exchange occurred four years ago, thus making the Rule 144(k) exemption from
registration arguably available to such securities; (iv) had there been a
formal vote on whether to approve the aforementioned exchange (with the
associated registration of the exchanged securities), the Registrant, as then
owner of nearly 95% of the voting securities of the California entity, was in
a position to control the approval of the exchange; and, (v) such holders are
presently on equal footing with all other investors in the Registrant and its
predecessor.
The following table sets forth, for the period indicated, the
range of high and low representative bid quotations for the Registrant's Units
which were obtained from market makers. The quotations are between dealers,
do not include retail mark-ups, mark-downs or other fees or commissions, and
may not necessarily represent actual transactions:
Bid
Period Ended High Low
March 31, 1996 no bid no bid
June 30, 1996 no bid no bid
September 30, 1996 no bid no bid
December 31, 1996 $4.25 no bid
March 31, 1997 $0.875 $0.3125
June 30, 1997 $0.6875 $0.1875
September 30, 1997 $0.8437 $0.3215
December 31, 1997 $0.46875 $0.25
March 31, 1998 $0.375 $0.1875
June 30, 1998 $0.50 $0.25
September 30, 1998 $0.32 $0.20
December 31, 1998 $0.20 $0.050
(b) Approximate Number of Holders of Common Stock. The number of
beneficial owners of the Registrant's $.0001 par value common stock at
December 31, 1997, was approximately 800, and, at December 8, 1998,
approximately 875.
(c) Dividends. Holders of common stock are entitled to receive
such dividends as may be declared by the Registrant's Board of Directors. No
dividends have been paid with respect to the Registrant's common stock and no
dividends are anticipated to be paid in the foreseeable future.
(d) Recent Sales of Unregistered Securities. During year ended
December 31, 1997, the Registrant issued unregistered securities in the form
of units, identical to those trading publicly, as shown in the following
table. In each case, the Registrant relied on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
Consideration, in Dollars
Converted
Date Units Cash Prom. Notes Services Other
01-14-97 155,050 $ 71,275 $ $ 2,500(1) $ 3,750(2)
02-06-97 240,744 120,372 33,368(3)
03-12-97 207,250 103,625
03-21-97 200,000 95,000
04-07-97 51,950 25,975
05-01-97 402,410 140,100 32,500(4)
05-19-97 142,158 56,833 4,908
06-05-97 382,750 45,000 101,000 15,000(5)
06-19-97 215,126 34,880 49,700 10,000(6)
06-20-97 98,200 25,000 17,000
06-28-97 85,000 48,000(7)
07-21-97 61,712 7,486 19,400
07-25-97 317,075 60,000 78,500
07-30-97 118,830 21,500 33,000
08-07-97 333,916 14,000 142,000
08-14-97 217,357 98,000 3,000 400(8)
08-18-97 11,275 2,330 3,000
08-26-97 55,886 26,000
08-27-97 129,138 39,650 6,000 40,000(9)
09-15-97 27,356 2,545 10,600
09-23-97 2,288,200 6,600 1,137,500(10)
10-10-97 26,519 8,500 2,500
11-04-97 400,812 74,054 62,750 21,875(11)
12-09-97 147,915 47,000
12-12-97 2,892,982 15,499 9,000 79,900(12) 1,000,000(13)
12-13-97 109,858 35,034
12-24-97 149,832 37,927 20,916(14)
(1) Per employment agreement with the Registrant's Controller
(2) Units exchanged for former President's shares in Registrant's
California subsidiary
(3) Legal
(4) Auto racing related
(5) Auto racing related
(6) Auto racing related
(7) Auto racing related ($20,000); Securities promotion ($28,000)
(8) Auto racing related
(9) Auto racing related
(10) Officers and Directors bonuses:
J.W. Rutherford: $1,000,000
Brent J. Humphrey: $ 50,000
R. Eric Ward $ 50,000
Karen L. Clark $ 37,500
(11) Per employment agreement with Registrant's Controller
(12) Auto racing related ($75,500); Employee bonuses ($2,400)
(13) Secured promissory note from Dr. Harold P. Kavoussi to purchase up to
2,666,666 Units; this was later canceled
(14) Legal
Item 6. Management's Discussion and Analysis.
Since inception in 1989, the Registrant has relied principally on the
proceeds from one public and several private offerings of its securities to
fund operations. The Registrant has used the proceeds from these offerings
and the limited revenues it has received from sales of the Registrant's
products to fund research and development activities and to cover its
recurring operating deficits. The Registrant had cash equivalents totaling
$23,321 available to cover recurring operating deficits and research and
development expenses.
The Registrant's total assets decreased $752,027 (48.69%) from $1,544,435
as of 12/31/96 to $792,408 as of 12/31/97. The decrease was due primarily to
a decrease in fixed maturities of $649,907; and, a decrease in cash and cash
equivalents of $97,199.
The Registrant's total assets decreased $2,369,301 (74.94%) from
$3,161,709 as of 9/30/97 to $792,408 as of 12/31/97. The decrease was due
primarily to a decrease in cash and cash equivalents of $3,055; a decrease in
notes receivable of $293,617; a decrease in accounts receivable of $1,057,660;
a decrease in prepaid expenses of $1,041,922; an increase in other assets of
$16,000; an increase in inventories of $23,693; and, an increase in furniture
and equipment of $1,017.
The Registrant's total liabilities decreased $313,288 (14.43%) from
$2,171,376 as of 12/31/96 to $1,858,088 as of 12/31/97. The decrease was due
primarily to a decrease in capital lease obligations of$1,899; an increase in
notes payable of $60,000; a decrease in notes payable-stockholders of
$775,233; an increase in notes payable-related party of $1,291; an increase
due to a payable to officer of $142,735; a decrease in accounts payable of
$6,110; an increase in accrued payroll and payroll taxes of $127,922; a
decrease in capital lease obligations, net of current, of $1,899; and, an
increase in notes payable-related party, net of current, of $72,685.
The Registrant's total liabilities increased $21,951 (1.19%) from
$1,836,137 as of 9/30/97 to $1,858,088 as of 12/31/97. The increase was due
primarily to an increase in accounts payable to J.W. Rutherford of $73,976; a
decrease in accounts payable of $501,552; a decrease in sales tax of $2,810;
an increase in accrued payroll and payroll taxes of $216,064; an increase in
accrued interest of $39,169; an increase in capital lease obligations,
current, of $14,926; an increase in notes payable-related party, net of
current, of $49,592; an increase in unearned deposits of $73,500; and, a
decrease in capital lease, long term, of $9,820.
The Registrant's accrued expenses increased $324,759 (905%) from $35,868
as of 12/31/96 to $360,627 as of 12/31/97. The increase was due primarily to
the accrual of payroll and payroll taxes of $214,864; and, an increase of
accrued interest of $39,169.
The Registrant's accrued expenses increased $252,497 (234%) from $108,139
as of 9/30/97 to $360,627 as of 12/31/97. The increase was due primarily to
accrual of payroll and payroll taxes of $201,200; increase in interest of
$39,169; and, an increase in other accruals of $12,129. The Registrant's
notes payable decreased $775,233 (44.37%) from $1,747,184 as of 12/31/96 to
$971,951 as of 12/31/97. The decrease was due primarily to $322,178 of
convertible promissory notes that were issued, less $884,233 of convertible
stock or common stock subscribed as of 12/31/97, less $213,178 of convertible
promissory notes that were paid with cash during the twelve month period
ending 12/31/97 resulting in a net decrease of $775,233 for the period.
The Registrant's notes payable increased $49,592 (5.34%) from $922,359 as
of 9/30/97 to $971,951 as of 12/31/97. The increase was due primarily to
$96,842 of convertible promissory notes that were issued during the three
month period ending 12/31/97, less $35,250 of convertible promissory notes
that were converted to common stock or common stock subscribed as of 12/31/97,
less $12,000 of convertible promissory notes that were paid with cash during
the twelve month period ending 12/31/97 resulting in a net decrease of $49,592
for the period.
