UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934; For the Fiscal Year Ended: June 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-24682
WORLDWIDE PETROMOLY, INC.
(Exact name of registrant as specified in its charter)
Colorado
84-1125214
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
1300 Post Oak Boulevard, Suite 1985, Houston, Texas 77056
(Address of principal executive offices, including zip code)
(713) 892-5823
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
N/A
Securities registered pursuant to 12(g) of the Exchange Act:
Title of Each Class
Common Stock, no par value
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing requirements for the past 90
days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for the year ended June 30, 1999 were $520,000. The aggregate
market value of Common Stock held by non-affiliates of the registrant as of
October 4, 1999, based upon the last reported sales prices on the OTCBB, was
$7,469,936. As of September 10, 1999, there were 20,690,915 shares of Common
Stock outstanding.
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Table of Contents
PART I
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7. Financial Statements 15
Item 8. Changes in and Disagreements with Accountant
on Accounting and Financial Disclosure 15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 15
Item 10. Executive Compensation 17
Item 11. Security Ownership of Certain Beneficial Owners and Management 19
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits, and Reports on Form 8-K 20
SIGNATURES 21
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PART I
Item 1. BUSINESS
HISTORICAL
Worldwide PetroMoly, Inc., formerly known as Ogden, McDonald & Company (the
"Company") was incorporated under the laws of the State of Colorado on October
13, 1989. The Company was originally formed for the primary purpose of seeking
out acquisitions of properties, businesses, or merger candidates, without
limitation as to the nature of the business operations or geographic area of the
acquisition candidate. In August 1994, the Company filed a registration
statement with the Securities and Exchange Commission on Form 10-SB, wherein it
registered its common stock under Section 12(g) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). As a result, the Company became a
reporting company under the Exchange Act, which management believed enhanced the
Company's ability to attract a suitable private merger or acquisition candidate.
Until July 22, 1996, when the Company acquired 100% of the outstanding
common stock of Worldwide PetroMoly Corporation, the Company had no operations
other than issuing stock to its original shareholders. As such, the Company
was a "shell" company whose sole purpose was to locate and consummate a merger
or acquisition with a private entity. On July 22, 1996 the Company effected a
3-for-1 stock split which resulted in 1,500,000 shares being outstanding. Also
on July 22, 1996, the Company completed a reverse acquisition of 100% of the
outstanding common stock of Worldwide PetroMoly Corporation in exchange for
14,507,500 shares of the Company's Common Stock which resulted in the
shareholders of Worldwide PetroMoly Corporation acquiring approximately 90.6% of
the shares outstanding in the Company. The Company then changed its name to
Worldwide PetroMoly, Inc.
Unless the context otherwise requires, the term "Company" as used
herein refers to the Company and its wholly-owned subsidiary, Worldwide
PetroMoly Corporation.
BUSINESS--GENERAL
The Company is engaged in the business of manufacturing, marketing and
distributing a line of molybdenum fortified lubricant products called
PetroMoly (tm), which uses the Company's proprietary technology called MOLYTECH
(tm) to blend an extended drain, high performance engine oil designed to enhance
and maintain all types of engines at their peak levels. The Company has
formulated products for use in Indy style racing cars, commercial fleets and
retail consumer use. One of the Company's principal promotional efforts is its
INDY style racing car sponsorship of race car drive Robby Unser who drives the
PetroMoly race car, which uses the racing formulation of PetroMoly with
Molytech.
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MARKETING--GENERAL
Prior to the completion of the Company's private offering during July
1996, the Company had focused its efforts on product development, field
testing and the development of a small customer base to acquire testimonial
support for the product technology. The Company's immediate focus is on
planning for a regional retail campaign, while adding new racing, industrial
and commercial customers to its customer base.
The industrial and commercial sales process takes a minimum of three to
six months because such customers typically want to test the Company's products
for 90 days before making any decisions. Some of the Company's current
customers are Continental Airlines, Enron, American Equipment, a division
of Flour Daniels, Americana Energy, Mooney Oil, the City of Coral Springs,
Bennett Auto Supply and The Oil Connection Lube Centers.
Based on various tests which have been conducted, the Company believes that
its product line offers several competitive advantages over other products.
These benefits include an increase in the time between oil changes, an increase
in fuel economy, longer engine life, improved engine performance, and an
ability to substantially reduce harmful exhaust emissions, engine wear and
friction.
Currently nearly all of the Company's personnel are involved in marketing
the Company's products. The target markets are racing cars, industrial,
commercial user markets, and consumer markets for passenger cars and light
trucks. The Company also has begun to approach the direct retail markets
through the Company's sales personnel. The Company is seeking premium
shelf space in automobile parts retail chains and lube center chains. The
Company desires to sell PetroMoly (tm) Oil Treatment using various mediums
including television, radio and print advertisements., and is presently seeking
marketing alliances for this purpose.
Marketing--Internet and E-Commerce
The Company's web site is www.petromoly.com. The U.S. Bureau of Statistics
has forecasted that the average U.S. consumer who owns a computer will make 20%
of their purchases on-line by the year 2002, and that usage is expected to grow
with each successive year.
In February 1999, the Company entered into an agreement with the principals
of Internet Billing Solutions, Inc. ("IBS"), a company highly experienced and
successful in the field of e-commerce. The principals of IBS will provide
consulting service for all of the Company's Internet activities, which includes
the revamping of the Company's Internet web site, and making it easier and more
attractive for on-line customers to purchase products. Existing industrial
customers will be able to re-order products on line, and can issue purchase
orders as well as check on their individual account status. The site is
scheduled to be a secured site, and will be state of the art on technology.
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ENGINE OIL AND OIL ADDITIVE PRODUCTS
The Company currently offers the following products for the markets
indicated:
1. Racing Car Motor Oil - For the professional competitive racing market
which includes Indy style racing as well as NASCAR and strait track competition.
2. Passenger and Other Automotive Oil Additive - PetroMoly Oil Treatment -
This product is sold in sixteen ounce containers to be added at every oil
change.
3. Passenger Cars, Light Duty Trucks, Vans and Utility Vehicles - SAE HP
10W-30, HP 5W-30, HP 20W-50, and LDF SAE 15W-40.
4. Industrial Engine Oil - HD SAE 40 Engine Oil - This was the Company's
first product and it is used as a general purpose industrial oil. It is
available in one quart containers, fifty-five gallon drums and in bulk
shipments.
5. Railroads - HD SAE 40 RR Engine Oil - The railroad industry is a major
market for the Company. The Company has received favorable test results from
Kyle Railroad, North Coast Railroad and Washington Central Railroad. This
product is available in fifty-five gallon drums up to rail car quantities.
6. Natural Gas Compressor Applications - NGC SAE 30 or SAE 40, Premium AA
and LA. The Company has received favorable on this specialized product, from
the CBS co-generation plant at their Los Angeles studio, demonstrating an
ability to triple drain intervals for servicing the equipment. This product is
available in fifty-five gallon drums up to rail car quantities.
PATENTS, TRADEMARKS AND LICENSES
During November, 1994, the Company filed an application with the United
States Patent and Trademark Office for a patent on PetroMoly. During December
1995, the Company received a Notice of Allowability indicating that a patent
would be granted for PetroMoly provided that certain formalities are met. The
Company has filed a continuance for three years to protect the disclosure in the
patent application from the public. The Company presently has plans to
re-file an application if Management determines that disclosing the Company's
intellectual property in the form of a patent is in the best interest of the
Shareholders. The Company also holds the rights to the registered trademark
"PetroMoly (tm)" and "Molytech (tm)."
COMPETITION
Management believes that there is no other fully formulated motor oil like
PetroMoly on the market. The major competitive products are the synthetic
oils; however, the Company believes their additional expense for synthetics
is often not justified by actual benefits with out Molytech in their
formulations. In many industrial applications there are also operational
limitations to the synthetic oils. Conventional motor oils differ according to
their additive packages. Most general use oils are similar in their makeup. As
a result, there is heavy competition in the consumer oils market due to the
similarity of the products. Pennzoil has been the market share leader in
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passenger car motor oils for 12 years. It introduced its first synthetic motor
oil, Performax 5W-50, in late 1992. Pennzoil has a nationwide distribution
system and they continue to expand to the international market. The Quaker
State Corporation is another major competitor in the passenger car motor oil
industry with distribution and products very similar to Pennzoil. The
industrial market has substantially less competition due to the unique
operational requirements of many industrial applications. In these
applications the customers are less sensitive to the purchase price of the
product and base their purchasing decisions on extensive real-life testing to
determine operational advantages and cost savings from prospective products.
