SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended: February 28, 2002
Commission File No. 0-29373
Nevada 33-0836954
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(State or other jurisdiction (IRS Employer File Number)
of incorporation)
32921 Calle Perfecto
San Juan Capistrano, California 92675
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(Address of principal executive offices) (zip code)
(949) 234-1999
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(Registrant's telephone number, including area code)
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Securities to be Registered Pursuant to Section 12(b) of the Act: None
Securities to be Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.001 per share par value
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year $1,971,774. The aggregate market value of the voting stock of the Registrant held by non-affiliates as of February 28, 2002 was approximately $1,050,000 The number of shares outstanding of the Registrant's common stock, as of the latest practicable date, February 28, 2002, was 9,508,480.
References in this document to "us," "we," or "the Company" refer to Seychelle Environmental Technologies, Inc., its predecessor and its subsidiary.
RISK FACTORS
THE OWNERSHIP AND INVESTMENT IN OUR SECURITIES INVOLVES SUBSTANTIAL RISKS. OUR COMMON SHARES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS RELATING TO OUR COMPANY.
LACK OF HISTORY. Our Company was formed on January 23, 1998 and acquired the operations of a company which had been in existence since 1995. Since beginning operations, we had not been profitable for the first three years. However, we have not engaged in enough consistent business activity over a sustained period of time to be said to have a successful operating history. Our product lines and sales have generated enough revenue to support our Company since becoming profitable. Still, we have limited financial results upon which you may judge our potential. We have experienced in the past and may experience in the future under-capitalization, shortages, setbacks and many of the problems, delays and expenses encountered by any early stage business. These include:
- operating as a public entity, incurring non-cost of sales expenses such as accounting, auditing, legal activities, and maintaining full compliance of a regulated reporting status,
- substantial delays and expenses related to research, development and testing of our new products,
- production and marketing problems encountered in connection with our existing products and technologies,
- competition from larger and more established companies, and
- under-capitalization to challenge the lack of market acceptance of our new products and technologies.
LIMITED PROFITABILITY. Sales of our products may not continue to generate sufficient revenues to fund our continuing operations. We may not continue to generate a positive cash flow or maintain profitability. To date, we have incurred significant losses. As of February 28, 2002, our accumulated revenue was $1,971,774. Even though we were marginally profitable last year, our accountants made a going concern qualification to their accounting opinion. For the fiscal year ended February 28, 2002, we incurred a net profit of $47,278 and for the previous fiscal year a net loss of $878,742. These profits are marginal as a result of:
- significant legal and professional fees associated with regulated business activities and SEC reporting requirements
- lack of consistent sales to maintain profitability,
- significant costs associated with the research and development of our products,
INHERENTLY RISKY-COMPETITION. Because we are a company with a limited history, our operations will be extremely competitive and subject to numerous risks. The water filtration business is highly competitive with many companies having access to the same market. Substantially all of them have greater financial resources and longer operating histories than we have and can be expected to compete within the business in which we engage and intend to engage. There can be no assurance that we will have the necessary resources to be competitive. We are subject to the risks which are common with under-capitalized companies. Therefore, investors should consider an investment in us to be an extremely risky venture.
NEED FOR ADDITIONAL FINANCING. For the foreseeable future, we expect to rely principally upon our cash flow, although we have raised limited private placement funds on occasion. We cannot guarantee the success of this plan. We believe that from time to time, we may have to obtain additional financing in order to conduct our business in a manner consistent with our proposed operations. There can be no guaranty that additional funds will be available when, and if, needed. If we are unable to obtain such financing, or if the terms there of are too costly, we may be forced to curtail proposed expansion of operations until such time as alternative financing may be arranged, which could have a materially adverse impact on our operations and our shareholders' investment. At the present time, we have no definitive plans for additional financing.
POTENTIAL INABILITY TO CONDUCT SUCCESSFUL OPERATIONS. The results of our operations will depend, among other things, upon our ability to develop and to market our water filtration products. Further, it is possible that our proposed operations will not continue to generate income sufficient to meet operating expenses or sustain ourselves. Our operations may be affected by many factors, some known by us, some unknown; and some which are beyond our control. Any of these problems, or a combination thereof, could have a materially adverse effect on our viability as an entity and might cause the investment of our shareholders to be impaired or lost. Our technologies and products are in various stages of development. The development stage products may not be completed in time to allow production or marketing due to the inherent risks of new product and technology development, limitations on financing, competition, obsolescence, loss of key personnel and other factors. Although we may license or market our development technology at its current stage of development, there can be no assurance that we will be able to do so. Unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or in a determination that further development is not feasible.
While we have a limited product line, the development of some of our technologies have taken longer than anticipated and could be additionally delayed. Therefore, there can be no assurance of timely completion and introduction of improved products on a cost-effective basis, or that such products, if introduced, will achieve market acceptance such that, in combination with existing products, they will sustain us or allow us to maintain profitable operations.
DEPENDENCE UPON TECHNOLOGY. We are operating in a business, which requires extensive and continuing research, development and testing efforts. There can be no assurance that new products will not render our products obsolete or non-competitive at some time in the future.
PROTECTION OF TECHNOLOGY. A successful challenge to the ownership of our technology could materially damage our business prospects. We rely on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We currently have three U.S. patents issued and a license on two patents. Any issued patent may be challenged and invalidated. Patents may not issue from any of our future applications. Any claims allowed from existing or future pending patents may not be of sufficient scope or strength to provide significant protection for our products. Patents may not be issued in all countries where our products can be sold so as to provide meaningful protection or any commercial advantage to us. Our competitors may also be able to design around our patents or the patents which we license.
Vigorous protection and pursuit of intellectual property rights or positions characterize our industry, which has resulted in significant and often protracted and expensive litigation. Therefore, our competitors may assert that our technologies or products infringe on their patents or proprietary rights. Problems with patents or other rights could increase the cost of our products or delay or preclude new product development and commercialization by us. If infringement claims against us are deemed valid, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions or to defend against infringement claims.
COMPETITION. Technological competition from larger and more established companies is significant and expected to increase. Most of the companies with which we compete and expect to compete have far greater capital resources and more significant research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. Our ability to compete effectively may be adversely affected by the ability of these competitors to devote greater resources to the sale and marketing of their products than we can. In addition, one or more of our competitors may succeed or may already have succeeded in developing technologies and products that are more effective than any of those we currently offer or are developing. In addition, there can be no guarantee that we will be able to protect our technology from being copied or infringed upon. Therefore, there are no assurances that we will ever be able to obtain and to maintain a profitable position in the marketplace.
SUCCESS DEPENDENT UPON MANAGEMENT. Our success is dependent upon the decision making of our directors and executive officers. These individuals intend to commit as much time as necessary to our business. The loss of any or all of these individuals could have a materially adverse impact on our operations. On December 1, 2001, we entered into an employment agreement with our President.
PART I
(a) General Development of Business
We are a Nevada corporation. Our principal business address is 32921 Calle Perfecto, San Juan Capistrano, California 92675. Our telephone number at this address is 949-234-1999.
We were incorporated under the laws of the State of Nevada on January 23, 1998 as a change of domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.
On January 30, 1998, we entered into an Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation ("SWT"), whereby we exchanged our issued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent company and SWT became a wholly owned subsidiary. SWT had been formed in 1997 to market water filtration systems of Aqua Vision International.
On January 31, 1998, we entered into a Purchase Agreement to acquire all of the assets of Aqua Vision International, a private California entity. This Purchase Agreement was amended on February 26, 1999 to provide for the issuance of 8,000 shares of Series "AAA" Cumulative Convertible Preferred Voting Stock in lieu of all consideration which had remained unpaid under the original Purchase Agreement. Aqua Vision International had been in operation since 1995 to develop, manufacture, and market its own proprietary water filtration systems.