The Registrant's accrued interest increased $62,708 (123.62%) from $50,727
as of 12/31/96 to $113,435 as of 12/31/97. The increase was due primarily to
an increase in capital leases for the three months ended 12/31/97.
The Registrant's accrued interest increased $39,170 (52.74%) from $74,265
as of 9/30/97 to $113,435 as of 12/31/97. The increase is due primarily to an
increase in capital leases for the three months ended 12/31/97.
The Registrant's accumulated deficit increased $3,640,241 (29.24%) from
$8,809,047 as of 12/31/96 to $12,449,288 as of 12/31/97 as a result of
increased net losses from operations.
The Registrant's accumulated deficit increased $3,620,043 (41%) from
$8,829,245 as of 9/30/97 to $12,449,288 as of 12/31/97 as a result of
increased net losses from operations.
The Registrant's shareholders' common stock and paid in capital increased
$4,196,567 (51.26%) from $8,184,987 as of 12/31/96 to $12,381,554 as of
12/31/97. The increase in common stock and paid in capital principally
resulted from the equity offerings and the conversion of the convertible
promissory notes to equity securities. The Registrant improved its cash
position through the use of private placements of its securities.
Since inception, the Registrant has experienced significant losses from
operations for each successive period. Losses from operations increased
$1,879,362 (52.41%) from $1,706,482 as of the year ended 12/31/96 to
$3,585,844 for the year ended 12/31/97. This increase could be generally
attributed to an increase in selling, general and administrative expenses of
$1,035,788 plus compensation to officers of $1,110,575.
Gross sales of products increased $205,764 (125.8%) from $163,569 as of
12/31/96 to $369,333 for the year ended 12/31/97. This increase could be
generally attributed to an increase in the Registrant's customer base.
Cost of sales increased $123,763 (53.65%) from $106,894 as of 12/31/96 to
$230,657 for the year ended 12/31/97. The Registrant achieved a gross profit
percentage of approximately (34.65%) for the twelve months ended 12/31/96
compared to (37.54%) for the year ended 12/31/97. This increase was
attributed to a proportional increase in sales.
Selling, general and administrative expenses increased $1,035,788 (65.63%)
from $1,578,157 as of the year ended 12/31/96 to $2,613,945 as of the year
ended 12/31/97. This increase could be generally attributed to an increase in
the use of stock and marketing consultants plus an increase in advertising
during the twelve months ended 12/31/97.
Interest expense increased $33,527 (31.8%) from $105,439 as of the year
ended 12/31/96 to $138,968 as of the year ended 12/31/97. This increase could
be generally attributed to an overall increase in debt instruments for the
year ended 12/31/97.
In December, 1997, the Registrant agreed to issue securities in exchange
for a secured promissory note in the amount of $1,000,000. The purchaser is
currently seeking to rescind this transaction. Please see Item 12 of this
Report.
Since inception, the Registrant has primarily used equity financing
transactions and borrowings convertible into equity securities to improve its
liquidity while operations have been unable to generate adequate working
capital. During the year ended 12/31/97, net cash used in operating
activities was $1,728,076.
Item 7. Financial Statements.
Please see pages beginning with F-1.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
There have been no disagreements between the Registrant and its
independent accountants on any matter of accounting principles or practices or
financial statement disclosure for the two most recent fiscal years.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act of the Registrant.
On September 25, 1998, the Registrant's Board of Directors suspended
J.W. Rutherford, without pay, from all of his Officer positions pending the
outcome of an investigation into his performance and conduct while in those
roles. At a duly called and noticed meeting of the Board of Directors held in
the offices of the Registrant's legal counsel on October 22, 1998, the Board
of Directors terminated Mr. Rutherford, for cause, effective September 25,
1998, based upon the results of its investigation into his conduct and
performance. Mr. Rutherford is no longer employed in any capacity by the
Registrant and his position as a member of the Company's Board of Directors
will end on the date of the upcoming shareholders' meeting. In a related
matter, Management is pursuing the return of the 2,000,000 Units of Registrant
securities issued to Mr. Rutherford as a $1,000,000 bonus (as described in
Item 5(d) of PART II and Item 10 of PART III of this Report), which
securities were forfeited back to the Registrant, according to an applicable
forfeiture provision, upon Mr. Rutherford's termination.
Directors and Executive Officers of USPI
Name Age Position with USPI
Brent J. Humphrey 34 President, Chief Executive Officer, Chief
Financial and Accounting Officer and
Director
R. Eric Ward 51 Executive Vice-President
and Director
Karen L. Clark 40 Secretary, Treasurer and Director
M. Scott Border 48 Director
Kenneth W. Jacobs 63 Director
J.W. Rutherford 47 Former President/CEO,
Director
Brent J. Humphrey -- President, CEO, CFO and a Director. Mr. Humphrey has
served as the Company's acting President, CEO and CFO since the Board
suspended J.W. Rutherford from those positions on September 25, 1998. Mr.
Humphrey served as the Company's Vice-President and a Director since July 31,
1997 and October 15, 1997, respectively. From July, 1996 to July, 1997, Mr.
Humphrey served as an account executive and then field sales trainer. In 1995
and until joining the Registrant in 1996, Mr. Humphrey served as president of
Progressive Promotional Products, of Rialto, California. From 1993 to 1995,
he served as physical distribution manager for Mervyn's of California, based
in Minnesota; and, from 1988 to 1993, he served as production manager for
Savon Drug Stores, an American Stores subsidiary. From 1986 to 1988, Mr.
Humphrey served as distribution supervisor for Ben Franklin Stores, Inc., a
subsidiary of Foxmeyer, Inc. Mr. Humphrey is a graduate of Chaffey College in
Rancho Cucamonga, California and devotes his full-time efforts to the
Registrant's business.
R. Eric Ward -- Executive Vice-President. Mr. Ward has served as the
Registrant's Executive Vice-President and a Director since July 31, 1997 and
October 15, 1997, respectively. From June, 1996 to 1997, Mr. Ward worked for
the Registrant coordinating its food service marketing. From 1969 to 1995,
Mr. Ward was employed by The C&C organization, d/b/a Cask and Cleaver, where
he rose through the ranks from manager to president and chief executive
officer. Mr. Ward received an AA degree in business administration from San
Bernardino Valley College in 1969 and took a business curriculum at Cal State,
San Bernardino, for two years not leading to a degree. Mr. Ward devotes his
full-time efforts to the Registrant's business.
Karen L. Clark -- Secretary, Treasurer and Director. Ms. Clark has served as
the Registrant's principal administrative assistant since March, 1993 and as
the Registrant's Secretary and Treasurer since March, 1997. Ms. Clark was
nominated and elected to the Registrant's Board of Directors on November 30,
1998. Ms. Clark received an LVN degree in nursing from Pasadena City College
in 1979 and devotes her full-time efforts to the Registrant's business.
M. Scott Border -- Director. Mr. Border has served as a Director of the
Registrant since December 8, 1998. Since 1989, Mr. Border has served a
partner/general manager of RCI Motorsports, a manufacturer of intelligent
racing components for automotive applications, located in Ontario, California.
From 1968 to 1989, Mr. Border worked in various capacities, ending as
Vice-President/Director of Marketing and Sales, for West Covina Auto Parts,
Inc., a substantial, regional auto parts distributor and retailer. Mr. Border
received a bachelor's degree in business and a master's degree in business/
marketing from Cal Poly State College in 1972 and 1975, respectively.