This process is more time consuming than traditional consumer sales due to its
one-on-one sales requirements. The Company intends to compete both in the
industrial and consumer motor oil markets by offering a product which the
Company believes provides significant benefits over competing products. The
major focus in the past has been in the commercial and industrial areas, and now
the Company is ready for a significant retail exposure.
MANUFACTURING
Fully formulated PetroMoly is not a synthetic (except for its racing
formulations), has no exotic ingredients, and is relatively inexpensive to
produce. The secret to PetroMoly's success is the proprietary blending
process which combines common components with high-grade base oil stock.
To provide rapid response to market needs without significant capital
investment, the Company has chosen to use existing contract blending companies
to produce the Company's products. The primary blending facility at this
point is Mega Lubricants, Inc., located in Houston, Texas. The Company also
uses Forsythe Lubrication Association, Ltd. in Canada as a blender. Mega
Lubricants is producing all of the Company's packaged goods (i.e. quarts and
gallons) for the passenger car and light truck markets. Forsythe is
producing railroad products, such as 15W-40 and 10W-30. LSC in California and
South Coast Terminals in Texas are also under contract for production and will
expand as the market grows. With these producers, the Company is able to
produce and ship products economically to any locality in the United States or
Canada. Additional manufacturers will be selected as necessary.
RESEARCH AND DEVELOPMENT
The Company spent approximately $39,000 in 1999 and $59,000 in 1998 on
research and development , in connection with methods of formulation and
production of its products.
EMPLOYEES
The Company presently has 11 employees, of which 4 are in management
positions, including corporate and administrative operations, and 7 are engaged
in sales.
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MAJOR CUSTOMERS
During the year ended June 30, 1999, approximately 50% of the Company's
revenues were received from 2 customers , as compared to June 30, 1998 where
17% of the Company's revenues were received from one customer.
Item 2. PROPERTIES
The Company maintains its corporate offices at 1300 Post Oak Boulevard,
Houston, Texas 77056. The Company rents approximately 932 square feet at this
location and pays approximately $1,200 per month for rent pursuant to a lease,
which expires on December 14, 2001. The Company also subleases approximately
1,200 square feet at this location and pays approximately $1,500 per month
for subleasing this space pursuant to a sublease, which expires on December 31,
1999. The Company also rents approximately 5,184 square feet at 757 Kenrick,
Houston, Texas 77060, pursuant to a lease which requires monthly payments of
approximately $2,330 and which expires October , 2002. The Company believes
that its properties are suitable and adequate for its present and
contemplated operations.
Item 3. LEGAL PROCEEDINGS
The Company is not currently a party to any pending litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held in Houston,
Texas on May 19, 1999 for the purpose of voting on the proposals described
below. Proxies for the meeting were solicited pursuant to Regulation 14A under
the Securities Act of 1934 and there were no solicitations in opposition to
management's solicitation.
The holders of common stock approved the election of the following three
directors, each to serve for a term of one year:
Votes For Votes Against Abstaining
Norton Cooper 11,852,198 -0- 4,400
Gilbert Gertner 11,852,998 -0- 3,600
Lance Rosmarin 11,852,998 -0- 3,600
The holders of common stock ratified the appointment of Jackson & Rhodes,
P.C. as the Company's independent auditor for the fiscal year ending June 30,
1999 by the following vote:
Votes For 11,843,598
Votes Against 8,100
Abstaining 4,900
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is currently traded on the over-the-counter
bulletin board ("OTC BB") under the symbol "MOLY". The following table sets
forth, for the quarters indicated, the reported high and low closing bid
quotations for the common stock of the Company as reported on the OTC BB . The
bid prices reflect inter-dealer quotations, do not include retail markups,
markdowns or commissions and do not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
High Bid Low Bid
1998
<S> <C> <C>
First Quarter $ 2.00 $ 1.00
Second Quarter $ 1.00 $ 1.00
Third Quarter $ 1-1/16 $ 13/16
Fourth Quarter $ 1-1/4 $ 11/16
1999
First Quarter $ 1-5/16 $ 7/16
Second Quarter $ 13/16 $ 3/8
Third Quarter $ 2-5/8 $ 1/2
Fourth Quarter $ 1-1/2 $ 7/8
</TABLE>
On October 4, 1999, the closing bid for the Common Stock as reported by the
OTCBB was $.75. On October 4, 1999, there were approximately 2,100 stockholders
of record of the Common Stock.
The Company has not paid, and the Company does not currently intend to pay,
cash dividends on its Common Stock in the foreseeable future. The current
policy of the Company's Board of Directors is to retain all earnings, if any, to
provide funds for the operation and expansion of the Company's business. The
declaration of dividends, if any, will be subject to the discretion of the Board
of Directors, which may consider such factors as the Company's results of
operations, financial condition, capital needs and acquisition strategy, among
others.
During the year ended June 30, 1999, the following transactions were
effected by the Company in reliance upon exemptions from registration under the
Securities Act of 1933 as amended (the "Act") as provided in Section 4(2)
thereof. Each certificate issued for unregistered securities contained a legend
stating that the securities have not been registered under the Act and setting
forth the restrictions on the transferability and the sale of the securities.
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No underwriter participated in, nor did the Company pay any commissions or fees
to any underwriter in connection with any of these transactions. None of the
transactions involved a public offering. The Company believes that each of the
persons had knowledge and experience in financial and business matters which
allowed them to evaluate the merits and risk of the purchase or receipt of these
securities of the Company. The Company believes that each of the persons were
knowledgeable about the Company's operations and financial condition.
In February, 1999, the Company sold 500,000 shares of common stock to an
investor for cash consideration of $.50 cents per share. In addition, the
Company granted the investor options to purchase common stock of the Company as
follows: (i) a three year option to purchase 750,000 shares of common stock at
an exercise price of $1.00 per share, which vests and is exercisable beginning
February, 2000, (ii) a three year option to purchase 375,000 shares of common
stock at an exercise price of $1.50, which vests and is exercisable beginning
February, 2000, and (iii) a three year option to purchase 375,000 shares of
common stock at an exercise price of $2.00, which vests and is exercisable
beginning February, 2000.
In January, 1999, the Company sold 100,000 shares of common stock to a
consultant for cash consideration of $.50 per share. At the same time, the
Company granted to this consultant an option to purchase up to 50,000 shares of
common stock at an exercise price of $.50 per share as consideration for
consulting services rendered.
In February, 1999, the Company issued 100,000 shares of common stock to
another consultant as a retainer for consulting services to be performed.
In February, 1999, the Company granted to another consultant an option to
purchase up to 30,000 shares of common stock at an exercise price of $.50 per
share as consideration for consulting services rendered.
In February, 1999, the Company issued a total of 215,000 shares of common
stock to non-management employees as incentive compensation.
In March, 1999, the Company issued 800,000 shares of common stock to a
sales and marketing promotion company, as consideration for the Company's
sponsorship of the PetroMoly racing car. Further, 200,000 additional shares
were issued and held in reserve, and may be delivered in part or in whole only
if the 800,000 shares already delivered do not have a value of at least
$1,600,000, (which equals $2.00 per share), on or about March 2, 2000. The
shares held in reserve are the maximum amount of additional shares that may be
delivered.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information Regarding and Factors Affecting Forward-looking Statements
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The Company is including the following cautionary statement in this Form
10-KSB to make applicable and take advantage of the safe harbor provision of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. Certain statements in this Form
10-KSB are forward-looking statements. Words such as "expects", "anticipates",
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. Such risks and
uncertainties are set forth below. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectation, beliefs or projections will result, be achieved, or be
accomplished. In addition to other factors and matters discussed elsewhere
herein, the following are important factors that, in the view of the Company,
could cause material adverse affects on the Company's financial condition and
results of operations: market acceptance and demand for the Company's products,
competitive factors, the ability of the Company to to obtain acceptable forms
and amounts of financing. The Company has no obligation to update or revise
these forward-looking statements to reflect the occurrence of future events or
circumstances.
Going Concern Qualification by the Company's Independent Auditor
The Company's independant auditor has included a going concern qualification
in the auditor's report. See, Financial Statements. The Company incurred net
operating losses for the two years ending June 30, 1999 and 1998. Operating
expenses and other financial obligations have been met, primarily, by the sale
of Company stock. There is no assurance that the Company will be able to
continue to sell stock to fund operations. These factors create substantial
doubt about the Company's ability to continue as a going concern.