As of February 28, 2001, we entered into a celebrity consulting and endorsement agreement with Mr. Pat Boone. This agreement calls for the issuance of 110,000 shares of common stock for services to be performed during the term of the agreement, which expires on December 31, 2002. Additionally, we will make commission payments of 2.5% of the gross revenue derived by us from sales of our products in which Mr. Boone directly participates.
In 2000, we sold 235,295 shares of our common stock to an unaffiliated third party investor in a private placement for $200,000 in cash. We also granted a stock option to this investor to purchase an additional 235,295 restricted shares at $0.85 per share. This stock option expired in September, 2000. We relied upon Sections 4(2) and 4(6) of the Securities Act of 1933, as amended, for our exemption from registration on these transactions.
In 2000, we entered into a consulting agreement with an unaffiliated third party to provide marketing and consulting services to us. We granted this unaffiliated third party a stock option to purchase 250,000 restricted shares of our common stock at $1.125 per share. The option expires after three years, and vests one-third per year based upon performance criteria in the consulting agreement. The first one-third vested upon the execution of the agreement. This agreement has been terminated, and no additional shares have vested.
In April 2001, we repurchased all of our issued and outstanding Series A 13.5% Non-Voting, Cumulative Preferred Stock, $.01 par value per share. This repurchase was combined with a comprehensive settlement agreement, for the benefit of all parties, with the beneficial owner of the Preferred Stock. We also retired all of these Series A 13.5% Non-Voting, Cumulative Preferred
Stock, $.01 par value per share, along with the liability for associated dividends. The TAM Irrevocable Trust, one of our principal shareholders, loaned us $350,000.00 at 10% simple interest, repayable upon demand, to finance the transaction. However, all accrued interest on this note has been waived by the TAM Irrevocable Trust through the end of the fiscal year.
Organization
Our Company is presently comprised of one corporation with one subsidiary, Seychelle Water Technologies, Inc., a Nevada corporation. We have a trade name, "Seychelle Water Filtration Products, Inc.," which we use in our commercial operations.
(b) Operations
General
We are implementing a business plan to manufacture and market a range of water filtration products. We are dedicated to improving the quality of life by providing highly effective, economical, convenient, durable, reliable filtration systems for assured quality drinking water. We design, manufacture and supply water filtration systems to the general public. These systems will range from portable water bottles that can be filled from nearly any available source, to units which provide entire water facilities at the point of entry for a facility. We also plan, in the coming year, to develop a product or products for a more diverse marketplace. We have the capability of tailoring systems to meet the needs of areas where specific water problems or severe water contamination exist, on a local or worldwide basis and have been funding research and development of more commercial and industrial lines of filtration.
General Business Plan
The Environmental Protection Agency (EPA) has established Maximum
Contamination Levels in their National Primary Drinking Water Standards. There
are forty-six (46) disclosed key contaminants out of a total of seventy-nine
(79) listed by the EPA which are addressed by our products. These forty-six (46)
disclosed key contaminants may be grouped into Volatile Organic Compounds,
Inorganics, Microbiological Organisms, Trihalomethanes, and Radiologicals.
Our patented portable products reduce up to 99.8% of the forty-six (46) disclosed key contaminants listed by the EPA in these five basic areas. We combine selective micron physical filtration, adsorption, and reduction using sorbent medias and other materials. All portable products are engineered by first analyzing the forty-six (46) disclosed key contaminants and the contaminants' direct effect upon health from ingestion. These forty-six (46) disclosed key contaminants are considered in the design effort in order to reach maximum reduction percentages of these pollutants. Health claims are represented by the reduction in volume percentages as determined by various independent labs. Testing is continually performed, most recently achieving verification from Los Angeles County Laboratories - up to 95% reduction of analyte Chromium 6.
We develop and manufacture products in the area of water filtration. We have historically focused our manufacturing on our flagship Portable Water Filtration Systems that we have availed Nikken for distribution for the previous fiscal year. We also plan to begin marketing products into residential, commercial and industrial venues for both point-of-use and service applications.
For the past year, our primary marketing focus has been our strategic alliance with Nikken Global, Inc. and Kenko World, two affiliated entities which are private multi-level marketing companies. We will collectively call them Nikken in this document. We were in negotiations to give to Nikken, subject to certain restrictions, the exclusive rights to distribute our products and technology for a period of ten years, commencing from March 1, 2001. This relationship would be renewable for three successive one-year periods thereafter, or until either party gives three months notice prior to the end of the current term.
We are reducing the emphasis of business with Nikken for the coming fiscal year. We currently have limited sales pending with Nikken and do not foresee any expansion. We had one product which we marketed through Nikken: The PiMag Portable Water Filtration Bottle - 24oz. portable water filtration bottle. The device fills from the top and has an easy grip design that also fits into bike holders or a car caddy.
However, we will also continue to promote our products and technologies to non-profit organizations, such as the Red Cross, the U.S. and international militaries, missionaries, charitable and fund-raising groups and other philanthropic organizations, which do not sell to distributors or resell to customers.
We have spent much of our focus in the latter part of the last the fiscal year researching new technologies in the field of water filtration. We believe that these new technologies will be our focus in the coming fiscal year.
We have been in active discussions to acquire a line of reverse osmosis-based products which are currently being developed in China. Subsequent to our fiscal year end, we completed an exclusive agreement with Heibei R.O. Environmental Technologies, which is a company that will produce membrane products for our sales and distribution in the United States. This agreement offers us the opportunity to expand into the home market with a product that we believe may be revolutionary and can be produced and sold at a price that we believe is extremely competitive to the market. We believe that this affiliation could further enable distribution of our portable filtration products throughout China.
We also have been examining the ozonation process as a possible technology for us to pursue. Ozonation can be defined as an oxidation and disinfectant process used in the water filtration industry. Ozonation is an alternative to the chlorination processes used in water treatment. Various municipalities and water treatment facilities have been examining and are choosing ozonation as a replacement for chlorination because of ozones ability to effectively purify water without side effects. We have been reviewing ozonation technology for possible use with our existing intellectual properties as a means of removing materials economically for the consumer, commercial, and industrial markets. We have been looking at this technology for potential point-of-use filtration in various situations. Our plan would be to develop a product or products which will be able to purify water of bacteria in developed communities as well as those without electrical supply.
We have completed negotiations for an agreement to acquire rights of Enviro(3) Care Incorporated, as well as all applicable intellectual properties. We will exercise our best efforts to complete the product packaging, marketing, and service in order to maximize sales and distribution of various ozonation products. This acquisition includes a patent and other trade
secret assets which we plan to use to our advantage in our distribution. This product market includes home, spas, wells, R.V., agricultural, medical and other commercial and industrial applications.
On June 6, 2002, we concluded the License Agreement for a product known as the "Hand Held Pump Technology." We licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear(TM) (#75/838,293). We will pay a two percent royalty and a one percent license of trademark fee on any sales using this technology during the term of the license. The License Agreement is for an initial term of five years, with five successive five-year renewals. We may market this technology in the United States and internationally. This offers us an additional proprietary product in the portable filtration industry. We believe that this purchase compliments our current product line.
We also have been examining the possibility of entering the waste water recovery business. We are examining the possibility of developing a portable, reclamation system that would meet requirements of state and federally regulated industries discharging water into our environment. Regulations covering water discharge occur in municipalities, service, commercial and industrial industries. We have had discussions with companies which service municipalities and commercial services. We have no definite agreements at this point.