Kenneth Jacobs -- Director. Mr. Jacobs has served as a Director of the
Registrant since December 8, 1998. Since 1995, Mr. Jacobs has been engaged in
the roofing business as owner of KJ & Associates, located in Santa Fe Springs,
California. From 1985 to 1995, he was manager of systems sales for Henry
Company, a roofing firm located in Huntington Park, California. Mr. Jacobs
received an associate's degree in business and accounting from Cerritos
College in 1966.
J.W. Rutherford -- Former President, Chief Executive, Chief Financial and
Accounting Officer; Director. Mr. Rutherford served as the Registrant's
Executive Vice-President and a Director from August, 1990 to October, 1992; as
President, Chief Executive Officer and a Director from October, 1992 to March,
1997; and, as President, Chief Executive Officer, Chief Financial and
Accounting Officer and a Director from March, 1997 to September, 1998. On
September 25, 1998, the Registrant's Board of Directors suspended J.W.
Rutherford, without pay, from all of his Officer positions pending the outcome
of an investigation into his performance and conduct while in those roles. At
a duly called and noticed meeting of the Board of Directors held in the
offices of the Registrant's legal counsel on October 22, 1998, the Board of
Directors terminated Mr. Rutherford, effective September 25, for cause, based
upon the results of its investigation into his conduct and performance. Mr.
Rutherford's position as a Director will end on the date of the upcoming
shareholders' meeting. From 1983 to 1986, Mr. Rutherford served as a
Certified Financial Planner and Registered Investment Adviser for Executive
Consultants Incorporated, financial planning firm located in Scottsdale,
Arizona. From 1986 to 1990, Mr. Rutherford was also licensed with the NASD
with respect to limited partnerships (series 22 license) and variable
annuities (series 6 license), while serving as president of The Rutherford
Agencies, a financial planning firm, located in Diamond Bar, California.
All Directors hold office until after the next annual meeting of the
stockholders when their successors are elected and qualified.
The Officers are elected by the Board of Directors at the first
meeting after each annual meeting of the stockholders and hold office until
their death or until they resign or are removed from office. No Director or
executive Officer is related to any other Director or executive Officer.
Voting Agreement
Other than as described below, there are no arrangements or
understandings among members of either former and/or new control groups and
their associates with respect to election of directors or other matters, nor
were there any changes in control of the Registrant since the beginning of the
its last fiscal year.
Item 10. Executive Compensation.
EXECUTIVE COMPENSATION
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h)
Other
Name Annual Restricted All Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SAR's(#) ($) ($)
J.W. Ru- 1997 $125,000 $ N/A $ N/A $1,000,000** N/A $ N/A $ N/A
ther- 1996 $125,000 $ 60,000 $ N/A $ N/A N/A $ N/A $ N/A
ford 1995 $ 48,140 $ N/A $ N/A $ 208,802 N/A $ N/A $ N/A
former
President
& CEO
NOTE: None of the Registrant's other Executive Officers received enough
compensation to require their inclusion in this table, according to applicable
disclosure rules. Please refer to the Registrant's Proxy Statement for
details as to their compensation.
Until his termination for cause on October 22, 1998, and effective as of
September 25, 1998 (the date of his suspension, without pay), Rutherford was
employed by the Registrant pursuant to a written ten year employment agreement
commencing February 1, 1996, which employment agreement provided for an annual
salary of $125,000 (to increase by 5% for each year following a year in which
the Registrant achieved a net after tax profit) and an annual bonus in the
form of cash and/or securities in the amount of 2.0% of the Registrant's net
after tax profit, if any, respectively. This employment agreement provided
that the Registrant pay the cost of insurance premiums for Mr. Rutherford and
his dependents, as specified in the Registrant's Board approved personnel
policy.
**Above and beyond the terms his employment agreement, Mr. Rutherford
awarded himself a 2,000,000 Unit bonus in 1997 (valued at $1,000,000), which
Units were forfeited upon Mr. Rutherford's termination.
Incentive Stock Option Plan
On March 28, 1989, the Registrant adopted an Incentive Stock Option Plan
(the "Plan") under which options granted are intended to qualify as "incentive
stock options" under Section 422A of the Internal Revenue Code of 1954, as
amended (the "Code"). Pursuant to the Plan, options to purchase up to 100,000
shares (as adjusted for the previously mentioned 1:100 reverse split) of the
Registrant's Common Stock may be granted to employees of the Registrant. The
Plan is administered by the Board of Directors, which is empowered to
determine the terms and conditions of each option, subject to the limitation
that the exercise price cannot be less than the market value of the Common
Stock on the date of the grant (110% of the market value in the case of
options granted to an employee who owns 10% or more of the Registrant's
outstanding Common Stock) and no option can have a term in excess of 10 years
(5 years in the case of options granted to employees who own 10% or more of
the Registrant's common stock). As of the date of this Report, no options
have been granted under this Plan.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("Statement 123"). Statement No. 123 is primarily a disclosure standard for
the Registrant because the Registrant will continue to account for employee
stock options under Accounting Principles Board Opinion No. 25.
Item 11. Security Ownership Of Certain Beneficial Owners and Management.
The following table sets forth, as of December 8, 1998, the stock
ownership of each person known by the Registrant to be the beneficial owner of
five percent or more of the Registrant's Common Stock, all Directors
individually and all Directors and Officers of the Registrant as a group.
Each person has sole voting and investment power with respect to the shares
shown. Percent of class calculations below are based on 19,907,261 shares
outstanding, not including adjustments pursuant to the requirements of
Securities Exchange Act Rule 13d-3(d)(1).*(1)
Amount of
Name and Address Beneficial Percent of
of Beneficial Owner Ownership Class
Brent J. Humphrey 361,200(2) 1.78%
10096 Sixth St. Units M-P
Rancho Cucamonga, CA 91730
R. Eric Ward 301,200(3) 1.49%
10096 Sixth St. Units M-P
Rancho Cucamonga, CA 91730
Karen L. Clark 415,935(4) 2.05%
10096 Sixth St. Units M-P
Rancho Cucamonga, CA 91730
M. Scott Border 637,410(5) 3.10%
10096 Sixth St. Units M-P
Rancho Cucamonga, CA 91730
Kenneth Jacobs 613,212(6) 2.99%
10096 Sixth St. Units M-P
Rancho Cucamonga, CA 91730
J.W. Rutherford 3,228,000(7) 13.95%
10096 Sixth St. Units M-P
Rancho Cucamonga, CA 91730
Dr. Harold P. Kavoussi 2,035,000(8) 9.27%
2005 N. Garey Ave.
Pomona, CA 91767
Greater Pacific HMO, Inc. 1,650,000(9) 7.65%
2005 N. Garey Ave.
Pomona, CA 91767
Dr. Dianna Mak 1,953,558(10) 8.94%
3463 Primera Ave.
Los Angeles, CA 90068
Dr. Glenn Y. Arima 1,436,505(11) 6.73%
3551 Farquhar Ave. #204
Los Alamitos, CA 90720
Bruce J. Kremers 2,301,375(12) 10.36%
P.O. Box 768
Troy, Montana 59935
All Directors and 5,556,957(13) 21.82%
Officers as a Group (4 Persons)
* Rule 13d-3(d)(1) promulgated under the Securities Exchange Act of 1934, as
amended, requires that the ownership figures shown in this table include
shares that could be acquired by the party pursuant to warrants held by the
party, and, that the pertinent percent of class figures be calculated
utilizing a figure for total shares outstanding that also includes the
additional shares underlying such warrants. This is intended to show how much
control each individual could acquire if (i) he/she exercised all of his/her
warrants; and, (ii) no one else exercised any of their warrants.
(1) As of December 8, 1998, 19,907,261 shares of common stock, and,
19,076,751 Class A and 19,076,751 Class B common stock purchase warrants were
outstanding. These amounts include the effect of the return to the Registrant
of 2,666,666 from Howard Kavoussi and 2,000,000 shares from J.W. Rutherford as
described herein, together with equal amounts of Class A and B warrants.