RESULTS OF OPERATIONS -GENERAL
---------------------------------
In July 1996, the Company's operating subsidiary, Worldwide PetroMoly
Corporation, was acquired through a reverse acquisition by Ogden McDonald &
Company (former symbol-OGDM) preceded by approximately $4,000,000 of investment
capital to provide the Company adequate funding to build a foundation for growth
and industrial brand awareness of its new lubricating technology. Since the
acquisition of Worldwide PetroMoly Corporation, now a subsidiary, by the Company
(name changed to Worldwide PetroMoly Inc. Symbol-MOLY), the Company's structure
changed significantly to reflect the activities of its subsidiary. In its third
year of operation, the Company has streamlined various aspects of the sales
force and the Company's infrastructure. These activities included scaling down
the salaried sales personnel. The focus has been on expanding and improving the
product lines and developing lines of distribution to enhance sales volume,
spending the appropriate and necessary amount of capital for product
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certification and quality control, and initiating new concepts that further
display the Company's technology and product lines in new markets as well as
strengthen existing markets. The two areas of primary focus have shifted from
the commercial and industrial market, to the retail/passenger car market.
Management's strategy to gain retail acceptance and credibility began by
designing a specially formulated moly racing-oil designed for INDY style motors,
which was tested last year, saw a successful debut in the 1999 Indy Racing
League (IRL) including an eight place finish at the Indianapolis 500, and a
second place finish at the league's Atlanta race. The Company sponsored the
racecar driven by veteran driver Robby Unser, in which the Company's lubricants
were being successfully used to display its advanced technology. Also product
development successfully focused on applying the proprietary technology to
produce new products such as high performance gear oil treatment and straight
track oil for competition drag racing engines. The company also continued its
development of cutting oils for threading, armament oil to private label, a two
cycle engine oil additive for motorcycles and outboard motors, a moly-grease, an
emissions reducing fuel treatment, and a very effective oil additive called
PetroMoly Oil Treatment designed for automobiles and light trucks.
Other activities include: the redesigning and upgrading of the corporate
web site, product brochures, product labels and packaging; the purchasing of
additional operational equipment, printing investor brochures along with related
marketing materials. The Company also invested in lab equipment for the purpose
of further testing its oil treatment to document stringent scientific tests
required by the Federal Trade Commission to make claims on engine enhancements,
emissions reduction, and fuel economy improvement. The Company intends to use
the test results derived to promote this additive product on a highly creative
product awareness campaign that will support the retail distribution of the
Company's products.
The Company has continued field testing and objective lab testing of its
fully formulated engine oil, while several major multinational customers
continue evaluation tests of the PetroMoly products on their complex
high-end machinery and fleet vehicles. These tests have been complex
and time consuming, and the results have eastablished the effectiveness of the
Petromoly products. Management continues to anticipate an increase revenue and
the size of the customer base related to contracts and agreements. During the
past year, commercial sales concentration was targeting various industrial
leaders and massive fleet operators. For these larger customers there are
usually test periods that the PetroMoly products are subjected to which can last
anywhere from three months to a year, depending on each market and end-user.
Co-generation, bus and gas compressor engines, for example, are very expensive
and complex machinery, requiring constant monitoring. Therefore, the addition
of PetroMoly's new lubrication technology to an entire line or fleet is gradual.
The Company has received inquiries from motor vehicle fleet operators as a
result of the publicity associated with the test results that PetroMoly achieved
from subjecting its product to various independent US Environmental Protection
Agency sanctioned lab tests that documented and certified the superior results
of PetroMoly engine oil. Although these tests are costly as well as time
consuming, management believes they will add to the Company and further
its ability to market the Company's technology. The Environmental Protection
Agency listed PetroMoly in the Federal register February 1999 for
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achieving improvements in both fuel economy and emissions reduction. The
listing included the analysis performed in September 1998 when the Company
submitted its product to an EPA lab in Maryland at the request of the US Postal
Service. The test was successful, showing a 10 percent improvement in fuel
economy, 14 percent reduction in emissions and 37 percent reduction in used oil.
Business Week publication included the Company in it March 22 1999 issue in it
"developments to watch" section writing that the results of the EPA test was
"remarkable".
Other sales and marketing activities included: (i) a service agreement with
The City of Coral Springs to service the entire municipal fleet, (ii) a service
agreement with American Equipment Services (AMECO), a subsidiary of the Fluor
Corporation, to service its 600 machines at its South Texas location, (iii) a
service agreement with Pride Pipeline, Inc., a crude oil transportation company
in Houston, to service its 120 international trucks was continued (Pride
Pipleline experienced a 7% improvement in fuel economy on their fleet), (iv) a
Distributor Agreement with Mooney Oil based in Lansing, Michigan, (v) a purchase
agreement with American Energy to service their Co-Generation facility in Los
Angeles, CA., and (vi) a distributorship Agreement with Environmental Fleet
Services of California that will service the entire west coast for the Company.
Also the Company's web site, www.petromoly.com, has become a more popular
place for purchasing the Company's automotive products over this past year.
YEAR ENDED JUNE 30, 1999, COMPARED TO YEAR ENDED JUNE 30, 1998
Total net sales for the year ended June 30, 1999 were $519,682 as compared
to $301,150 for the year ended June 30, 1999, a 72% increase. The reason for
the increase is Management's decision to expand to retail markets in the last
two quarters of fiscal 1998 versus an earlier strategy to concentrate the sales
resources on procuring a few large industrial customers that are known industry
leaders. Sales discounts, selective sampling of products, together with long
attentive testing periods were however continued to be practiced to educate the
strategic customers about the new lubricant technology. The Company continued
to benefit from publicity from its association with Continental Airlines, and
this has led to discussions and testing with other industry related
companies. The Company also received a considerable amount of attention from
the IRL racing sponsorship, and racing results of race cars using PetroMoly
products. Management believes that the next fiscal year will prove that this
year's sales and marketing strategy will reward the Company with increased
revenues, PetroMoly product awareness and fiscal commitments.
Cost of sales as a percentage of net sales decreased from 71% for the year
ended June 30, 1998, to 63% for the year ended June 30, 1999. During the last
fiscal quarter of 1998 the Company negotiated lower costs of production with its
suppliers as well as more favorable freight rates for distribution. The Company
is currently interviewing several strategically located blending facilities
throughout North America, South America and Europe. Once these blending
agreements are in place, proximity will dictate lower freight cost thus reducing
the cost of goods. A more material drop in costs should be realized due to the
economies of scale with increased volume production runs. The demand associated
with the caliber of customers that the Company has been targeting, as well as
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the projected increase in retail demand from the anticipated brand awareness
campaign could qualify the Company for a decrease in the cost of production runs
with only a few, or in some cases one, consummated commitment.
Selling, general and administrative expenses increase to $3,300,609 for the
year ended June 30, 1999, from $2,372,476 for the year ended June 30, 1998. The
large increase in expenses was mainly due to 1999 non-cash transactional
payments in the form of shares and options granted as compensation to
non-employees totaling approximately $2,780,000 as compared to $578,000 for
fiscal 1998.
Interest income in 1998 was $104,822, and in 1999 was $4,518 due to the
interest received from the investments in certificates of deposit and commercial
paper with the Company's cash reserves. Miscellaneous expense increased from
$2,676 in the year ended June 30, 1998, to $34,196 in the year ended June 30,
1999,
Interest expense remind fairly constant from $15,709 in the year June 30,
1998, to $15,051 in the year ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES.
At June 30, 1999, the Company had positive working capital in the amount of
$1,446,745 including $936,340 in prepaid expense which included the Indy race
car sponsorship amortization as compared to working capital of $291,274 at June
30, 1998. The increase in working capital was primarily due to financing and
investment activities that management had caused for the benefit of the Company.
Operating activities for the year ended June 30, 1999 used cash of $950,395
compared to $1,531,725 for the year ended June 30, 1998. This use of cash was
principally the result of the Company's net loss each year, less the common
stock and options issued for services rendered and modified for the changes in
operating assets and liabilities, principally prepaid expenses and accounts
payable (see Statement of Consolidated Cash Flows page F-7).
Net cash provided from financing activities in 1999 was $1,142,562 of which
$1,096,900 were proceeds from options exercised. Net cash used from financing
activities in 1998 was $160,000. These activities involved repayments to the
Company on notes receivable from related parties.
As of June 30, 1999, the Company had no material commitments for capital
expenditures.
At June 30, 1999, the Company has recorded a full valuation allowance
against all deferred tax assets because it could not determine whether it was
more likely or not that the deferred tax asset would be utilized.
For the years ended June 30, 1999 and 1998, the Company incurred net losses
totaling $2,942,441 and $2,193,554 respectively. In the event that the Company
is unable to generate sufficient revenues from operations, or is unable to
11
<PAGE>
obtain additional financing, it may be unable to continue to develop and support
its present cost levels and continue as a going concern. The Company is
presently seeking to raise additional equity through the sale of its common
stock for financing to develop a professionally developed brand awareness
advertising campaign and to expand its marketing efforts in order to generate
additional revenues. No assurance can be given that the Company will be
successful in achieving its revenue growth strategy; or that it will obtain
financing at terms that are acceptable to the Company.
THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs and hardware with
embedded date technology (embedded chips) using two digits to define the
applicable year rather than four digits. Any programs or hardware that are time
sensitive and have not been determined to be Year 2000 compliant may recognize a
date using "00" as the year 1900 rather than the year 2000. Such improper date
recognition could, in turn, result in erroneous processing of data, or, in
extreme situations, system failure.
The Company is currently implementing a Year 2000 program which encompasses
performing an inventory of information technology and non-information technology
systems, assessing the potential problem areas, testing the systems for Year
2000 readiness, and modifying systems that are not Year 2000 compliant.
To date, inventory and assessment are in progress for all core systems that
are essential for business operations. The Company believes all of its core
systems are Year 2000 compliant. The Company's management estimates that the
work they have completed represents more than seventy-five percent of the work
involved preparing the Company's systems for the Year 2000.
Although the Company expects to be ready to continue business activities
without interruption by a Year 2000 problem, Company management recognizes the
general uncertainty inherent in the Year 2000 issue, in part because of the
uncertainty about the Year 2000 readiness of third parties. Under a "worst case
Year 2000 scenario", it may be necessary for the Company to temporarily
interrupt normal business activities or operations. The Company has begun, but
not yet completed, development of a contingency plan to deal with the most
likely worst case Year 2000 scenario".
Based on a current assessment, the Company's total cost of becoming Year
2000 compliant is not expected to be significant to its financial position,
results of operations or cash flows and is estimated to be less than $10,000.
There can be no assurances that the Company will not experience serious,
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in the technology used in its internal systems or in the
technology used by its venders or customers. The occurrence of any of the
foregoing could have a material adverse effect on the Company's business,
operating results or financial condition. The Company has taken additional
12
<PAGE>
steps in sending out questionnaires to its vendors and major customers
concerning their respective Year 2000 compliance status. So far all major
accounts, both vendors and customers have reported that they do not anticipate
any material adverse effect on the Company's on-going servicing relationships.
OUTLOOK
The year ended June 30, 1999 was a year of more development for the Company
as its strategic focus has expanded to the development of a retail approach that
encompasses a brand and product awareness campaign in strategic markets. This
approach is expected to increase sales volumes and promote relationships with
automotive after-market chains while enhancing our presence with the leaders in
the industrial markets, which are end users, or already have established lines
of distribution and marketing capital. The brand awareness began with the INDY
race car/Robby Unser sponsorship and it has been very well received by the
various automotive retail chains that the Company wants to carry its PetroMoly
Products. The media campaign, which is anticipated to begin in the fourth
calendar quarter, will roll out in strategic regions where the Company's
products are sold.
In 1998, the Company trademarked the name "molytech" that embodies the
Company's proprietary technology that the US patent office had issued a "letter
of acceptability". Management is actively pursuing licensing agreements with
major oil companies to utilize molytech in their existing lines, where the
Company would receive royalty income with pre-negotiated minimum volumes.
With the progressing sales relationships maturing and the new product lines
being marketed, the Company expects operating margins and revenues to improve
during fiscal 2000.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"), effective for periods ending after
December 15, 1997, establishes standards for disclosing information about an
entity's capital structure. SFAS 129 requires disclosure of the pertinent
rights and privileges of various securities outstanding (stock, options,
warrants, preferred stock, debt and participating rights) including dividend and
liquidations preferences, participant rights, call prices and dates, conversion
or exercise prices and redemption requirements. Adoption of SFAS 129 has had no
effect on the Company as it currently discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position are unaffected by
implementation of these new standards. Statement of Financial Accounting
Standards (SFAS) 130, "Reporting Comprehensive Income", establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.
13
<PAGE>
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company only operates in one segment of business, the
marketing and distribution of engine lubrication products. Major customers are
disclosed in Note 1.
SFAS 132, Statement of Financial Accounting Standards (SFAS) 132, "Employers'
Disclosure about Pensions and Other Postretirement Benefits," revises standards
for disclosures regarding pensions and other postretirement benefits. It also
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. This statement
does not change the measurement or recognition of the pension and other
postretirement plans. The financial statements are unaffected by implementation
of this new standard.
SFAS 133, Statement of Financial Accounting Standards (SFAS) 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for sale security, or a foreign-currency-denominated forecasted
transaction. Because the Company has no derivatives, this accounting
pronouncement has no effect on the Company's financial statements.
Item 7. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
Name Age Positions Held
- ---- --- ------------------------------------------
Gilbert Gertner* 74 Chairman of the Board, Director
and Chief Executive Officer of the Company
Lance Rosmarin* 37 Director, President, Secretary and Chief
Financial and Accounting Officer
Norton Cooper 67 Director
- ------------------------
* Gilbert Gertner is the stepfather of Lance Rosmarin. There is no family
relationship between any other officer and director of the Company.
BUSINESS EXPERIENCE
GILBERT GERTNER has served as the Chairman of the Board of the Company since
July 22, 1996, and Chairman of the Board and CEO of Worldwide PetroMoly
Corporation since April 15, 1993. Gilbert Gertner was born and raised in New
York City and entered the real estate business in New York in 1946 as a real
estate salesman. He became a partner in the firm, with holdings in several
states consisting of hospitals, motels and office buildings and other
businesses. In 1964, Mr. Gertner came to Houston where he had major holdings.
In 1965 he entered the apartment business with a purchase of 1,900 apartment
units. He became involved in general real estate and specifically in the area
of apartments, motels, mobile home parks, restaurant franchising, nursing homes,
hospitals, land developments and businesses. From 1977 to 1992, he was the
senior partner of Gertner, Aron, Ledet and Lewis Investments, an investment
company which was involved in apartment construction, shopping center
development, mini-warehouse development, business purchases, financing and
medical investments. In 1992, Mr. Gertner formed his own company, Gertner
Investments. He serves on the Board of Directors of one of his companies, CXR
Telecom Communications, located in San Jose, California.
He has served on the Board of Directors of several public and private
corporations which include: (i) DATA Systems Software, Inc. (Stock Symbol:
DSSI), which provides sophisticated software services and products to commercial
and military customers (1990 - 1991), (ii) Citadel Computer Systems, Inc.
(Stock Symbol: CITN), which produces a line of network security computer
software (1992 to 1999), (iii) GGR Oil, Inc., which manages a chain of Texaco
Express Lube centers and Pennzoil related lube centers, located in Texas
and Florida (which employ over 100 people (1993 to present), (iv) National
Recycling Group, an oil and oil filter recycling company (1994 to present).
He has owned and operated many hospitals and hotels, including Pasadena
General, Medical Arts Hospital Building, Southmore Hospital and Peachtree
Hospital (Atlanta), Villa Capri (Austin, Texas), and the Villa Inn (Dallas,
Texas). He has also owned and operated over 6,000 apartment units in Houston
and Pasadena, Texas. In 1990, Mr. Gertner was honored with the Zionist
Organization of America ("ZOA") "Man of the Year" award, commending him has
15
<PAGE>
a civic leader and humanitarian. Mr. Gertner is a member of Congregation
Beth Yeshuran. He has served in numerous communal activities in the UJA
Prime Minister's Mission. Mr. Gertner spends approximately 80% of his
time on the Company's business. In addition, Mr. Gertner has served on the
Board of Directors of several privately owned companies.
LANCE ROSMARIN has served as President since January, 1998, and as
Director, Chief Financial and Accounting Officer and Secretary the Company since
July 22, 1996, and as Secretary, Treasurer and a Director of Worldwide PetroMoly
Corporation since April 15, 1993. Since 1993, he has been a partner in Gertner
Investments, an investment company with investments in real estate and other
businesses. From 1990 until 1993, Mr. Rosmarin was employed by Gertner, Aron,
Ledet and Lewis Investments. He has served as Secretary, Vice President and a
director of GGR Oil, Inc. since 1993, and as Vice President and a director of
National Recycling Group since 1994. He also served as Secretary, Vice
President and a director of Citadel Computer Systems, Inc., a public company,
from 1993 until March 1996. Mr. Rosmarin received a Bachelor of Science Degree
in Finance and Marketing from the University of Texas in 1985, and an MBA Degree
in Finance from the University of Texas in 1988.
NORTON COOPER became a Director of the Company in January 1998. Since
1992, Mr. Cooper has been the chief executive officer of Financial Entrepreneurs
Incorporated of Las Vegas (FEI), a company engaged in strategic financial
planning.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
All persons known to the Company to be a director, officer or beneficial
owner of more than 10% of the Company's Common Stock made timely reports
required by Section 16(a) of the Exchange Act during the most recent fiscal
year.