We have entered into the first stage of contractual agreements with the representatives of a company in Japan on an exclusive basis to market and sell our entire product line throughout Japan. We anticipate completing the negotiations on this agreement within this fiscal year, although there can be no guarantee.
We also have several products which we are not currently marketing but have been developing for marketing in the future to other consumer markets through avenues other than Nikken. In any event, our goal is to capture a significant share of the water filtration market using these and other products. We plan to continue to market our current products and to complete the additional products in research and development.
(d) Raw Materials
The use of proprietary medias in the manufacturing of our line of products is a major factor. To date, there is adequate availability of raw materials and proprietary medias for all of our products. We do not expect this situation to change in the near future.
(e) Customers and Competition
There are a number of established companies in the water filtration business, with no one company dominating this business. However, Innova Pure Water, Inc. (with whom we have a patent license agreement), and our company hold patents specifically covering the majority of all portable water filtration bottle design concepts. We cannot guarantee that we will be able to successfully compete.
Our primary customer in the past has been Nikken. Most of our revenues for the past fiscal year have been based upon our sales through Nikken. We are reducing the emphasis of business with
Nikken for the coming fiscal year. We currently have limited sales pending with Nikken and do not foresee any expansion. We plan to expand the focus of our operations to include other products and markets.
(f) Backlog
As of February 28, 2002, we had a backorder of $595,305 in portable water filtration units.
(g) Employees
As of February 28, 2002, we had eleven (11) employees, four (4) corporate and administrative employees and seven (7) operations and warehouse employees. Until the calendar year end, these employees worked for us under a lease arrangement with an unaffiliated third party Professional Employer Organization. We have discontinued this arrangement as of January 1, 2002 and now manage all human resources internally. We hire additional employees, on a temporary or ongoing basis, as circumstances require.
(h) Proprietary Information
We own a patent for the Portable Water Filtration System with the filter cap assembly, Patent # 5,914,045. As described in the Abstract, it is "[a] filter assembly for a flexible, portable bottle having a sealing cap including a filter attached to the interior of the cap to filter out substantially all INORGANICS, ORGANICS, RADIOLOGICAL CHEMICALS AND MICROBIOLOGY. The filter assembly also may include a second filter or Iodinator sealed in the flexible bottle to further remove micro-organisms from water passing there-through. The filter assembly is designed so that the flexible bottle must be pressurized, as by being hand pressed, after it is filled with water to force flow of water through the [sic] either or both of the filters. The filter in the cap includes a check valve to allow the bottle to be re-pressurized after water has been dispensed from the bottle."
We own a patent, Patent # 6,004,460, for the Portable Water Filtration System that allows the user to fill the bottle from the bottom, thereby reducing any chance of contaminating the filter that is attached to the top of the bottle. The patent is described in the abstract as "[a] combination filter assembly and flexible portable bottle having a bottom opening with a sealing cap attached thereto, to filter out substantially all INORGANICS, ORGANICS, RADIOLOGICAL CHEMICALS and MICROBIOLOGY held in water in the bottle. The filter assembly may be attached to an adapter sealed to the top of the flexible bottle. Water in the bottle passes through the filter assembly and out a top nozzle or valve when the flexible bottle is squeezed. The flexible bottle is filled with water through the bottom opening." This is the technology which we use for our Bottom's UP product line.
We own a patent, Patent #6,058,971, for Quick Connect Diverter Valve. As described in the Abstract, it is "A quick-connect diverter valve for use in connecting existing water faucets and water filtration units in and around a kitchen, or other areas where clean water is desired."
In addition, we have the trademark registration for "Pres 2 Pure," S.N.75/040,704.
We have a trade name, "Seychelle Water Filtration Products, Inc.," which we use in our commercial operations.
In January, 2001, we entered into a non-exclusive patent license agreement with Innova which allows us, for a period of one year, to manufacture, market, distribute and sell all portable water filtration bottles which are filled from the top. The license is renewable on an annual basis providing the minimum unit sales levels are achieved. These minimum unit level sales are 100,000 as a condition of renewal for the initial term and escalate in 100,000 unit increments, with 500,000 units as a condition for renewal for the fifth and all subsequent renewal periods. The license agreement is worldwide and requires a royalty for each unit sold. Given the shift our focus in providing water filtration products, we are not sure if this license will continue or will be renegotiated at some point on different terms. In any case, we do not see this technology as being a material part of our operations in the future.
On June 6, 2002, we concluded the License Agreement for a product known as the "Hand Held Pump Technology." We licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear(TM) (#75/838,293). We will pay a two percent royalty and a one percent license of trademark fee on any sales using this technology during the term of the license. The License Agreement is for an initial term of five years, with five successive five-year renewals.
(i) Government Regulation
We are not, as a company, subject to any material governmental regulation or approvals. However, our products are subject to inspection and evaluation by regulatory authorities who have jurisdiction over water quality standards. Such authorities are on the federal, state, and local level, both in the United States and overseas, where we market our products. Most of our products have already been inspected and evaluated by all applicable governmental authorities in the areas in which we operate or plan to operate in the near future. With respect to our new proposed focus of operations, we do not know if governmental regulation will have a material impact on us in the future.
(j) Research and Development
We have spent approximately $79,000 and $38,000 in research and development activities for the fiscal years ended February 28, 2002 and February 28, 2001, respectively.
(k) Environmental Compliance
At the present time we, as a company, are not subject to any material costs for compliance with any environmental laws. With respect to our new proposed focus of operations, we do not know if environmental compliance will have a material impact on us in the future.
(l) Subsequent Events
On June 6, 2002, we concluded the License Agreement for a product known as the "Hand Held Pump Technology." We licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear(TM) (#75/838,293). We will pay a two percent royalty and a one percent license of trademark fee on any sales using this technology during the term of the license. The License Agreement is for an initial term of five years, with five
successive five-year renewals. We may market this technology in the United States and internationally.
Subsequent to our fiscal year end, we completed an exclusive agreement with Heibei R.O. Environmental Technologies, which is a company that will produce membrane products for our sales and distribution in the United States. This agreement offers us the opportunity to expand into the home market with a product that we believe may be revolutionary and can be produced and sold at a price that we believe is extremely competitive to the market.
We have completed negotiations for an agreement to acquire rights of Enviro(3) Care Incorporated, as well as all applicable intellectual properties. We will exercise our best efforts to complete the product packaging, marketing, and service in order to maximize sales and distribution of various ozonation products. This acquisition includes a patent and other trade secret assets which we plan to use to our advantage in our distribution. This product market includes home, spas, wells, R.V., agricultural, medical and other commercial and industrial applications.
ITEM 2. Description of Properties.
As of February 28, 2002, our business office was located at 32921 Calle Perfecto, San Juan Capistrano, CA 92675. Our telephone number at this address is 949-234-1999. We pay a total of $8,020 in rent per month for approximately 13,000 square feet of office space through March 31, 2002, escalating to $8,750 per month through January 14, 2003. We have a three-year lease with an unaffiliated third party. We own our manufacturing equipment, office equipment and inventory.
We own three patents, a trademark, a trade-name, trade secrets and a non-exclusive patent license agreement with Innova, see Proprietary Information above, and other proprietary information related to our business operations.
ITEM 3. Legal Proceedings.
During May, 2001, Seychelle Water Technologies, Inc. was named and served
with a lawsuit filed by SafeWater Anywhere, Inc. This lawsuit was filed in State
Superior Court in Orange County, California. Mr. Carl Palmer was also named as a
defendant. The complaint alleges breach of fiduciary duty, constructive fraud,
promissory fraud, rescission, constructive trust, unfair trade practices, and
conversion. The complaint sought unspecified damages and injunctive relief. We
filed a motion with the court on behalf of all defendants to have this matter
set for mediation/arbitration. The court approved our motion.