(2) Includes 120,400 shares and equal amounts of shares underlying Class A
and B warrants owned by Mr. Humphrey.
(3) Includes 100,400 shares and equal amounts of shares underlying Class A
and B warrants owned by Mr. Ward.
(4) Includes 138,645 shares and equal amounts of shares underlying Class A
and B warrants owned by Ms. Clark; and, 250 shares and equal amounts of shares
underlying Class A and B warrants owned by each of Ms. Clark's two sons (500
total) relative to which Ms. Clark denies beneficial ownership.
(5) Includes 212,470 shares and equal amounts of shares underlying Class A
and B warrants owned by Mr. Border.
(6) Includes 204,404 shares and equal amounts of shares underlying Class A
and B warrants owned by Mr. Jacobs.
(7) Includes 1,075,000 shares owned by Mr. Rutherford; and, 1,000 shares
owned by Mr. Rutherford and his spouse, Carol J. Rutherford. Does not include
25,000 shares owned by each of Mr. Rutherford's two daughters (50,000 total)
relative to which Mr. Rutherford denies beneficial ownership; however, with
respect to which he serves as custodian under the California Uniform Gift to
Minors Act. Includes equal amounts of shares underlying Class A and B
warrants for all of the shares described in this explanatory note excepting
those described as disclaimed. The Registrant has placed a stop transfer
restriction, with notice of adverse claim, on all of Mr. Rutherford's
securities pending the results of discussion and negotiations concerning
issues arising from the circumstances surrounding, and activities underlying,
Mr. Rutherford's termination.
(8) Includes 70,000 shares owned by Dr. Kavoussi, 105,000 shares owned by
Pomona Equity Fund, Inc. and 550,000 shares owned by Greater Pacific HMO,
Inc., entities of which Dr. Kavoussi is the principal shareholder; and,
includes equal amounts of shares underlying Class A and B warrants owned by
Pomona Equity Fund, Inc. and Greater Pacific HMO, Inc.
(9) Includes 550,000 shares owned by Greater Pacific HMO, Inc. an entity of
which Dr. Harold P. Kavoussi is the principal shareholder, and equal amounts
of shares underlying Class A and B warrants owned by Greater Pacific HMO, Inc.
(10) Includes 651,186 shares and equal amounts of shares underlying Class A
and B warrants owned by Dr. Mak.
(11) Includes 478,835 shares and equal amounts of shares underlying Class A
and B warrants owned by Dr. Arima.
(12) Includes 767,125 shares and equal amounts of shares underlying Class A
and B Warrants owned by Mr. Kremers, who is a legal counsel for the Registrant
and who received the securities shown in exchange for legal services.
(13) This group includes Messrs. Humphrey, Ward, Border, Jacobs, Rutherford
and Ms. Clark.
Item 12. Certain Relationships and Related Transactions.
In March, 1997, the Registrant filed a legal action against George A.
Money, a former officer and director, seeking to cancel the 659,931 shares of
Registrant's common stock held by Mr. Money. The Registrant contended in its
complaint that Mr. Money did not give the promised consideration underlying
the issuance of such shares. That consideration was to consist of certain
real property, fixtures and equipment located in Iowa as well as certain
chemical formulae. Mr. Money did not file any responsive pleading; and, on
March 17, 1998, the Court entered a default judgment order canceling the
shares and allowing the Registrant to recover its costs of the suit.
On December 9, 1997, the Registrant agreed to issue 2,666,666 units of its
securities in exchange for a $1,000,000 secured promissory note from Harold P.
Kavoussi, M.D. and his medical practice, Harold P. Kavoussi, M.D., Inc. The
security, which was subject to augmentation in the event its fair market value
declined below the amount of the note plus accrued interest, consisted of
certain assets owned by Dr. Kavoussi and his medical practice. The promissory
note, which matured June 9, 1998, carried a 10% annual interest rate and had a
60 day right to cancel provision in favor of Dr. Kavoussi, meaning that it
could be cancelled by Dr. Kavoussi at any time until February 9, 1998. Dr.
Kavoussi subsequently claimed to have extended this promissory note until
December 11, 1998 via an arrangement with J.W. Rutherford, the Registrant's
former President, and further claimed that such arrangement also extended his
cancellation right until December 11, 1998.
Pursuant to an interest rate reduction provision in the promissory note, on
November 6, 1998, the Registrant notified Dr. Kavoussi that the interest rate
for the note was being reduced to 8% in exchange for the return to the
Registrant of 666,666 of the aforementioned units. Dr. Kavoussi is a
principal shareholder of the Registrant, as described hereinabove, by virtue,
in part, of his controlling ownership interests in Pomona Equity Fund, Inc.
and Greater Pacific HMO, Inc. The securities issued to Dr. Kavoussi in
exchange for the secured promissory note were held in the name of Howard
Kavoussi, who is Dr. Kavoussi's brother.
Upon being notified of the interest rate reduction election, on November 6,
1998, the Kavoussi's sought to return all 2,666,666 units issued in the
aforementioned transaction based on the aforementioned alleged extended
cancellation arrangement. On November 20, 1998, the Registrant, through legal
counsel, issued a demand letter to Dr. Kavoussi for full payment under the
promissory note. After various discussions involving the Registrant, its
legal counsel, the Kavoussi's and legal counsel for the Kavoussi's, on
December 3, 1998, the Registrant accepted the Kavoussi's tender back of
2,666,666 units and cancelled the promissory note and agreed to cancel the
associated security interests.
On November 11, 1998, a small group of holders of Registrant securities
requested a November 12, 1998 informal meeting with the Registrant's
management. At such meeting, the group (which did not represent a majority of
the Registrant's voting securities) demanded that the Registrant's Board of
Directors immediately (i.e. at such meeting) nominate and elect four
additional Directors, all from the group. This would have, essentially, given
immediate control of the Registrant to the group. The Directors in attendance
at such meeting refused to comply with this demand.
On November 30, 1998, Karen L. Clark, the Registrant's Secretary/Treasurer
was nominated and elected to the Registrant's Board of Directors. Ms. Clark
was nominated and elected on November 30, 1998 until the pending shareholders'
meeting when she may be slated to stand for re-election along with the
Registrant's current Directors and others by vote of the holders of a majority
of the Registrant's voting securities.
On December 8, 1998, at a reconvened meeting of the Registrant's Board
(which had been in recess since November 30, 1998), M. Scott Border and
Kenneth W. Jacobs, both non-Management shareholders, were nominated and
elected to the Registrant's Board of Directors until the pending shareholders'
meeting when they may be slated to stand for re-election along with the
Registrant's current Directors and others by vote of the holders of a majority
of the Registrant's voting securities.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) 1. The following Financial Statements are filed as part of this
report:
Page
Report of Independent Certified Public
Accountants for the Year Ended December
31, 1997 ....................................... F - 1
Consolidated Balance Sheet
as of December 31, 1997 ........................ F - 2
Consolidated Statements of Operations
For the Years Ended December 31, 1997
and 1996 ....................................... F - 3
Consolidated Statements of Stockholders'
Deficit For the Years Ended December 31,
1997 and 1996 .................................. F - 4
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997,
and 1996 ....................................... F - 5
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997,
and 1996 ....................................... F - 7
2. All schedules have been omitted, as the required information is
inapplicable or the information is presented in the financial statements or
the notes thereto.
3. Exhibits.
Exhibit
No. Description Location
2 Agreement for the
Exchange of Shares Incorporated by this
reference to Exhibit
No. 2 to the Regis-
trant's Form 10-KSB for
the period ending December
31, 1995
3 Articles of Incorpora-
tion and By-laws Incorporated by this
reference to Exhibit
No. 3 to the Regis-
trant's Registration
Statement (No. 33-31566)
10.1 Employment agreement
with J.W. Rutherford Incorporated by this
reference to Exhibit
No. 10.1 to the Regis-
trant's Form 10-KSB for
the period ending December
31, 1995
10.3 Lease Incorporated by this
reference to Exhibit
No. 10.3 to the Regis-
trant's Form 10-KSB for
the period ending December
31, 1995
(b) No Reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ULTRA SHIELD PRODUCTS
INTERNATIONAL, INC.