Item 10. EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for services to the
Company for the fiscal years ended June 30, 1999, 1998 and 1997 of the Chief
Executive Officer of the Company. No executive officer of the Company, other
than Gilbert Gertner, received compensation that exceeded $100,000 during the
fiscal year ended June 30, 1999.
16
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------- ------------------------
AWARDS PAYOUTS
OTHER ---------- -------
NAME AND ANNUAL RESTRICTED SECURITIES
PRINCIPAL COMPEN- STOCK UNDERLYING LTIP ALL
POSITION YEAR SALARY BONUS SATION AWARDS OPTIONS/SARS PAYOUTS Other
- --------- ----------- -------- ------ ----------- ---------- ------------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gilber 1999 (1) $ -0- -0- -0- -0- -0- -0- -0-
Gertner 1998 $110,000 -0- $11,400 (2) -0- 95,000 (3) -0- -0-
CEO 1997 $110,000 $6,000 $ 9,900 (2) -0- 540,000 (4) -0- -0-
<FN>
- --------------------
(1) Mr. Gertner waived his compensation and automobile allowance for fiscal year 1999.
(2) Automobile allowance.
(3) Options vested in December 1997, and expire in December 2002.
(4) Options vested in August 1996, and expire in July 2001.
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
------------------
Percent of
Number of Total
Securities Options/SARs
Underlying Granted To Exercise
Options/SARs Employees Or Base
Granted In Fiscal Price Expiration
Name (#) Year ($/Sh) Date
- ---- ----- ---- ------ ----
(There were no option or stock appreciation rights granted in fiscal year 2000)
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
Number Of
Securities Value Of
Underlying Unexercised
Unexercised In-The-Money
Options/SARs At Options/SARs At
Fiscal Year-End Fiscal Year-End
Shares Value (#) ($)
Acquired On Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- --------------- ------------ --------- ---------------- ----------------
<S> <C> <C> <C> <C>
Gilbert Gertner -0- -0- 635,000 / 0 0 / 0
</TABLE>
(There were no exercises of options or stock appreciation rights in fiscal year
1999)
DIRECTOR COMPENSATION
The Company does not currently pay any cash directors' fees, but it pays
the expenses of its directors in attending board meetings. In January, 1998 the
Company compensated Mr. Cooper with 500,000 shares of restricted common stock of
the Company and with an option to purchase 500,000 shares of common stock of the
Company at an exercise price of $2.00 which expires on January 7, 2003. In
17
<PAGE>
January, 1998 the Company compensated Mr. Gertner with an option to purchase
95,000 shares of common stock of the Company at an exercise price of $1.00 which
expires on January 7, 2003.
EMPLOYMENT AGREEMENTS
Effective August 1, 1996, Worldwide PetroMoly Corporation entered into a
five year employment with Mr. Gertner, which provides that Mr. Gertner receive
$144,000 in compensation during the first and second year of the agreement,
and $180,000 per year during the final three years of the agreement. The
agreement also provides that Mr. Gertner receive $950 per month as an
automobile allowance. The agreement also contains a non-compete provision
during the term of the agreement and for a period of five years following
the termination of the agreement. Mr. Gertner waived his compensation and
automobile allowance for fiscal year 1999.
STOCK OPTION PLAN
During July 1996, the Board of Directors adopted a Stock Option Plan (the
"Plan"), and in July 1996, the Company's shareholders approved the Plan. The
Plan as amended authorized the issuance of options to purchase up to 3,500,000
shares of the Company's Common Stock. The Plan allows the Board to grant stock
options from time to time to employees, officers, directors and consultants of
the Company. The Board has the power to determine at the time that the option
is granted whether the option will be an Incentive Stock Option (an option which
qualifies under Section 422 of the Internal Revenue Code of 1986) or an option
which is not an Incentive Stock Option. Vesting provisions are determined by
the Board at the time options are granted.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of September 10, 1999, the stock
ownership of each person known by the Company to be the beneficial owner of
five percent or more of the Company's Common Stock, each officer and director
individually, and all officers and directors as a group. Each person has
sole voting and investment power over the shares except as noted.
<TABLE>
<CAPTION>
Amount and Nature Common Stock
Name and Address of Beneficial Ownership Percent of Class
- --------------------------- ------------------------ -----------------
<S> <C> <C>
Gilbert Gertner 11,053,000 (1) 53.4%
1300 Post Oak Boulevard, Direct
Houston, Texas 77056
18
<PAGE>
Lance Rosmarin 145,000 (2) 0.7%
1300 Post Oak Boulevard, Direct
Houston, Texas 77056
Norton Cooper 813,000 (3) 3.7%
1300 Post Oak Boulevard, Direct
Houston, Texas 77056
All Directors and Officers
as a Group (3 Persons) 12,011,000 56.1%
<FN>
- ------------------------------
(1) Includes 635,000 shares underlying currently exercisable options held by
Mr. Gertner.
(2) Includes 145,000 shares underlying currently exercisable options held by
Mr. Rosmarin.
(3) Includes 500,000 shares underlying currently exercisable options held by
Mr. Cooper.
</TABLE>
The Company knows of no arrangement or understanding, the operation of
which may at a subsequent date result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ACQUISITION OF
WORLDWIDE PETROMOLY CORPORATION
On July 22, 1996, the Company completed the acquisition of 100% of the
outstanding common stock of Worldwide PetroMoly Corporation in exchange for
14,507,500 shares of the Company's Common Stock (approximately 90.6% of the
shares now outstanding). The stock issuances were made pursuant to the
Agreement ("Agreement") between the Company and Worldwide PetroMoly Corporation.
The terms of the Agreement were the result of negotiations between the
management of the Company and Worldwide PetroMoly Corporation. However, the
Board of Directors did not obtain any independent "fairness" opinion or other
evaluation regarding the terms of the Agreement, due to the cost of obtaining
such opinions or evaluations. A total of 12,500,000 of the shares issued in
connection with the acquisition of Worldwide PetroMoly Corporation were issued
to PetroMoly Capital Partners, which is a Texas general partnership. Gilbert
Gertner is a general partner and owns 90% of the partnership. PetroMoly
Capital Partners subsequently distributed its shares of the Company to its
general partners.
OTHER TRANSACTIONS
In December, 1996 the Company loaned Citadel Computer Systems
Incorporated ("Citadel"), a company of which Mr. Gertner is a director, $500,000
pursuant to a short term promissory note which bore interest at the rate of 10%
per annum and was due in January, 1997 (the "Citadel Note"). The Citadel Note
was secured by 733,000 shares of common stock of Citadel. As part of the loan
transaction, the Company received warrants to purchase 150,000 shares of common
stock of Citadel at an exercise price of $.59 per share. In February 1997,
19
<PAGE>
Citadel paid the Company $250,000 as a principal reduction payment. As of June
30, 1997, the outstanding balance on the Citadel Note, which was in default, was
$267,289.
In partial consideration for not foreclosing on the Citadel Note, on
June 30, 1997, Commercial Capital Trading Corporation ("Commercial Capital"),
a company in which Mr. Gertner is a stockholder, agreed to enter into a new
promissory note with the Company in the amount of the then outstanding
obligation of Citadel (the "Commercial Capital Note"). The agreement by
Commercial Capital to execute this new note and to assume the obligations of
Citadel to the Company was part of a transaction between Citadel and
Commercial Capital, in which the Company was not a party. The Commercial
Capital Note provided for the payment to the Company of $5,000 per month
and bore interest at the rate of 10% per annum. The Commercial Capital Note
was secured by the accounts receivable of Commercial Capital. In October, 1997,
the Company and Commercial Capital agreed to restructure and modify the
Commercial Capital Note, which had a then outstanding balance of $204,000
to provide for an increase in the monthly installment payments to the
Company of the greater of (i) $10,000 per month or (ii) 15% of the proceeds
received from the collection of accounts receivable up to $100,000 and 50% of
the collection of any accounts receivable thereafter, for 12 months, with a
final payment to the Company of the remaining outstanding principal and
interest, if any, due in the 13th month. The Commercial Capital Note was
secured by the accounts receivable of Commercial Capital and the personnel
guarantee of Mr. Gertner and another stockholder of Commercial Capital.
As of June, 1998, the Commercial Capital Note was paid off in full.
From time to time, the Company's principal stockholder, Gilbert Gertner,
has made unsecured, non-interest-bearing advances of working capital funds to
the Company. The outstanding balance of the advances as of June 30, 1999 and
June 30, 1998 were $233,635 and $116,263 respectively. Mr. Gertner has agreed
to defer repayment of these advances until excess cash flow of the Company
allows the repayment.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
16.1 * Letter on change in certifying accountant
21.1 ** Subsidiaries
27.1 *** Financial Data Schedule
- -----------------
* Incorporated by reference to the Company's report on Form 8-K dated August
14, 1998 and filed with the Commission on August 20, 1998.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended June 30, 1998.