Mediation/arbitration is pending. We continue to believe that this matter is
without any merit and intend to vigorously defend our rights.
In February, 2002, Mr. Douglas Copp filed a lawsuit on behalf of himself and American Rescue Team International, Inc. against us, Nikken, and Carl Palmer in the U.S. District Court for the District of New Mexico. The Complaint, which is essentially a claim for royalty payments, alleges breach of contract, unfair trade practices, misappropriation of publicity, unjust enrichment, violation of the Lanham Act, and conspiracy. While we believe that the claims are without merit and
will aggressively defend our rights. We plan to seek an early dismissal because we believe that the case was filed in the wrong court. We have not yet responded in this matter.
Otherwise, no legal proceedings of a material nature to which we are a party are pending, and we know of no legal proceedings of a material nature pending or threatened or judgments entered against any of our directors or officers in his or her capacity as such.
ITEM 4. Submission of Matters to a Vote of Security Holders.
We did not submit any matter to a vote of security holders through solicitation of proxies during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.
(a) Principal Market or Markets
Our Common Stock began trading in 1987. Since the consummation of the Exchange Agreement between our Company and SWT, market makers and other dealers have provided bid and ask quotations of our Common Stock under the symbol "SYEV." Trading was conducted in the over-the-counter market on the NASD's "Electronic Bulletin Board" until April 20, 2000. We traded on the "Pink Sheets" until December, 2000, when we were re-listed on the NASD's "Electronic Bulletin Board," where we currently trade. The table below represents the range of high and low bid quotations of our Common Stock as reported during the reporting period herein. The following bid price market quotations represent prices between dealers and do not include retail markup, markdown, or commissions; hence, they may not represent actual transactions.
Fiscal Year 2002 High Low ---------------- ----- ----- First Quarter Common Shares $1.28 $ .82 Second Quarter Common Shares $ .98 $ .35 Third Quarter Common Shares $ .40 $ .25 Fourth Quarter Common Shares $ .44 $ .20 |
Fiscal Year 2001 High Low ---------------- ----- ----- First Quarter $1.43 $ .75 Common Shares Second Quarter $1.10 $ .87 Common Shares Third Quarter $1.47 $ .62 Common Shares Fourth Quarter $1.62 $ .34 Common Shares |
(b) Approximate Number of Holders of Common Stock
As of February 28, 2002, a total of 9,508,480 of our shares of Common Stock were outstanding and approximately 273 holders of record owned these shares. However, we believe that we have a significantly greater number of shareholders because a substantial number of our shares are held in nominee name.
(c) Dividends
Holders of Common Stock and Preferred Stock are entitled to receive such dividends as may be declared by our Board of Directors. No dividends on the Common Stock were paid by us during the periods reported herein nor do we anticipate paying such dividends in the foreseeable future.
ITEM 6. Management's Discussion and Analysis or Plan of Operation.
Forward-Looking Statements
The following discussion contains forward-looking statements regarding our Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that may affect such forward-looking statements include, without limitation: our ability to successfully develop new products for new markets, the impact of competition on our revenues, changes in law or regulatory requirements that adversely affect or preclude customers from using our products for certain applications, delays in our introduction of new products or services, and our failure to keep pace with emerging technologies.
When used in this discussion, words such as "believes," "anticipates," "expects," "intends" and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by us in this document and other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business.
Results of Operations
For the fiscal year ended February 28, 2002, we saw an increase in our sales revenues from the prior year. As a result we were marginally profitable for the fiscal year ended February 28, 2002. Our revenues increased for the fiscal year ended February 28, 2002 compared to the fiscal year ended February 28, 2001. They were $1,971,774 and $830,323, respectively.
Costs of sales include all costs incurred in the manufacturing process. The major components of direct costs are direct labor and associated benefits, materials and freight. The major components of indirect job costs are indirect labor costs and associated benefits and depreciation of production equipment. Our costs of sales as a percentage of revenue decreased for the fiscal years ended February 28, 2002 and February 28, 2001. They were 63% and 70% respectively.
Gross profit from operations was $738,331 or 37% for the year ended February 28, 2002, compared to $249,080 or 30% of revenue for the year ended February 28, 2001.
Our general and administrative expenses were $505,407 for the year ended February 28, 2002 and $761,349 for the year ended February 28, 2001. The major components of general and administrative expenses are office salaries and associated payroll costs, general and health insurance costs, rent, telephone, accounting and legal expenses.
We had a net profit of $47,278 for the year ended February 28, 2002, compared to a net loss of $(878,742) for the year ended February 28, 2001. Our basic and diluted income per share for the year ended February 28, 2002 was $0. Our basic and diluted loss per share for the year ended February 28, 2001 was $.11.
While we have had a successful year marketing our products principally through Nikken, we plan to expand the scope of our products. We are reducing the emphasis of business with Nikken in the coming fiscal year.
At this time, we believe that we can replace the revenues which Nikken provided, but do not know to what extent the loss of revenues will have an impact on us. We have had a similar situation in the past with a major customer and were able to replace the lost revenues within approximately a one year period. However, we cannot make a prediction at this point.
On June 6, 2002, we concluded the License Agreement for a product known as the "Hand Held Pump Technology." We licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear(TM) (#75/838,293). We will pay a two percent royalty and a one percent license of trademark fee on any sales using this technology during the term of the license. The License Agreement is for an initial term of five years, with five successive five-year renewals. We may market this technology in the United States and internationally.
Subsequent to our fiscal year end, we completed an exclusive agreement with Heibei R.O. Environmental Technologies, which is a company that will produce membrane products for our sales and distribution in the United States. This agreement offers us the opportunity to expand into the home market with a product that we believe may be revolutionary and can be produced and sold at a price that we believe is extremely competitive to the market.
We have completed negotiations for an agreement to acquire rights of Enviro(3) Care Incorporated, as well as all applicable intellectual properties. We will exercise our best efforts to complete the product packaging, marketing, and service in order to maximize sales and distribution of various ozonation products. This acquisition includes a patent and other trade secret assets which we plan to use to our advantage in our distribution. This product market includes home, spas, wells, R.V., agricultural, medical and other commercial and industrial applications.
We continue to be in active discussions with various companies concerning our current product line and the expansion of our business segments.
Liquidity and Capital Resources
Our cash flows from operating activities produced a net $265,680 during the year ended February 28, 2002, compared to using a net $155,408 during the year ended February 28, 2001.
Our investing activities used $27,796 during the year ended February 28, 2002, compared to using $29,366 for the year ended February 28, 2001. All investing activities were directed toward the purchase of equipment.
Financing activities used $147,450 for the year ended February 28, 2002 compared to February 28, 2001 of $260,000. The cash for these activities came principally from sales of common stock and stockholder advances.
Our net cash increased to $201,451 at February 28, 2002 from $111,017 at February 28, 2001.
Inventories increased by $99,833 for the year ended February 28, 2002, compared to a decrease of $118,579 for the year ended February 28, 2001.
We plan to continue to internally fund the expansion of our operations. However, we may investigate the use of outside funding, including debt financing or equity private placements. We have no specific plans for any outside funding at this point.
ITEM 7. Financial Statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report F-1
Financial Statements
Consolidated Balance Sheet F-2 to F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Deficit F-5 to F-6
Consolidated Statements of Cash Flows F-7 to F-8
Notes to Consolidated Financial Statements F-9 to F-29
|
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Seychelle Environmental Technologies, Inc.