Dated: December 9, 1998 By /s/ Brent J. Humphrey
Brent J. Humphrey, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity
Date: December 9, 1998
/s/ Brent J. Humphrey President, CEO
Brent J. Humphrey CFO and Director
/s/ R. Eric Ward Executive Vice-President and
R. Eric Ward Director
/s/ Karen L. Clark Secretary, Treasurer and
Karen L. Clark Director
Director
M. Scott Border
/s/ Kenneth W. Jacobs
Kenneth W. Jacobs
Director
J.W. Rutherford
ULTRA SHIELD PRODUCTS
INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
CONTENTS
December 31, 1997
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet 2 - 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Deficit 5
Consolidated Statements of Cash Flows 6 - 7
Notes to Consolidated Financial Statements 8 - 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Ultra Shield Products International, Inc.
We have audited the accompanying consolidated balance sheet of Ultra Shield
Products International, Inc. and subsidiary as of December 31, 1997, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ultra Shield
Products International, Inc. and subsidiary as of December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the
consolidated financial statements, the Company has incurred a net loss of
$3,640,241 and had negative cash flows from operations of $1,728,076 during
the year ended December 31, 1997, and as of December 31, 1997, the Company's
current liabilities exceeded its current assets by $1,349,746 and it had a
stockholders' deficit of $1,065,680. In addition, as of December 31, 1997,
the Company is in technical default on $312,260 of the notes payable -
stockholders, and the Internal Revenue Service has assessed the Company
$571,680 for back payroll taxes, fines, and penalties for the tax years ended
December 31, 1994, 1995, and 1996 for which the Company is contesting and
believes the amount due is approximately $30,000. These factors, among
others, as discussed in Note 1 to the consolidated financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As described in Note 7 to the consolidated financial statements, the Company
issued 2,980,288 shares of its common stock for services rendered by employees
and non-employees, including 2,000,000 shares issued to the Company's
President.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 7, 1998 (except for Note 6, paragraph 4,
as to which the date is September 25, 1998,
and Note 9, as to which the date is October
22, 1998)
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
Current assets
Cash and cash equivalents $ 29,321
Notes receivable 28,844
Accounts receivable, net of allowance for doubtful accounts
of $8,000 60,454
Inventories 256,308
___________
Total current assets 374,927
Furniture and equipment, net 204,895
Investment in real estate 204,762
Other assets 7,824
___________
Total assets $ 792,408
===========
The accompanying notes are an integral part of these financial statements.
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1997
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Capital lease obligations $ 14,926
Note payable 60,000
Notes payable - stockholders 971,951
Note payable - related party 1,291
Due to officer 68,759
Accounts payable 247,119
Accrued payroll and payroll taxes 221,694
Accrued interest 113,435
Other accrued liabilities 25,498
____________
Total current liabilities 1,724,673
Capital lease obligations, net of current portion 40,730
Note payable, net of current portion 20,000
Note payable - related party, net of current portion 72,685
____________
Total liabilities 1,858,088
____________
Commitments and contingencies
Stockholders' deficit
Preferred Stock, $.0001 par value
10,000,000 shares authorized
no shares issued and outstanding -
Common Stock, $.0001 par value
500,000,000 shares authorized
20,644,090 shares issued and outstanding 2,064
Additional paid-in capital 12,381,544
Note receivable from stockholder (1,000,000)
Accumulated deficit (12,449,288)
____________
Total stockholders' deficit (1,065,680)
____________
Total liabilities and stockholders' deficit $ 792,408
============
The accompanying notes are an integral part of these financial statements.
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
1997 1996
Net sales $ 369,333 $ 163,569
Cost of sales 230,657 106,894
___________ ____________
Gross profit 138,676 56,675
Selling, general, and administrative expenses 2,613,945 1,578,157
Officer compensation 1,110,575 185,000
___________ ____________
Loss from operations (3,585,844) (1,706,482)
___________ ____________
Other income (expense)
Net gain on legal settlements 70,652 375,822
Interest expense (138,968) (105,439)
Interest income 15,519 15,098
___________ ____________
Total other income (expense) (52,797) 285,481
___________ ____________
Loss before provision for income taxes (3,638,641) (1,421,001)
Provision for income taxes 1,600 1,600
___________ ____________
Net loss $(3,640,241) $(1,422,601)
=========== ============
Basic loss per common share $ (0.26) $ (0.15)
=========== ============
Diluted loss per common share $ (0.26) $ (0.15)
=========== ============
Weighted-average common shares outstanding 14,129,334 9,552,994
=========== ============
The accompanying notes are an integral part of these financial statements.
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31,
Common Stock
Common Stock Subscribed
Shares Amount Shares Amount
Balance, December 31, 1995 7,628,516 $ 764 1,017,447 $ 101
Shares issued for
common stock subscribed 1,017,447 101 (1,017,447) (101)
cash 692,150 69
services rendered 30,400 3
notes payable 2,960,254 296
in lieu of interest 135,421 13
Shares canceled (1,435,297) (143)
Shares reacquired (5,000) (1)
Unrealized loss on
investments
Net loss
__________ __________ __________ _________
Balance, December 31, 1996 11,023,891 1,102 - -
Shares issued for
cash and notes 5,030,631 503
services rendered 2,980,288 298
notes payable conversion 1,811,833 181
in lieu of interest 98,750 10
Shares canceled (301,303) (30)
Change in unrealized loss on
investments
Net loss
__________ __________ __________ _________
Balance, December 31, 1997 20,644,090 $ 2,064 - $ -
========== ========== ========== =========
The accompanying notes are an integral part of these financial statements.
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Continued)
For the Years Ended December 31,
Unrealized Note
Additional Holding Receivable
Paid-in Loss on from
Capital Investments Stockholder
Balance, December 31, 1995 $ 6,289,180 $ - $ -
Shares issued for
common stock subscribed
cash 329,906
services rendered 25,197
notes payable 1,477,084
in lieu of interest 68,476
Shares canceled 143
Shares reacquired (4,999)
Unrealized loss on
investments (3,983)
Net loss
___________ __________ ____________
Balance, December 31, 1996 8,184,987 (3,983) -
Shares issued for
cash and notes 1,923,916 (1,000,000)
services rendered 1,489,846
notes payable conversion 884,052
in lieu of interest 49,365
Shares canceled (150,622)
Change in unrealized loss on
investments 3,983
Net loss
___________ __________ ____________
Balance, December 31, 1997 12,381,544 $ - $(1,000,000)
=========== ========== ============
The accompanying notes are an integral part of these financial statements.
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Continued)
For the Years Ended December 31,
Accumulated
Deficit Total
Balance, December 31, 1995 $ (7,386,446) $(1,096,401)
Shares issued for
common stock subscribed -
cash 329,975
services rendered 25,200
notes payable 1,477,380
in lieu of interest 68,489
Shares canceled -
Shares reacquired (5,000)
Unrealized loss on
investments (3,983)
Net loss (1,422,601) (1,422,601)
____________ ____________
Balance, December 31, 1996 (8,809,047) (626,941)
Shares issued for
cash and notes
services rendered 1,490,144
notes payable conversion 884,233
in lieu of interest 49,375
Shares canceled (150,652)
Change in unrealized loss on
investments 3,983
Net loss (3,640,241) (3,640,241)
____________ ____________
Balance, December 31, 1997 $(12,449,288) $(1,065,680)
The accompanying notes are an integral part of these financial statements.