*** Filed herewith
(b) Reports on Form 8-K.
None
20
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 of 15(d) of the Exchange
Act, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on October 11, 1999.
Worldwide PetroMoly, Inc.
By: /s/ Gilbert Gertner
----------------------------------
Gilbert Gertner
Director and Chairman of the Board
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:
October 11, 1999 By: /s/ Gilbert Gertner
----------------------------------
Gilbert Gertner
Director and
Chairman of the Board
October 11, 1999 By: /s/ Lance Rosmarin
----------------------------------
Lance Rosmarin
Director, President,
Secretary and
Chief Financial
and Accounting Officer
October 11, 1999 By:
----------------------------------
Norton Cooper
Director
21
<PAGE>
WORLDWIDE PETROMOLY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------- Page
Independent Auditors' Reports F-2
Balance Sheets as of June 30, 1999 and 1998 F-3
Statements of Operations
For the Years Ended June 30, 1999 and 1998 F-4
Statements of Changes in Stockholders' Equity
For the Years Ended June 30, 1999 and 1998 F-5
Statements of Cash Flows
For the Years Ended June 30, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Worldwide Petromoly, Inc.
We have audited the accompanying consolidated balance sheet of Worldwide
Petromoly, Inc. as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Worldwide PetroMoly, Inc. at June 30, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/S/ Jackson & Rhodes P.C.
September 17, 1999
Dallas, Texas
F-2
<PAGE>
<TABLE>
<CAPTION>
WORLDWIDE PETROMOLY, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and 1998
Assets
1999 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 603,336 $ 34,375
Restricted investments in certificates of deposit (Note 6) - 276,579
Receivables:
Trade 270,794 107,720
Affiliate companies (Note 7) 20,383 38,807
Notes receivable - related parties, current portion (Note 7) - 111,151
Inventories (Note 4) 115,690 45,394
Prepaid expenses 936,340 10,840
------------- ------------
Total current assets 1,946,543 624,866
------------- ------------
Property, plant and equipment, net (Note 5) 102,523 121,419
------------- ------------
$ 2,049,066 $ 746,285
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 496,173 $ 173,592
Notes payable (Note 6) 3,625 160,000
------------- ------------
Total current liabilities 499,798 333,592
Advances from stockholder (Note 7) 233,636 116,263
------------- ------------
Total liabilities 733,434 449,855
------------- ------------
Commitments and contingencies (Note 9,10 and 12) - -
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares - -
authorized, none issued
Common stock, no par value, 800,000,000 shares authorized,
17,247,500 and 16,747,500 shares issued and outstanding 11,454,871 7,493,228
Accumulated deficit (10,139,239) (7,196,798)
------------- ------------
Total stockholders' equity 1,315,632 296,430
------------- ------------
$ 2,049,066 $ 746,285
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
WORLDWIDE PETROMOLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1999 and 1998
1999 1998
------------ ------------
<S> <C> <C>
Net sales (Note 2) $ 519,682 $ 301,150
Cost of goods sold 329,392 214,017
------------ ------------
Gross profit 190,290 87,133
Selling, general and administrative expenses 3,300,609 2,372,476
------------ ------------
Loss from operations (3,110,319) (2,285,343)
Other income (expense): (Note 7)
Interest income 4,518 104,822
Interest expense (15,051) (15,709)
Gain on sale of marketable securities 212,607 -
Miscellaneous income (expense), net (34,196) 2,676
------------ ------------
167,878 91,789
------------ ------------
Net Loss $(2,942,441) $(2,193,554)
============ ============
Loss per common share:
Basic $ (0.16) $ (0.13)
============ ============
Diluted $ (0.16) $ (0.13)
============ ============
Weighted average common shares outstanding 18,373,469 17,039,167
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
WORLDWIDE PETROMOLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1999 and 1998
Common Stock Accumulated
-----------------------
Shares Amount Deficit Total
---------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Balance, June 30, 1997 16,747,500 $ 6,914,773 $ (5,003,244) $ 1,911,529
Issuance of common stock to non-
employees in exchange for services rendered 500,000 500,000 - 500,000
Stock options granted-
in exchange for services rendered - 78,455 - 78,455
Net loss - - (2,193,554) (2,193,554)
---------- ----------- -------------- ------------
Balance, June 30, 1998 17,247,500 7,493,228 (7,196,798) 296,430
Sale of common stock for cash 135,000 84,664 - 84,664
Proceeds from options exercised 1,863,750 1,096,900 - 1,096,900
Issuance of common stock to non-
employees in exchange for services rendered 1,534,665 1,999,679 - 1,999,679
Stock options granted-
in exchange for services rendered - 780,400 - 780,400
Net loss - - (2,942,441) (2,942,441)
---------- ----------- -------------- ------------
20,780,915 $11,454,871 ($10,139,239) $ 1,315,632
========== =========== ============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
WORLDWIDE PETROMOLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997
1998 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,942,441) $(2,193,554)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 29,832 24,565
Common stock issued to non-employees for services rendered 1,999,679 500,000
Stock options granted to non-employees for services 780,400 78,455
Changes in operating assets and liabilities:
Accounts receivable (144,650) (55,230)
Inventories (70,296) 83,257
Prepaid expenses and other assets (925,500) 7,299
Accounts payable and accrued expenses 322,581 23,483
------------ ------------
Net cash used in operating activities (950,395) (1,531,725)
------------ ------------
Cash flows from investing activities:
Certificates of deposit - 527,971
Restricted investments in certificates of deposit 276,579 142,278
Capital expenditures (10,936) (37,437)
Repayments on loans to related parties 111,151 228,733
------------ ------------
Net cash provided by investing activities 376,794 861,545
------------ ------------
Cash flows from financing activities:
Proceeds from private offering, net of offering costs 84,664 -
Proceeds from options exercised 1,096,900 -
Repayments of notes payable (156,375) (105,000)
Advances from and repayments to stockholders 117,373 (55,000)
------------ ------------
Net cash provided by (used in) financing activities 1,142,562 (160,000)
------------ ------------
Net decrease in cash and cash equivalents 568,961 (830,180)
Cash and cash equivalents at beginning of year 34,375 864,555
------------ ------------
Cash and cash equivalents at end of year $ 603,336 $ 34,375
============ ============
Supplemental disclosure:
Total interest paid $ 15,051 $ 15,708
============ ============
<FN>
Non-cash transactions:
During 1999 and 1998, the Company issued common stock for services rendered (Note 11)
and stock options were granted for services rendered (Note 10).
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. FINANCIAL CONDITION AND GOING CONCERN
For each of the years ended June 30, 1999 and 1998, the Company incurred net
losses totaling $2,942,441 and $2,193,554, respectively, and at June 30, 1999
had an accumulated deficit of $10,139,239. These losses contributed to net cash
used in operating activities of $950,395 and $1,531,725 for each of the years
ended June 30, 1999 and 1998, respectively. As a result of these recurring
losses and operating cash flow deficits, the Company will require additional
working capital to develop and support its customer base, technologies and
business until the Company either: (1) achieves a level of revenues adequate to
generate sufficient cash flows from operations; or (2) receives additional
financing necessary to support the Company's working capital requirements.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern.
Currently, the Company's focus has been on developing its customer base by
creating brand awareness of its lubrication technology through increasing its
marketing efforts and quality control. The Company's marketing efforts have
included the recruiting and training of a sales force and advertising and
promotion. Quality control developments have included product testing and
certification and research and development with a focus toward improving and
expanding its product lines. Management's plans include raising the necessary
capital to continue this revenue growth strategy.
There are no assurances, however, that the Company can: (1) raise the necessary
capital to enable it to continue the execution of its revenue growth strategy;
or (2) generate sufficient revenue growth and improvements in operating margins
to meet its working capital requirements if such capital is obtained. To the
extent that funds generated from operations are insufficient, the Company will
have to raise additional working capital. No assurance can be given that
additional financing will be available, or if available, will be on terms
acceptable to the Company. If adequate working capital is not available the
Company may be required to curtail its operations.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
F-7
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Worldwide Petromoly, Inc.(the "Company"), a publicly-held Delaware corporation,
is engaged in the marketing and distribution of a line of engine lubrication
products under the tradename "Petromoly". The Company was formed as a result of
a reverse merger (see Note 3) on July 22, 1996, between Ogden, McDonald &
Company ("Ogden McDonald") the former name of the Registrant with the Securities
and Exchange Commission) and Worldwide Petromoly Corporation ("WPC"). Ogden
McDonald was incorporated in the state of Delaware on October 13, 1989, and
became a public "shell" company for the purpose of engaging in selected mergers
and acquisitions. WPC was incorporated in the state of Texas on April 1, 1993,
and prior to the reverse merger, was engaged in the same line of business as the
Company. In connection with the reverse merger, Ogden McDonald acquired all of
the outstanding common stock of WPC and subsequently changed its name to
Worldwide Petromoly, Inc. WPC is now a wholly-owned subsidiary of the Company.