San Juan Capistrano, California
We have audited the accompanying consolidated balance sheet of Seychelle Environmental, Technologies, Inc. and subsidiary as of February 28, 2002, and the related consolidated statements of operations, of changes in stockholders' deficit, and of cash flows for each of the two fiscal years then ended. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 Seychelle Environmental Technologies, Inc. and subsidiary at February 28, 2002 and the consolidated results of their operations and their cash flows for each of the two fiscal years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company has recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Solana Beach, California
June 7, 2002
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
February 28, 2002
ASSETS
CURRENT ASSETS
Cash $201,451
Trade receivables, net of allowance for 167,080
doubtful accounts $42,984
Inventories, net 268,630
Prepaid expenses 12,300
--------
Total current assets 649,461
--------
PROPERTY AND EQUIPMENT, NET 111,798
INTANGIBLE ASSETS, NET 13,598
OTHER ASSETS 550
--------
Total non-current assets 125,946
--------
TOTAL ASSETS $775,407
========
|
See accompanying notes to consolidated financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET (CONTINUED)
February 28, 2002
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 127,640
Accrued expenses 299,450
Customer deposits 225,266
Income taxes payable 3,597
Stockholder advances 309,588
-----------
Total current liabilities 965,541
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, $.01 par value
Series "AAA", preferred stock, 8,000 shares 80
authorized, issued and outstanding
Common stock $.001 par value - 50,000,000 shares 9,433
authorized; 9,433,480 shares issued and outstanding
Additional paid-in capital 3,003,662
Accumulated deficit (3,160,602)
Unearned compensation (42,707)
-----------
Total stockholders' deficit (190,134)
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 775,407
===========
|
See accompanying notes to consolidated financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Fiscal Years Ended February 28, 2002 and 2001
2002 2001
----------- -----------
SALES $ 1,971,774 $ 830,323
COST OF SALES 1,233,443 581,243
----------- -----------
Gross profit 738,331 249,080
----------- -----------
OPERATING EXPENSES
Selling 153,635 230,369
General and administrative 505,407 761,349
----------- -----------
Total expenses 659,042 991,718
----------- -----------
INCOME (LOSS) FROM OPERATIONS 79,289 (742,638)
OTHER INCOME (EXPENSES)
Interest expense (29,592) (1,895)
Miscellaneous income (expense) 1,581 9,699
Write down due to discontinuance
of product lines 0 (142,308)
----------- -----------
Total other income (expense) (28,011) (134,504)
----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 51,278 (877,142)
PROVISION FOR INCOME TAXES 4,000 1,600
----------- -----------
Net income (loss) $ 47,278 $ (878,742)
=========== ===========
BASIC AND DILUTED (LOSS)
PER SHARE $ 0.00 $ (0.11)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES: BASIC AND DILUTED 9,043,925 8,772,289
=========== ===========
|
See accompanying notes to consolidated financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For Fiscal Years Ended February 28, 2002 and 2001
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
------ ----------- --------- ----------- -----------
Balance, February 29, 2000 8,017 $ 80 8,475,046 $ 8,475 $ 2,544,125
Issuance of common stock in
connection with celebrity
consulting contract 0 0 110,000 110 145,090
Issuance of stock options
for services 0 0 0 0 59,375
Issuance of common stock for
compensation and
services 0 0 109,139 109 109,030
Issuance of common stock to
employees 0 0 35,000 35 14,183
Issuance of common stock to
former consultant 0 0 37,000 37 (37)
Cancellation of common stock
of former consultant 0 0 (80,000) (80) 80
Sale of common stock 0 0 235,295 235 199,765
Contributed executive services 0 0 0 0 58,391
Net loss from fiscal year ended
February 28, 2001 0 0 0 0 0
----- ----------- --------- ----------- -----------
Balance, February 28, 2001 8,017 $ 80 8,921,480 $ 8,921 $ 3,130,002
Total
Stock Subscription Stockholder'
Receivable and Equity
Accumulated Unearned Stockholder (Accumulated)
Deficit Compensation Receivable (Deficit)
----------- ------------ ------------------ -------------
Balance, February 29, 2000 $(2,329,138) $ 0 $ (13,609) $ 209,933
Issuance of common stock in
connection with celebrity
consulting contract 0 (93,953) 0 51,247
Issuance of stock options
for services 0 0 0 59,375
Issuance of common stock for
compensation and
services 0 0 0 109,139
Issuance of common stock to
employees 0 0 0 14,218
Issuance of common stock to
former consultant 0 0 0 0
Cancellation of common stock
of former consultant 0 0 0 0
Sale of common stock 0 0 0 200,000
Contributed executive services 0 0 13,609 72,000
Net loss from fiscal year ended
February 28, 2001 (878,742) 0 0 (878,742)
----------- ----------- ----------- -----------
Balance, February 28, 2001 $(3,207,880) $ (93,953) $ 0 $ (162,830)
|
See accompanying notes to consolidated financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (CONTINUED)
For Fiscal Years Ended February 28, 2002 and 2001
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
----- ----------- --------- ----------- -----------
Repurchase Series A
Preferred stock (17) $ 0 0 $ 0 $ (350,000)
Issuance of common stock for
compensation and
services 0 0 507,000 507 113,585
Issuance of common stock
to employees 0 0 5,000 5 1,495
Forgiveness of interest
due shareholder 0 0 0 0 29,580
Contributed executive
services 0 0 0 0 54,000
Celebrity consulting agreement 0 0 0 0 0
Reduce negotiated share
price on stock issued to
board member 0 0 0 0 25,000
Net income from fiscal year ended
February 28, 2002 0 0 0 0 0
----- ----------- --------- ----------- -----------
Balance, February 28, 2002 8,000 $ 80 9,433,480 $ 9,433 $ 3,003,662
===== =========== ========= =========== ===========
Total
Stock Subscription Stockholder'
Receivable and Equity
Accumulated Unearned Stockholder (Accumulated)
Deficit Compensation Receivable (Deficit)
----------- ------------ ------------------ -------------
Repurchase Series A
Preferred stock $ 0 $ 0 $ 0 $ (350,000)
Issuance of common stock for
compensation and
services 0 0 0 114,092
Issuance of common stock
to employees 0 0 0 1,500
Forgiveness of interest
due shareholder 0 0 0 29,580
Contributed executive
services 0 0 0 54,000
Celebrity consulting agreement 0 51,246 0 51,246
Reduce negotiated share
price on stock issued to
board member 0 0 0 25,000
Net income from fiscal year ended
February 28, 2002 47,278 0 0 47,278
----------- ----------- ----------- -----------
Balance, February 28, 2002 $(3,160,602) $ (42,707) $ 0 $ (190,134)
=========== =========== =========== ===========
|
See accompanying notes to consolidated financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended February 28, 2002 and 2001
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 47,278 $(878,742)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 54,166 72,481
Provision for doubtful accounts 6,674 22,551
Stock issued for services 315,339 116,762
Fair market value of stock options issued for services 0 59,375
Forgiveness of accrued interest 29,580 0
Provision for slow moving inventory (19,001) 142,308
Contributed executive services 54,000 72,000
Gain on disposal of equipment (1,581) (11,514)
Changes in operating assets and liabilities:
Trade receivables (158,087) (600)
Inventory 99,833 (118,579)
Other current assets 12,084 (2,784)
Intangible and other assets 12,800 (10,160)
Accounts payable 39,180 8,057
Accrued expenses (243,876) 174,265
Income tax payable (1,600) 0
Customer deposits 18,891 199,172
--------- ---------
Net cash provided (used) by operating activities 265,680 (155,408)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment 2,500 25,000
Purchase of equipment (30,296) (54,366)
--------- ---------
Net cash used by investing activities (27,796) (29,366)
========= =========
|
See accompanying notes to consolidated financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Fiscal Years Ended February 28, 2002 and 2001
2002 2001
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock $ 0 $ 200,000
Repurchase preferred stock (350,000) 0
Proceeds from stockholder's advances 350,000 80,000
Repayments on stockholder's advances (147,450) (20,000)
--------- ---------
Net cash (used) provided by financing activities (147,450) 260,000
--------- ---------
NET INCREASE IN CASH 90,434 75,226
Cash, beginning of year 111,017 35,791
--------- ---------
Cash, end of year $ 201,451 $ 111,017
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 0 $ 347
========= =========
Income taxes $ 1,600 $ 1,600
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Stock issued for services and settlement of litigation $ 386,839 $ 109,140
========= =========
Contributed executive services $ 54,000 $ 58,391
========= =========
Forgiveness of accrued interest on stockholder advances $ 29,580 $ 0
========= =========
Reduction of value of shares issued for legal services $ 25,000 $ 0
========= =========
Settlement of stockholders' receivable for services $ 0 $ 13,609
========= =========
Stock options issued for services $ 0 $ 59,375
========= =========
Settlement of accounts payable
by stockholder advance $ 0 $ 30,000
========= =========
|
See accompanying notes to consolidated financial statements.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE A: ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization
Seychelle Environmental Technologies, Inc. ("SET"), was incorporated under the laws of the State of Nevada on January 23, 1998 as a change in domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.