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1997 1996
Cash flows from operating activities
Net loss $ (3,640,241) $ (1,422,601)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 55,600 44,458
Write-off of notes receivable from officers
and stockholders 97,770 -
Interest expense recorded upon issuance or
subscription of common stock 49,375 68,489
Consulting, promotional services, and
compensation expense recorded upon
issuance or subscription of common
stock 1,490,144 25,200
Net gain on legal settlements (70,652) (375,822)
(Increase) decrease in
Accounts receivable (32,376) (22,313)
Inventories 21,237 (84,311)
Prepaid expenses and other current assets 70,984 (70,134)
Other assets (4,974) (2,850)
Increase (decrease) in
Accounts payable 172,250 (60,092)
Accrued payroll and payroll taxes 127,021 60,039
Accrued interest 62,708 (45,826)
Other accrued liabilities (126,922) (161,374)
____________ _____________
Net cash used in operating activities (1,728,076) (2,047,137)
____________ _____________
Cash flows from investing activities
Issuance of notes receivable (100,000) (26,614)
Purchase of furniture and equipment (71,213) (127,484)
Purchase of investment in real estate (19,107) (185,655)
Purchase of investments in fixed maturities - (1,253,890)
Proceeds from sale of investments in fixed
maturities 653,890 600,000
____________ _____________
Net cash provided by (used in) investing
activities 463,570 (993,643)
____________ _____________
The accompanying notes are an integral part of these financial statements.
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
1997 1996
Cash flows from financing activities
Net advances from officer $ 68,759 $ -
Proceeds from note payable - related party 75,000 -
Payments on note payable - related party (1,024) (10,000)
Proceeds from the issuance of notes payable to
stockholders 348,000 2,910,660
Payments on notes payable to stockholders (239,000) (60,700)
Payments on capital lease obligations (8,847) (3,420)
Proceeds from the sale of common stock 924,419 329,975
Payments on the purchase of common stock - (5,000)
____________ _____________
Net cash provided by financing activities 1,167,307 3,161,515
____________ _____________
Net increase (decrease) in cash and cash
equivalents (97,199) 120,735
Cash and cash equivalents, beginning of year 126,520 5,785
____________ _____________
Cash and cash equivalents, end of year $ 29,321 $ 126,520
============ =============
Supplemental disclosures of cash flow information
Interest paid $ 26,885 $ 4,045
============ =============
Taxes paid $ 1,600 $ -
============ =============
Supplemental schedule of non-cash investing and financing activities
The Company issued 2,980,288 and 30,400 shares of its common stock for
services valued at $1,490,144 and $25,200 during the years ended December 31,
1997 and 1996, respectively.
The Company issued 1,811,833 and 2,960,254 shares of its common stock in
satisfaction of convertible promissory notes payable totaling $884,233 and
$1,477,380 during the years ended December 31, 1997 and 1996, respectively.
The Company issued 98,750 and 135,421 shares of its common stock in lieu of
accrued interest on notes payable amounting to $49,375 and $68,489 during the
years ended December 31, 1997 and 1996, respectively.
The Company entered into capitalized lease obligations of $13,000 and $54,923
during the years ended December 31, 1997 and 1996, respectively.
The accompanying notes are an integral part of these financial statements.
ULTRA SHIELD PRODUCTS INTERNATIONAL, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1 - SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Ultra Shield Products International, Inc. ("Ultra Shield" or the "Company")
was incorporated on March 21, 1989 under the laws of the State of Delaware.
The Company's wholly-owned subsidiary, Ultra Shield Products International,
Inc. ("OLD - Ultra Shield") was incorporated on April 29, 1987 under the laws
of the State of California. During the year ended December 31, 1994, the
Company issued shares of its common stock in connection with the conversion of
the remaining 5% of common shares of OLD - Ultra Shield into common shares of
the Company (see Note 6).
Ultra Shield invents, manufactures, and distributes environmentally preferred
specialty chemical and biological formulations for the restaurant, hotel and
motel industry, consumer/retail, automotive appearance, fire fighting, and
commercial/industrial markets. Ultra Shield is known for its technological
development of "cross linking carbon molecules" and the application of this
technology to cleaners, degreasers, dishwashing, and graffiti removing agents
as well as coating and renovation chemical processes.
Principles of Consolidation
The consolidated financial statements include the accounts of Ultra Shield and
its wholly-owned subsidiary, OLD - Ultra Shield. All significant intercompany
accounts and transactions have been eliminated in the accompanying
consolidated financial statements.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate
continuation of the Company as a going concern. However, during the year
ended December 31, 1997, the Company had a net loss of $3,640,241, had
negative cash flows from operations of $1,728,076, and as of December 31,
1997, the Company's current liabilities exceeded its current assets by
$1,349,746 and it had a stockholders' deficit of $1,065,680. In addition, as
of December 31, 1997, the Company is in technical default on $312,260 of notes
payable - stockholders (see Note 4), and the Internal Revenue Service has
assessed the Company $571,680 for back payroll taxes, fines, and penalties for
the tax years ended December 31, 1994, 1995, and 1996 for which the Company is
contesting and believes the amount due is approximately $30,000 (see Note 6).
In the event that the Company is required to make payments on these debts, it
does not have the cash flow to satisfy these obligations. The Company's
ability to generate positive cash flows depends on its ability to maintain a
level of revenues sufficient to meet its obligations and sustain its
operations. The Company has had limited sales to date and has sustained
substantial operating losses since inception due to its inability to generate
a sufficient level of revenues. Consequently, the Company's primary source of
cash has been from the sale of its common stock and the issuance of notes
payable. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the outcome
of which is indeterminable. In addition, the Company's attainment of
profitable operations is dependent upon achieving a level of revenues adequate
to support the Company's cost structure. In view of these matters,
realization of a major portion of the assets in the accompanying balance sheet
is dependent upon the Company's ability to achieve profitable operations and
obtain sufficient capital to fund its operations. The financial statements do
not include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classifications of liabilities that
might be necessary should the Company be unable to continue its existence.
Management is in the process of negotiating with several national, fast-food
restaurant chains for the installation of its blend centers into the
restaurants. The blend centers are used to proportion and dispense the
environmentally preferred specialty chemicals sold by the Company. The new
markets include fire departments, grocery stores, brake, mufflers, auto body
shops and garages, the aerospace industry, and machine shops due to the South
Coast Air Quality Management District approval of the Company's clear air
solvent.
Management believes that the current cash and additional capital that it
expects to raise through the sale of debt and equity securities along with the
cash generated from the sale of its products will sustain the Company for the
foreseeable future.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly-liquid investments purchased with original maturities of three months
or less to be cash equivalents.
Inventories
Inventories, which consist primarily of finished goods, are stated at the
lower of cost (which is determined using the first-in, first-out method) or
market.
Furniture and Equipment
Furniture and equipment are stated at cost. The Company provides for
depreciation and amortization using accelerated and straight-line methods over
the estimated useful lives as follows:
Machinery and equipment 5 to 7 years
Computers 5 years
Furniture and fixtures 7 years
Office equipment under capital leases 5 years
Trade show equipment 5 years
Leasehold improvements 7 years
Revenue Recognition
Revenue is recognized upon the shipment of products to the customer.
Advertising Costs
For the years ended December 31, 1997 and 1996, the Company incurred
approximately $633,000 and $271,000, respectively, for advertising and
promotional expense. A majority of these expenditures were related to the
Company's sponsorship of racing teams through the Company's reverse
sponsorship program displaying its customers' logos on these racing vehicles.
Concentrations of Credit Risk
The Company sells its products to customers throughout the United States. The
Company's sales are not materially dependent on a single customer or small
group of customers. The Company performs ongoing credit evaluations of its
customers. The Company maintains reserves for potential credit losses based
on historical credit write-offs.