The Company contracts with independent parties for the blending of its lubricant
products.
Basis of Presentation
The Company has retained the June 30 fiscal year end of the former Ogden
McDonald. Accordingly, the accompanying consolidated financial statements
reflect the consolidated results of operations and cash flows of Ogden McDonald
and its wholly-owned subsidiary, WPC, as if the reverse merger occurred on July
1, 1996. All significant intercompany accounts and transactions have been
eliminated. Prior to the reverse merger, WPC reported on a December 31 fiscal
year end as a private company.
Revenue Recognition
Revenue is recognized when the product is shipped to the customer.
Inventories
Inventories are valued at the lower of cost (weighted average cost) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight line method for financial reporting purposes over the estimated useful
lives of the assets ranging from 5 to 7 years.
F-8
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment (Continued)
The Company reviews its property and equipment whenever events or changes in
circumstances indicate the carrying value of an asset may not be fully
recoverable.
Research and Development
Research and development expenses are charged to operations as incurred. During
the year ended June 30, 1999 and 1998, research and development costs were
$39,000 and $59,000, respectively.
Advertising
Advertising costs are expensed as incurred. The amount charged to advertising
expenses was $35,865 and $28,000 for the years ended June 30, 1999 and 1998,
respectively.
Income Taxes
Deferred income taxes result from the temporary differences between the
financial statement and income tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
differences are expected to reverse.
Loss Per Common Share
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 provides a different method of calculating earnings per share than was
formerly used in APB Opinion 15. SFAS 128 provides for the calculation of basic
and diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Dilutive
earnings per share reflects the potential dilution of securities that could
share in the earnings of the Company. The Company was required to adopt this
standard in the fourth quarter of 1997. Using the principles set forth in SFAS
128, basic and diluted earnings per share are identical and are not materially
different from that which would have been presented under APB 15, since
outstanding stock options would be antidilutive.
F-9
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentrations of Credit Risk
The Company is required by FASB Statement 105, "Disclosure of Information about
Financial Instruments with Concentrations of Credit Risk" to disclose
concentrations of credit risk. The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of cash and cash
equivalents, restricted cash and certificates of deposit, trade accounts
receivable and notes receivable with related parties. The Company places cash
and temporary cash investments, which, at times, exceed FDIC insurance limits,
in financial institutions with strong credit ratings. The Company extends
credit in the normal course of business to a number of customers in the
transportation industry. As of June 30, 1999, the Company had uncollateralized
receivables with three customers approximating $274,634, which represents 86% of
the Company's trade account balance, including the related party. During fiscal
1998, sales to one customer amounted to approximately 17% of the Company's
revenues. During fiscal 1999, sales to two customers amounted to approximately
33% and 17% of the Company's revenues.
Other Risks and Uncertainties
The Company is subject to the business risks inherent in the petroleum industry.
These risks include, but are not limited to, a high degree of competition within
the petroleum industry and continuous technological advances. Future
technological advances in the petroleum industry may result in the availability
of new services or products that could compete with the products currently
provided by the Company.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash investments
in certificates of deposit, accounts and notes receivable and long-term debt
reported on the balance sheet approximate their fair value. The Company
estimated the fair value of long-term debt by comparing the carrying amount to
the future cash flows of the instruments, discounted using the Company's
incremental rate of borrowing for similar instruments.
Management's Estimates and Assumptions
The accompanying financial statements are prepared in conformity with generally
accepted accounting principles which requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The actual results could differ from those estimates.
F-10
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Product Warranty
The Company maintains product liability insurance for claims, if any, resulting
from the use of the "Petromoly" product.
Statement of Cash Flows
For the purpose of the statement of cash flows, the Company considers demand
deposits and highly liquid debt instruments with an initial maturity of three
months or less to be cash equivalents.
Stock Based Compensation
In October 1995, Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" was issued which establishes financial
accounting and reporting standards for stock-based employee compensation plans,
effective for fiscal years beginning after December 15, 1995. Those plans
include all arrangements by which employees receive shares of the employer or
the employer incurs liabilities to employees in amounts based on the price of
the employer's stock. The Statement also applies to transactions in which an
entity issues its equity securities or other equity investments to acquire goods
or services from non-employees. As of June 30, 1998, the Company has stock
options outstanding under its 1996 Stock Option Plan (see Note 10).
SFAS No.123 also requires that equity instruments issued to non-employees be
accounted for based on fair value. The Statement encourages all entities to
adopt the fair value based method for employee stock compensation plans.
However, it allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, ("APB No. 25"), "Accounting for Stock Issued to Employees".
Entities electing to remain with the accounting in APB No.25 must make pro forma
disclosures of net income and earnings per share, as if the fair value based
method of accounting had been applied. The Company has elected to remain with
the accounting under APB No. 25 and has made the required pro forma disclosures
in Note 10.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("SFAS 129"), effective for periods ending after
December 15, 1997, establishes standards for disclosing information about an
entity's capital structure. SFAS
F-11
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements (Continued)
129 requires disclosure of the pertinent rights and privileges of various
securities outstanding (stock, options, warrants, preferred stock, debt and
participating rights) including dividend and liquidations preferences,
participant rights, call prices and dates, conversion or exercise prices and
redemption requirements. Adoption of SFAS 129 has had no effect on the Company
as it currently discloses the information specified.
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards. Results of operations and financial position are unaffected by
implementation of these new standards.
Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive
Income", establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from investments
by owners and distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company only operates in one segment of business, the
marketing and distribution of engine lubrication products. Major customers are
disclosed in Note 1.
SFAS 132, Statement of Financial Accounting Standards (SFAS) 132, "Employers'
Disclosure about Pensions and Other Postretirement Benefits," revises standards
for disclosures regarding pensions and other postretirement benefits. It also
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. This statement
does not change the measurement or recognition of the pension and other
postretirement plans. The financial statements are unaffected by implementation
of this new standard.
F-12
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements (Continued)
SFAS 133, Statement of Financial Accounting Standards (SFAS) 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for sale security, or a foreign-currency-denominated forecasted
transaction. Because the Company has no derivatives, this accounting
pronouncement has no effect on the Company's financial statements.
3. REVERSE MERGER
On July 22, 1996, a reverse merger was consummated, whereby Ogden McDonald
offered one share of its common stock for each share of WPC's issued and
outstanding common stock, or a total of 14,507,500 restricted shares. WPC
became a wholly-owned subsidiary of, and WPC stockholders assumed 90.6%
ownership in Ogden McDonald as of that date. In anticipation of the reverse
merger, the following equity transactions occurred:
On July 15, 1996, WPC amended its Articles of Incorporation to: (1) increase its
authorized common stock from 1,000,000 to 20,000,000 shares; (2) change the par
value from $.10 to $.001 per share; (3) reclassify and automatically exchange
each share of issued stock from one share, $.10 par value, for 1,250 shares,
$.001 par value.
Between July 15-22, 1996, WPC sold 2,007,500 shares of its common stock at $2.00
per share in a private offering to non-U.S. investors for total net proceeds of
$3,900,115. These shares were exchanged for 2,007,500 of Ogden McDonald's
shares as part of the exchange.
On July 22, 1996, Ogden McDonald effected a 3 for 1 stock split which increased
its issued and outstanding common stock to 1,500,000 shares.
In accordance with the exchange agreement, on July 22, 1996, Ogden McDonald
offered one share of its common stock for each share of WPC's common stock
issued and outstanding, or a total of 14,507,000 restricted shares after the
3-for-1 stock split.
F-13
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REVERSE MERGER (CONTINUED)
In connection with the reverse merger, 1,500,000 shares of Ogden McDonald's
common stock were reserved for issuance pursuant to the 1996 Stock Option Plan
(subsequently amended to 3,000,000 shares) which includes officers of the
Company.
4. INVENTORIES
The major components of inventories as of June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Finished goods $ 93,479 $19,824
Raw materials and packaging 22,211 25,570
-------- -------
$115,690 $45,394
======== =======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Office furnishings and equipment $141,591 $134,536
Machinery and equipment 17,616 13,735
Vehicles 12,062 12,062
--------- ---------
171,269 160,333
Less accumulated depreciation (68,746) (38,914)
--------- ---------
$102,523 $121,419
========= =========
</TABLE>
6. NOTES PAYABLE
At June 30, 1998, the Company had a $250,000 revolving line-of-credit facility
with a bank which expired in July 1998. At June 30, 1998, the Company had drawn
$160,000 under this agreement.