Seychelle Water Technologies ("SWT") was formed as a corporation in February 1997 under the laws of the state of Nevada for the purpose of marketing the products of Aqua Vision International ("Aqua Vision"), a private California entity operating since 1996. Prior to January 1998, SWT operations were limited primarily to fundraising and marketing activities.
On January 30, 1998, SET entered into a stock exchange agreement with SWT, whereby SWT shareholders emerged as the majority stockholder of SET. This reverse acquisition resulted in SWT becoming a wholly owned subsidiary of SET. SWT had no material operations for each of the four fiscal years ended February 28, 2002.
On January 31, 1998, SET purchased the assets of Aqua Vision for $9.5 million. Only $1.2 million was paid to the Aqua Vision owners and the transaction was not consummated. Effective February 28, 1999, the Company revised its Purchase Agreement and issued 8,000 shares of its Series "AAA" Preferred Stock Cumulative Preferred Voting Stock (described in Note E) to Aqua Vision's owners. As a result, Aqua Vision's owners became the ultimate controlling stockholder of SET. Because the assets were acquired from existing shareholders, the $1.2 million payment was treated as a distribution and the Series "AAA" stock issuance was treated as a recapitalization.
Description of Business
The Company designs, manufactures and supplies water filtration systems to the general public. These systems range from portable water bottles that can be filled from nearly any available source, to units which provide entire water facilities at the point of entry for a facility. There are a number of established companies in the water filtration business, with no one company dominating the business.
During February 2001, SET entered into a strategic alliance with Nikken Global, Inc. and Kenko World (collectively "Nikken"), whereby Nikken obtained exclusive rights to distribute the SET products and technology for a period of ten
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE A: ORGANIZATION AND DESCRIPTION OF BUSINESS, continued
years commencing from March 1, 2001. The Alliance would be renewable for three successive one-year periods thereafter, or until either party gives three months notice prior to the end of the current term.
Nikken is one of the leading direct distribution organizations in the world. The Alliance is worldwide and royalty free. Revenue from the Company's sales to Nikken approximated $1,757,000 and $71,000 for the fiscal years ended February 28, 2002 and 2001, respectively.
SET reserved its rights to continue marketing and selling its products and technology to nonprofit organizations that do not resell to distributors or sell to consumers, for example the Red Cross, US Armed Forces and similar organizations.
The Company is reducing the emphasis of business with Nikken for the coming fiscal year. The Company currently has limited sales pending with Nikken and does not foresee any expansion. As of February 28, 2002, the Company had received $225,266 as deposit towards purchase orders of approximately $465,000. The Company had one primary product, which they marketed through Nikken: The PiMag Portable Water Filtration Bottle - 24oz. Portable water filtration bottle.
During the later part of the fiscal year ended February 28, 2002, the Company began discussions with other companies researching new technologies in the field of water filtration including -
o Reverse osmosis-based products;
o Ozination; and,
o Waste water recovery
During May 2002, the Company completed negotiations for an agreement to acquire rights to Enviro Care Inc., as well as, all applicable intellectual properties, whereby the Company can market various ozonation products. The Company believes this agreement will provide opportunities in additional markets including home, spa, agriculture, medical and other commercial and industrial applications.
During June 2002, the Company entered into an exclusive agreement with Heibei R.O. Environmental Technologies, whereby the Company can sell reverse osmosis-based products, which is currently being developed in China. The Company believes this agreement provides opportunities to expand into the home market with a product that can be produced and sold at a
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE A: ORGANIZATION AND DESCRIPTION OF BUSINESS, continued
price that is competitive to the market. Additionally, the Company believes the agreement will further enable distribution of portable filtration products in China.
The Company believes that these new initiatives will be their primary focus during the fiscal year ending February 28, 2003.
Prior to entering into this strategic alliance, the Company entered into a patent license agreement with Innova Pure Water, Inc. (Innova), whereby Innova granted the Company a limited non-exclusive license to manufacture, market, distribute and sell all portable water filtration bottles that are filled from the top for a period of one year (initial term). The Company and Innova, respectively, hold patents covering the majority of all portable water filtration bottle design concepts. The agreement is renewable on an annual basis providing the minimum unit sales levels are achieved. The minimum unit sales level of 100,000 is a condition of renewal for the initial term and escalates in 100,000 unit increments with 500,000 units as a condition for renewal for the fifth and all subsequent renewal periods. The license agreement is worldwide and requires a royalty ranging from $.25 to $.40 for each unit sold. Based upon the shift in focus for providing water filtration products, the Company is not sure if this license will continue or will be renegotiated at some point on different terms. In any case, the Company does not anticipate this technology as being a material part of their operations in the future. Royalty expense for the fiscal years ended February 28, 2002 and 2001 was approximately $62,000 and $7,000, respectively.
During the fiscal year ended February 28, 2001, as a result of the Nikken alliance, the Company recorded non-recurring charges of approximately $142,000, consisting of an inventory write down of $126,000 and tooling costs of $16,000 to discontinue its former product lines no longer sold through the Company's new direct distribution alliance with Nikken.
The Company sells its products throughout the United States and abroad including Europe and Asia. Geographic information for the fiscal years ended February 28, 2002 and 2001 is as follows:
2002 2001
---------- ----------
Water filtration products sold to
external customers (1)(2) in:
The United States $1,945,971 $ 828,017
Canada 11,441 1,639
Others 14,362 667
---------- ----------
Total $1,971,774 $ 830,323
========== ==========
|
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE A: ORGANIZATION AND DESCRIPTION OF BUSINESS, continued
(1) Sales to external customers are attributed based on the country of residence of the customer.
(2) Long lived assets outside the United States included $59,400 and $65,400 in tooling costs located in Asia at February 28, 2002 and 2001, respectively.
Basis of Presentation
Until this current fiscal year the Company had experienced recurring net losses and has an accumulated deficit of $3,160,602 as of February 28, 2002. Additionally, the Company is reducing the emphasis of business with Nikken for the coming fiscal year. At this time, the Company believes that they can replace the revenues, which Nikken provided through new initiatives in the field of water filtration, but does not know to what extent the loss of revenues will have an impact on them. The Company has entered into an exclusive distribution rights to a line of reverse osmosis-based products in the United States and possibly elsewhere which are currently manufactured in China. Additionally, the Company completed an agreement to acquire rights to products developed by Enviro Care Inc., as well as, all applicable intellectual properties, whereby the Company can sell various ozonation products. The Company has also entered into the first stage of contractual agreements with representatives of one of the largest companies in Japan to market and distribute the Company's entire product line throughout Japan. The Company expects to complete the negotiations within the fiscal year ending February 28, 2003.
Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or other adjustments that might be necessary should the Company be unable to continue as a going concern in its present form.
NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SET and its wholly-owned subsidiary, SWT, (collectively, the "Company"). All significant intercompany transactions and balances have been eliminated.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue Recognition
Revenues and cost of sales are recognized when products are shipped.
Inventories
Inventories are stated at the lower of cost or market using the average cost method and consist of the following at February 28, 2002:
Raw materials $ 327,830
Work in progress 36,476
Finished goods 93,609
---------
457,910
Less: Reserve for obsolete or slow moving inventory (189,280)
---------
Net inventories $ 268,630
|
As previously noted (Note A), during the fiscal year ended February 28, 2001, the Company in anticipation of the Nikken alliance recorded a $126,000 inventory reserve, primarily raw materials, due to the discontinuance of previous product lines.
Management reviews and estimates realization of inventory on a regular basis with respect to obsolete and slow moving inventory. Although management believes its evaluations are sound, it is at least reasonably possible that such estimates may change in the near term.
Property and Equipment
Property and equipment, including significant improvements thereto, are stated at cost and are depreciated using the straight-line method over an estimated useful lives ranging from 3 to 5 years. Maintenance and repairs are charged to expense as incurred.
Intangible Assets
Intangible assets include patents, product rights and technology costs. All patent, product rights and technology costs are capitalized and amortized over ten years using the straight-line method. The Company assesses whether there has been a permanent impairment of the value of intangible assets by considering factors such as expected future product revenues, anticipated product demand and
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
prospects and other economic factors. Intangible assets net of accumulated amortization amounted to $13,598 at February 28, 2002.
Accounting For Long-Lived Assets
Long-lived and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In that case, if the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between the carrying amount of the asset and the fair value of the asset.
Customer Deposits
Customer deposits represent advance payments received for products, primarily from Nikken, and is recognized as revenue when products are shipped.
Research and Development Expenses
Research and development costs are expensed as incurred and amounted to approximately $79,000 and $38,000 for the fiscal years ended February 28, 2002 and 2001, respectively, and are included in cost of sales in the accompanying consolidated statements of operations.
Advertising Expenses
Advertising expenses are expensed as incurred. Total advertising expenses amounted to approximately $1,000 and $30,000 for the fiscal years ended February 28, 2002 and 2001, respectively, and are included in selling expenses in the accompanying consolidated statements of operations.
Concentration of Credit Risk
Nikken is required to deposit 30 percent of the total cost of each order. The balance of each order is due within fifteen days of delivery. On other sales, the Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Trade receivables generally are due in 30 days. Credit losses have consistently been within management's expectations. An allowance for doubtful accounts is recorded when it is probable that all or a portion of trade receivables balance will not be collected.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
For the fiscal years ended February 28, 2002 and 2001, SET had several customers, which individually accounted for at least 10% of total sales. The following table summarizes total sales and accounts receivable for the fiscal years then ended for these customers:
2002 2001
---------------------- -----------------------
Sales Accounts Sales Accounts
Percentage Receivable Percentage Receivable
---------- ---------- ---------- ----------
Customer 1 89% $160,287 8% $ 0
Customer 2 4% 875 16% 7,310
Customer 3 2% 0 12% 0
|
As previously disclosed (Note A), during February 2001, SET entered into a strategic alliance with Nikken, whereby Nikken obtained exclusive rights to distribute SET products and technology and thereby, the Company reduced sales volumes with previously significant customers during the fiscal year ended February 28, 2001.
For the fiscal years ended February 28, 2002 and 2001, SET had several vendors, which individually supplied at least 10% of total purchases. The following table summarizes total raw material purchases and accounts payable for the fiscal years then ended.
2002 2001
-------------------------- ----------------------------
Purchase Accounts Purchase Accounts
Percentage Payable Percentage Payable
---------- -------- ---------- --------
Vendor 1 45% $35,594 34% $35,971
Vendor 2 35% 13,017 20 0
Vendor 3 15% 18,212 13 3,620
|
Management believes that these raw materials can be purchased through other comparable suppliers.
Income Taxes
The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method,
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
deferred tax liabilities and assets are determined based on the difference between the consolidated financial statements and the tax basis of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Issuance of Stock for Services
Shares of the Company's common stock issued for services are recorded in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", at the fair market value of the stock issued or the fair market value of the services provided, whichever value is the more clearly evident.
Stock Compensation Plan
The Company accounts for stock-based compensation using the intrinsic value method prescribed in APBO No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.
Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of outstanding common shares during the periods presented. Basic loss per share and diluted loss per share are the same amount because the impact of additional common shares that might have been issued under the Company's stock option plan, warrants and convertible debt would be anti-dilutive.
Comprehensive Income
Comprehensive income is defined as net income adjusted for changes to equity resulting from events other than net income or transactions related to an entity's capital structure. Comprehensive income equaled net income for all periods presented.
Management's Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States, requires
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE B: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts, sales returns, inventory reserves, deferred income tax valuation allowances and litigation. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.
Segment Disclosures
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" requires public enterprises to report financial and descriptive information about reportable operating segments and establishes standards for related disclosures about product and services, geographic areas, and major customers. At this time, the Company has only one operating segment.
Reclassifications
Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation.
NOTE C: PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at February 28, 2002:
Tooling $208,621
Equipment 14,392
Vehicles 33,433
Furniture and fixtures 15,775
Computer equipment 15,726
--------
287,947
Less: Accumulated depreciation 176,149
--------
$111,798
========
|
During the fiscal year ended February 28, 2002, the Company scrapped tooling and equipment with an approximate cost and net book value of $39,000 and $1,000, respectively. The loss on disposition of tooling and equipment is included in other expenses in the accompanying consolidated statement of operations.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE C: PROPERTY AND EQUIPMENT, continued
Total depreciation expense for the fiscal years ended February 28, 2002 and 2001 was approximately $52,000 and $70,000, respectively.
NOTE D: ACCRUED EXPENSES
Accrued expenses consist of the following at February 28, 2002:
Reserve for returned products $ 61,630
Accrued legal expenses 113,500
Accrued accounting expenses 26,979
Accrued settlement 12,750
Accrued wages and benefits 19,249
Accrued commissions 10,909
Accrued credit card purchases 25,361
Other accrued expenses 29,072
---------
$ 299,450
=========
|
The Company provides a liability for returned products generally for a period of twelve months. Such costs are included in cost of sales. Total costs for returned products for the fiscal years ended February 28, 2002 and 2001 was approximately $0 and $64,000, respectively. Management periodically reviews its estimate for potentially returnable products. Although management believes its recorded liability is adequate, it is at least reasonably possible that such estimate may change in the near term.
The Company is currently investigating their liability under a royalty license agreement. Although the Company believes that no additional royalty payments will be made, the Company is clarifying the agreement terms with the license holder. Accordingly, no accrual has been made for potential royalties owed. Management believes that any liability under such agreement would be significant.
The accrued legal expenses represent the attorney fees the Company incurred in connection with various litigation, of which approximately $108,500 will be paid in stock.
During February 2002, the Company paid approximately $61,300 in legal fees of which $50,000 was accrued as of February 28, 2001, through the issuance of 232,000 shares of common stock. In connection with the issuance of 100,000 shares of this common stock, the Company again negotiated with a related party (Note H) to issue a similar number of shares valued at $0.25 per share rather than the $0.50 per share value on the grant date. This decrease in aggregate share value of $25,000 was record to contributed capital.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE D: ACCRUED EXPENSES, continued
The accrued settlement represents an estimate of the settlement of an employment-related claim, of which $12,750 will be paid in stock.