Patent Risk
The Company's proprietary formulae and related products are not protected by
any patents or licenses; however, the Company has safeguarded against reverse
engineering of its proprietary formulae. To the extent that the Company's use
of such proprietary formulae is ever successfully challenged or such
proprietary formulae is duplicated, the Company's future results of operations
would be materially adversely affected.
Income Taxes
The Company accounts for income taxes under the liability and asset method,
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts
at each period end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized. The
provision for income taxes represents the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
Common Stock Issued for Services Provided
Common stock issued for services is valued at the estimated fair value of such
services as determined by management of the Company. Management considers the
fair value of such services by reference to prior sales of common stock for
cash.
Loss Per Share
For the year ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Basic
losses per share is computed by dividing losses available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted losses per share is computed similar to basic losses per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares had
been issued and if the additional common shares were dilutive. Earnings per
share for 1996 has been restated to conform with SFAS No. 128.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's
financial instruments, including cash and cash equivalents, accounts
receivable, accounts payable, and other accrued liabilities, the carrying
amounts approximate fair value due to their short maturities. The amounts
shown for notes payable and capital lease obligations also approximate fair
value because current interest rates offered to the Company for notes payable
and capital lease obligations of similar maturities are substantially the
same.
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 disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
NOTE 2 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1997 consisted of the following:
Machinery and equipment $ 186,612
Computers 65,159
Furniture and fixtures 82,732
Office equipment under leases (Note 6) 67,923
Trade show equipment 21,369
Leasehold improvements 49,136
___________
472,931
Less accumulated depreciation and amortization 268,036
___________
Total $ 204,895
===========
NOTE 3 - INVESTMENT IN REAL ESTATE
During the year ended December 31, 1996, the Company purchased rental property
in Montana. There was no rental income generated during the years ended
December 31, 1997 and 1996.
NOTE 4 - NOTES PAYABLE - STOCKHOLDERS
Notes payable to stockholders at December 31, 1997 consist of convertible
promissory notes which bear interest at 10% per annum. The notes are
unsecured. Each note is issued for a term of six months and is convertible,
at the option of the holder, into units at $.50 per unit. Each unit consists
of one share of the Company's common stock and one each of the A and B
warrants (see Note 7). As of December 31, 1997, $312,260 of these notes were
in technical default. Subsequent to December 31, 1997, $20,000 of these notes
plus accrued interest were converted to the Company's common stock. In the
event that the note holder elects to have the note repaid rather than
converted to common stock, the Company may not have the funds available to
repay the notes.
NOTE 5 - RELATED PARTY TRANSACTIONS
In December 1997, the Company issued 2,666,666 units of its securities in
exchange for a promissory note from a principal stockholder of the Company
collateralized by certain assets of the stockholder. The promissory note is
in the amount of $1,000,000, bearing interest at 10% per annum, and is due on
or before December 11, 1998. The stockholder is required to augment the
collateral to ensure that the promissory note remains fully collateralized in
the event that the value of the collateral declines below the face amount of
the note.
During the year ended December 31, 1997, the Company's President borrowed
$75,000, from a bank, which in turn was advanced to the Company. The note
bears interest at prime (8.5% at December 31, 1997) plus 1.25% per annum and
requires monthly principal and interest payments of $711 with all accrued
interest and principal due in November 2017. The note is collateralized by
the Company's real estate investment and is guaranteed by the Company.
Required principal payments under the note payable are as follows:
Year Ending
December 31,
1998 $ 1,291
1999 1,417
2000 1,561
2001 1,720
2002 1,896
Thereafter 66,091
_________
Total $ 73,976
=========
The Company's President advanced $68,759 to the Company for expenses paid on
behalf of the Company. The advances are non-interest bearing and are due on
demand.
During the year ended December 31, 1997, the Company purchased a race truck
for advertising and promotion for $21,700 from C.W. Race Truck Construction.
From time to time, the Company rents the truck to independent drivers
displaying logos of the Company's customers for advertising and promotion as a
part of the Company's reverse sponsorship program.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities for its corporate and operations offices
under long-term lease agreements. The Company also leases certain equipment
under non-cancelable operating and capital lease arrangements.
The following is a schedule by years of future minimum rental payments
required under these long-term lease agreements:
Year Ending Operating Capital
December 31, Leases Leases
1998 $ 95,422 $ 26,674
1999 57,777 22,330
2000 9,339 19,664
2001 1,688 10,254
2002 - 294
__________ __________
$ 164,226 79,216
==========
Less amount representing interest 23,560
__________
55,656
Less current portion 14,926
__________
Long-term portion $ 40,730
==========
For the years ended December 31, 1997 and 1996, total rent expense was $70,643
and $70,258, respectively.
Employment Agreements
The Company has entered into employment agreements with the Company's
President that expire in 2006. The President will receive an annual salary of
$125,000 plus additional compensation increases of 5% per year as long as the
Company has net income, as defined, for the previous year. In addition, the
agreement provides for a bonus in the form of stock and/or cash in amount of
2% of net income. During the year ended December 31, 1997, the President was
issued 2,000,000 shares of the Company's common stock for past services
rendered and future services to be performed. The stock is restricted for
sale for two years and subject to forfeiture of such securities in the event
that the President fails to be employed by the Company through September 17,
1999. During 1996, the President was paid a cash bonus of $60,000.
On September 25, 1998, the Company's President was terminated for cause. The
2,000,000 shares were forfeited upon the President's termination.
Private Placement Exemptions
The Company's private placements of securities have been issued in
transactions intended to be exempt from registration under the 1933 Securities
Act pursuant to the provisions of Section 4(2) and Regulation D promulgated
thereunder. These rules include factors pursuant to which one or more private
placement transactions may be integrated as part of other offerings. In the
event any of the Company's private placement transactions, including private
placement transactions undertaken by the Company since the transactions
referred to above, were deemed to be integrated, it is possible that the
exemption from the registration requirements of the 1933 Securities Act would
not be available for one or more of those offerings. While management and
legal counsel believe that each of the Company's private offerings were exempt
from the registration requirements of the 1933 Exchange Act, in the event that
one or more of such transactions are determined not to have been exempt from
such registration requirements, the purchasers may have the right to seek
rescission of the sales and/or seek money damages against the Company. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Exchange of Shares
During 1994, a small, hostile group of holders of a significant percentage of
the Company's voting securities claimed control of the Company. During their
short and disputed possession of the Company's offices, books, and records,
these individuals conducted an informal exchange of Company securities, in the
form of units identical to those traded publicly, for the remaining shares of
the California entity (which shares represented approximately 5% of the
California subsidiary then outstanding). Such units currently held by the
former remaining OLD - Ultra Shield stockholders have not been registered
pursuant to the Securities Act of 1993, as amended.
While the Company realizes that it may have exposure to rescission liability
relative to the aforementioned informal, unregistered exchange, it believes
that, in the best interests of all of its securities holders, such a
rescission should not occur for the following reasons: (i) there is no market
for the California entity's securities; (ii) such entity has no operations or
assets, and is, in fact a suspended entity; (iii) the exchange occurred four
years ago, thus making the Rule 144(k) exception from registration arguably
available to such securities; (iv) had there been a formal vote on whether to
approve the aforementioned exchange (with the associated registration of the
exchanged securities), the Company, as then owner of nearly 95% of the voting
securities of the California entity, was in a position to control the approval
of the exchange; and (v) such holders are presently on equal footing with all
other investors in the Company and its predecessor.
Payroll Taxes
The Internal Revenue Service has assessed the Company $571,680 for back
payroll taxes, fines, and penalties for the tax years ended December 31, 1994,
1995, and 1995. The Company has filed an appeal, believes that it can
successfully defend against the claims, and believes the amount due is
approximately $30,000. However, the Company has accrued $200,000 in the event
it is unsuccessful in defending its position.