F-14
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. RELATED PARTY TRANSACTIONS
Accounts Receivable - Related Party
The Company sells products to an entity that is controlled by the Company's
majority stockholder. Sales and the amount due from the entity at June 30, 1999
were approximately $29,000 and $20,000, respectively. Sales and the amount due
from the entity at June 30, 1998 were approximately $20,000 and $39,000,
respectively.
Notes Receivable - Related Parties
On December 12, 1996, the Company executed a note agreement with a
publicly-held corporation in the amount of $500,000, in which a Company officer
serves in a similar capacity for both companies. Principal and interest (10%
annual rate) was due on January 17, 1997, and was secured by 1,000,000 shares of
the borrower's common stock. On February 19, 1997, a portion of the note
receivable balance in the amount of $250,000 was paid. On June 30, 1997, the
note agreement was assigned to a privately-held corporation controlled by this
Company officer and an individual Company stockholder. The note, which had a
principal balance of $267,289 at June 30, 1997, was refinanced on October 1,
1997 in the amount of $204,950 (reflecting payments and accrued interest
thereon). The note was paid in full in June 1998.
On June 30, 1997,the Company refinanced a note agreement with a stockholder in
the amount of $210,945. The note agreement was again refinanced on October 1,
1997, in the amount of $202,182 (reflecting payments and accrued interest
thereon). Principal and interest are payable monthly in thirteen consecutive
installments ranging between $5,000 and $60,000 commencing October 20, 1997, at
10% per annum. The principal balance of the note is $111,151 at June 30, 1998.
The note was secured by 40,000 shares of Company common stock and 200,000 shares
of common stock of the publicly traded corporation referred to above. The note
was paid in full during the year ended June 30, 1999.
Advances from Stockholder
Prior to the reverse merger, the principal stockholder of WPC who is now an
officer and majority stockholder of the Company, advanced funds to the Company.
During the year ended June 30, 1998, the balance was reduced by $55,000 in cash
payments and $141,310 as an offset to the note receivable from the stockholder.
During the year ended June 30, 1999, the stockholder has advanced additional
funds to the Company. The advances are interest-free.
F-15
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
Deferred taxes are determined based on temporary differences between the
financial statement and income tax basis of assets and liabilities as measured
by the enacted tax rates which will be in effect when these differences reverse.
Deferred tax assets are comprised of the following at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net operating loss carryforwards $ 2,593,000 $ 1,833,000
Stock options granted to non-employees 827,000 567,000
Amortization expense 25,500 25,500
Bad debt expense 7,000 7,000
------------ ------------
Gross deferred tax asset 3,452,500 2,432,500
Valuation allowance (3,452,500) (2,432,500)
------------ ------------
Net deferred tax asset $ - $ -
============ ============
</TABLE>
The Company has recorded a full valuation allowance against all deferred tax
assets because it could not determine whether it was more likely than not that
the deferred tax asset would be realized.
At June 30, 1998, the Company had net operating loss carryforwards totaling
approximately $5,400,000 available to reduce future taxable income through the
year 2013. The net operating loss carryforwards expire as follows:
<TABLE>
<CAPTION>
Year ended December 31, Amount
- ----------------------------------- ----------
<S> <C>
2008 $ 70,000
2009 263,000
2010 112,000
Eighteen months ended June 30, 2012 2,753,000
Year ended June 30, 2013 2,202,000
Year ended June 30, 2014 2,180,000
----------
$7,580,000
==========
</TABLE>
F-16
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS
The Company leases its office space and a vehicle under long-term operating
lease agreements. At June 30, 1999, future minimum lease payments under these
operating leases were as follows:
2000 $32,584
2001 15,560
2002 7,780
Rent expense for the years ended June 30, 1999 and 1998 was $66,000 and $84,000,
respectively.
In August 1996, the Company entered into five year employment agreements with
four officers at a combined annual salary of $361,000 (subject to escalation
ranging from $385,000 in fiscal 1998 to $432,000 in fiscal 2001) plus a combined
annual automobile allowance of $33,600. During fiscal year 1999, two officers
elected to forego their salaries, aggregating $300,000.
10. STOCK OPTIONS
On July 22, 1996 the Company approved the 1996 Stock Option Plan which
authorizes the Company's Board of Directors to grant options to purchase up to
3,500,000 shares of Common Stock (as amended), to eligible employees, officers
and directors of the Company, and consultants to the Company. The terms of the
options are generally over five years with immediate vesting. The Plan is not
qualified under Section 401(a) of the Internal Revenue Code of 1986, nor is it
subject to any provision of the Employee Retirement Income Security Act of 1974.
The Company has elected to continue to account for stock options issued to
employees in accordance with APB No. 25. For the year ended June 30, 1998,
options for 317,000 shares were granted to officers and employees at an exercise
price which was less than the market price per share at the date of grant,
resulting in a charge to operations of $55,475.
The Company has adopted the disclosure portion of SFAS No. 123. This statement
requires the Company to provide proforma information regarding net loss
applicable to common stockholders and loss per share as if compensation cost for
the Company's stock options granted had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. The Company estimates the
fair value of each stock option
F-17
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTIONS (CONTINUED)
at the grant date by using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1999 and 1998 as
follows:
1. Dividend yield of 0%
2. Expected volatility of 150% and 119% for options granted in June
1999 and 1998, respectively.
3. Risk-free interest rates of 4.51% and 5.77% for 1999 and 1998,
respectively.
4. Expected term of 1 year for 1999 and 2 years for 1998.
Under the accounting provisions of SFAS No. 123, the Company's net loss
applicable to common stockholders and loss per share for the years ended June
30, 1999 and 1998 would have been increased to the proforma amounts indicated
below:
Net loss applicable to common stockholders:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
As reported $(2,942,441) $(2,193,554)
============ ============
Proforma $(2,975,816) $(2,755,013)
============ ============
Loss per share:
As reported $ (0.16) $ (0.13)
============ ============
Proforma $ (0.16) $ (0.16)
============ ============
</TABLE>
For the years ended June 30, 1999 and 1998, in accordance with SFAS No. 123, the
Company accounted for options issued to non-employees for services rendered
using the fair value method. The Company granted 2,395,750 options to purchase
an equal number of shares of common stock at exercise prices ranging from $.31
to $1.50 per share to consultants during the year ended June 30, 1999. The
Company granted 30,000 options to purchase an equal number of shares of common
stock at an exercise price of $1.00 per share to a consultant during the year
ended June 30, 1998. The options vest immediately and expire 5 years from the
date of grant. The options were granted for services rendered during the
respective years. The Company recorded compensation expense in the amount of
$7480,400 and $22,980 in the accompanying consolidated statements of loss for
the years ended June 30, 1999 and 1998, respectively, based on the fair value of
the options on the grant date using the Black-Scholes option pricing model.
F-18
<PAGE>
WORLDWIDE PETROMOLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's stock options as of June 30, 1999 and
1998, and changes during the years then ended is presented below.
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ------ --------- ------
<S> <C> <C> <C> <C>
Outstanding at beginning 3,462,000 $ 1.23 2,835,000 $ 2.00
Granted 2,493,750 0.57 627,000 1.59
Exercised (1,863,750) 0.59 - -
Forfeited (110,000) 1.00 - -
----------- ------ --------- ------
Outstanding at end of year 3,982,000 $ 0.59 3,462,000 $ 1.12
=========== ====== ========= ======
Options exercisable at end of year 3,882,000 $ 0.59 3,385,333 $ 1.12
=========== ====== ========= ======
Weighted average fair value of options
granted during the year $ 0.57 $ 1.34
====== ======
</TABLE>
The weighted average remaining contractual life of the above options was 2.8
years and 3.0 years at June 30, 1999 and 1998, respectively.
F-19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 603336
<SECURITIES> 0
<RECEIVABLES> 291177
<ALLOWANCES> 0
<INVENTORY> 115690
<CURRENT-ASSETS> 1946543
<PP&E> 171269
<DEPRECIATION> (68746)
<TOTAL-ASSETS> 2049066
<CURRENT-LIABILITIES> 499798
<BONDS> 0
0
0
<COMMON> 11454871
<OTHER-SE> (10139239)
<TOTAL-LIABILITY-AND-EQUITY> 2049066
<SALES> 519682
<TOTAL-REVENUES> 519682
<CGS> 329392
<TOTAL-COSTS> 3630001
<OTHER-EXPENSES> 29678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15051
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