NOTE 7 - STOCK AND STOCK OPTIONS
Preferred Stock
The Company has the authority to issue up to 10,000,000 shares of preferred
stock, $.0001 par value. The Company has authority to issue all or any
portion of the unissued preferred stock in one or more series and to fix the
rights, preferences, privileges, and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms of redemption, and liquidation
preferences. There are no preferred shares outstanding at December 31, 1997.
Warrants
The Company has issued its common stock in units to certain investors (see
Note 4) which consist of one share of the Company's common stock, one Series A
warrant, and one Series B warrant. The Series A warrant allows the purchaser
to acquire one share of the Company's common stock at $4.00 per share. The
Series B warrant allows the purchaser to acquire one share of the Company's
common stock at $7.00 per share. Series A and Series B warrants totaling
19,562,059, each, were outstanding to purchase a total of 39,124,118 shares of
common stock at December 31, 1997. Series A and Series B warrants expire
February 6, 1999.
Incentive Stock Option Plan
On March 28, 1989, the Company adopted an Incentive Stock Option Plan (the
"Plan") under which options granted are intended to qualify as "incentive
stock options" under Section 422A of the Internal Revenue Code of 1954, as
amended (the "Code"). Pursuant to the Plan, options to purchase up to 100,000
shares of the Company's common stock may be granted to employees of the
Company. The Plan is administered by the Board of Directors, which is
empowered to determine the terms and conditions of each option, subject to the
limitation that the exercise price cannot be less than the market value of the
common stock on the date of the grant (110% of the market value in the case of
options granted to an employee who owns 10% or more the Company's outstanding
common stock), and no option can have a term in excess of 10 years (5 years in
the case of options granted to an employee who owns 10% or more of the
Company's outstanding common stock). As of December 31, 1997, no options have
been granted or are outstanding under this Plan.
SFAS No. 123 establishes and encourages the use of the fair value based method
of accounting for stock-based compensation arrangements under which
compensation cost is determined using the fair value of stock-based
compensation determined as of the date of grant, and is recognized over the
periods in which the related services are rendered. SFAS No. 123 also permits
companies to elect to continue using the current implicit value accounting
method specified in Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the implicit value based method
and will disclose the pro forma effect of using the fair value based method to
account for its stock-based compensation, if and when, any stock options are
granted under the Company's incentive stock option plan.
Common Stock Transactions
During the year ended December 31, 1997, the Company completed the following
significant common stock transactions:
* issued for legal services 108,568 shares for an aggregate value of $54,284.
* issued for additional compensation to the President and stockholder
2,000,000 units for an aggregate value of $1,000,000.
* issued for additional compensation and bonuses to employees 348,550 shares
for an aggregate value of $174,275.
* issued for promotional events, services, and race car sponsorships 523,170
shares for an aggregate value of $261,585.
* Cancelled 301,303 shares that were collateral for a loan to the Company's
ex-Chief Financial Officer and stockholder. The stockholder was in default
on the loan. Pursuant to the promissory note, the Company was entitled to
redeem and cancel the issued common stock.
NOTE 8 - INCOME TAXES
Income tax expense was $1,600 for both the years ended December 31, 1997 and
1996 and consists of the minimum State of California franchise taxes.
Income tax expense for the years ended December 31, 1997 and 1996 differs from
the amounts computed by applying a United States Federal income tax rate of
34% to pretax loss as a result of the following:
1997 1996
Computed "expected" tax benefit $(1,141,948) $ (486,409)
Increase in income taxes resulting from
Change in the valuation allowance
for deferred tax assets allocated to
income tax expense 1,141,948 486,409
State income taxes 1,600 1,600
___________ ____________
Total $ 1,600 $ 1,600
=========== ============
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 1997 are presented below. Deferred
tax liabilities at December 31, 1997 are not significant:
Deferred tax assets
Deferred officers' salary $ 400,000
Net operating loss carryforwards 3,813,226
Other 68,296
___________
Total gross deferred tax assets 4,281,522
Less valuation allowance 4,043,005
___________
238,517
Deferred tax liabilities 238,517
___________
Net deferred tax assets $ -
===========
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $9,462,000 and $6,744,000 for federal and state tax reporting
purposes, respectively, which if not utilized to offset future taxable income,
will expire through 2012. The Tax Reform Act of 1986 includes provisions
which may limit the net operating loss carryforwards available for use in any
given year if certain events, including changes in stock ownership, should
occur.
NOTE 9 - LEGAL SETTLEMENTS
As of December 31, 1995, the Company was a party to several lawsuits and had
estimated losses from these suits in the amount of $550,822. During the year
ended December 31, 1996, the Company reached settlements with the other
parties involved in the lawsuits, and as a result of these settlements, the
Company has reflected a recovery on legal settlements of $375,822 in its
statement of operations.
In May 1996, the Company entered into a settlement agreement with former
stockholders. Pursuant to the settlement agreement, the Company was entitled
to rescind certain loan and consulting agreements, awarded a money judgement
of $16,500, entitled to cancel the 511,656 shares of the Company's stock
originally issued to the former stockholder, and entitled to recover legal
fees incurred relating to the case of $75,762. The money judgement of $16,500
and the legal fees to be recovered of $75,762 have not been recorded as of
December 31, 1997. These amounts will be reflected in the statement of
operations in the year realized. The 511,656 shares of common stock have been
canceled as of December 31, 1996.
In December 1996, the Company entered into a settlement agreement with a
former stockholder. Pursuant to the settlement agreement, the Company agreed
to pay $50,000 to settle the suit, and the former stockholder agreed to return
761,641 shares of the Company's common stock previously issued. This amount
was paid by the Company as of December 1996, and the 761,641 shares of common
stock have been canceled as of December 31, 1996.
In January 1997, the Company entered into a settlement agreement with a former
stockholder. Pursuant to the settlement agreement, the Company agreed to pay
$125,000 to settle the suit, and the former stockholder agreed to return
162,000 shares of the Company's common stock previously issued. The $125,000
was paid in January 1997 and is included in other accrued liabilities as of
December 31, 1996. The 162,000 shares have been canceled as of December 31,
1996.
In February 1998, the Company's President entered into a settlement agreement
to pay $80,000 in the form of a note payable with interest at 10% per annum.
The note is payable $5,000 in April 1998, $50,000 in July 1998, and
installment payments of $1,000 per month until the remaining principal and
interest is paid in full. In addition, the settlement required that the
President provide as collateral 271,000 shares of the Company's issued,
outstanding, and tradable common stock. The note payable was recorded as
of December 31, 1997. The Company had originally indemnified the President
and agreed to pay the judgement and issued 271,000 of its common shares to the
President, which were issued for the collateral. On October 22, 1998, the
Company reversed its decision and will not pay the judgement. In addition,
the Company put a stop order on the 271,000 common shares issued for the
collateral.
The Company is also involved in certain legal proceedings and claims that
arise in the normal course of business. Management does not believe that the
outcome of these matters will have a material adverse effect on the Company's
financial position or results of operations.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Consolidated Statements of Operations,
Stockholders' Deficit and Cash Flows of Ultra Shield Products International,
Inc. for the year ended December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,321
<SECURITIES> 0
<RECEIVABLES> 97,298
<ALLOWANCES> 8,000
<INVENTORY> 256,308
<CURRENT-ASSETS> 374,927
<PP&E> 472,931
<DEPRECIATION> 268,036
<TOTAL-ASSETS> 792,408
<CURRENT-LIABILITIES> 1,724,673
<BONDS> 0
0
0
<COMMON> 12,383,608
<OTHER-SE> (1,000,000)
<TOTAL-LIABILITY-AND-EQUITY> 792,408
<SALES> 369,333
<TOTAL-REVENUES> 369,333
<CGS> 230,657
<TOTAL-COSTS> 3,955,177
<OTHER-EXPENSES> 86,171
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 138,968
<INCOME-PRETAX> (3,638,641)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (3,640,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,640,241)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