NOTE E: CAPITAL STRUCTURE
Common Stock
The holders of Common Stock have one vote per share on all matters (including election of Directors) without provisions for cumulative voting. The Common Stock is not redeemable and has no conversion or preemptive rights.
In the event of liquidation of the Company, the holders of Common Stock will share equally in any balance of the Company's assets available for distribution to them after satisfaction of creditors and the holders of the Company's senior securities. The Company may pay dividends, in cash or in securities or other property, when and as declared by the Board of Directors from assets legally available. To date, the Company has not declared or paid dividends on its Common Stock.
During March 2000, the Company sold 235,295 shares of common stock to an investor for $200,000. The Company also issued this investor a stock option to purchase an additional 235,295 shares at the then estimated fair market value of $0.85 per share. The stock options expired unexercised in September 2000.
During the fiscal year ended February 28, 2001, the Company issued 35,000 shares for compensation; and 219,139 shares for services provided.
During May 2001, the Company settled approximately $51,000 of its accrued expenses as of February 28, 2001 through the issuance of 270,000 shares of common stock.
During February 2002, the Company settled approximately $25,000 of its accrued expenses as of February 28, 2001 through the issuance of 100,000 shares of common stock. Additionally, the Company issued 10,000 shares for compensation; and 132,000 shares for services provided.
Preferred Stock
The Board of Directors has the authority to issue Preferred Stock and to fix and determine its series, relative rights and preferences to the fullest extent permitted by the laws of the State of Nevada and its articles of incorporation. As of
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE E: CAPITAL STRUCTURE, continued
February 28, 2002, three classes of Preferred Stock were authorized and one was outstanding.
Series "A" 13.5% Non Voting, Cumulative, Convertible Preferred Stock
Series "A" Preferred Stock has rights which are superior to all other securities of the Company, including upon liquidation and as to payment of dividends, if any, carries a cumulative dividend of 13.5% per annum, is non-voting, and is redeemable by the Company at any time at face value and is convertible into common shares of the Company at the lesser of $10 per share or 85% of the last five closing bid prices.
During April 2001, the Company repurchased for $350,000 all issued and outstanding Series A 13.5 percent non-voting, cumulative preferred stock, $0.01 par value per share and settled all liability for dividends. This repurchase was done in conjunction with a comprehensive settlement agreement with the beneficial owner of the preferred stock.
The stock repurchase was funded by a loan made by one of the Company's principal stockholders.
Series "AA" Non Voting, Cumulative, Convertible Preferred Stock
Series "AA" Preferred Stock had rights superior to all other securities of the Company except to Series "A" Preferred Stock, including upon liquidation and as to payment of dividends, if any, carried a 10% cumulative dividend, was non-voting, redeemable by the Company at any time at face value and was convertible into common shares of the Company at 85% of the last five closing bid prices. On June 14, 1999, all of the Series "AA" Non Voting, Cumulative Convertible Preferred Stock was converted into 1,337,509 shares of Common Stock at the original conversion terms.
Series "AAA" 12 % Cumulative, Convertible Preferred Shares
Series "AAA" Preferred Stock has rights which are superior to all other securities of the Company except Series "A" and the Series "AA" Preferred Stock, including upon liquidation and as to payment of dividends, if any. Series "AAA" Cumulative, Convertible Preferred Voting Stock carries a 12% per annum dividend payable in stock or cash, is voting, with each share equal to 100 shares of Common Stock, and is redeemable, at the Company's option, according to the following procedure: upon written notice of conversion from the holders, the Company shall have 45 days from receipt of such notice to repurchase for cash up
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE E: CAPITAL STRUCTURE, continued
to 2,000 shares of the Series "AAA" 12 % Cumulative, Convertible Preferred Shares at $1,000 per share.
As a result of the settlement of the litigation involving the Company and its former Chairman, in which the Company was seeking to rescind the issuance of all common shares in the Company previously issued to the former Chairman, the number of common shares issuable to the holders pursuant to the conversion provisions of the Series "AAA" Cumulative, Convertible Preferred Shares were reduced from 8,000,000 shares to 4,500,000 shares (but after pro rata adjustments, if any, for stock dividends, stock splits, reverse stock splits, and any other similar capital stock adjustments of a general nature). There are 8,000 shares issued and outstanding at February 28, 2002. The cumulative dividend shall be computed based on the Preferred Stock $80 par value.
Cumulative Dividends
Aggregate preferred redemption value and cumulative dividends in arrears at February 28, 2002 is as follows:
Series "AAA"
Aggregate redemption value $4,500,010 Cumulative preferred dividend in arrears $ 38 Per share cumulative preferred dividend $ 0.00 |
As previously noted, during April 2001, the Company repurchased all outstanding Series "A" preferred stock and settled all liability for dividends for $350,000 (Note J).
Stockholder's Receivable
Represents advances made to a stockholder and not reimbursed at February 29, 2000. Such advances were settled during the fiscal year ended February 28, 2001.
Contributed Executive Services
Contributed executive services represents an estimate of the fair value of services donated by the President of the Company through November 30, 2001.
Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE E: CAPITAL STRUCTURE, continued
Company as reported in the Company's Form 10-KSB. The agreement shall be automatically renew for successive one-year terms unless the Company or employee provides written notice of non-renewal.
Celebrity Endorsement Contract
During March 2000, the Company entered into a celebrity consulting and endorsement contract, which calls for the issuance of 110,000 shares of common stock for services to be performed during the term of the contract, which ends December 31, 2002. The shares were issued and recorded to contribute capital at fair market value of $145,200 and the related expense is amortized over the life of the contract. Additionally, commission payments are to be made for 2.5% of gross revenue derived by the Company from sales of the Company's products in which the consultant directly participates, for example the Red Cross, US Armed Forces and similar organizations. No such sales occurred during the fiscal years ended February 28, 2002 and 2001.
During the fiscal year ending February 28, 2003, the Company intends to use the celebrity in an info-mercial.
Consulting Agreement
During April 2000, the Company entered into a one-year consulting agreement with an individual who will provide marketing and consulting services for the Company. The agreement can be extended one year by the Company. As consideration for services to be rendered, the consultant received a stock option agreement to purchase 250,000 restricted shares of the Company's common stock at $1.125 per share.
The options expire after three years, and vest one third per year based on performance benchmarks to be achieved according to the contract. The first third vested on the effective date of the agreement as an enticement to enter into the agreement. The fair market value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for the fiscal year 2001: risk-free interest rate of 6%; expected life of the option of 3 years; zero dividend yield; and a volatility factor of the expected market price of SET common stock of 60%. The fair market value of the options earned during the fiscal year ended February 28, 2001 was estimated at $59,375 and recorded to expense with an offset to additional paid in capital.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE E: CAPITAL STRUCTURE, continued
During May 2001, the parties mutually agreed to terminate the consulting agreement and no additional options were granted as the performance benchmarks were not achieved.
Stock Compensation Plan
During July 2000, the Company adopted a stock compensation plan to be administered by the Board of Directors, or a Compensation Committee to be appointed by the Board. Consultants, advisors, and employees of the Company are eligible to participate in the Plan. The Plan provides for the issuance of 300,000 shares of common stock to be issued as stock grants, or under stock option agreements. During October 2000, the Company settled approximately $109,200 of its accrued expenses through the issuance of 109,139 shares of common stock.
During February 2002, the Company adopted an additional stock compensation plan to be administered by the Board of Directors or a Compensation Committee to be appointed by the Board. The Plan provides for the issuance of 300,000 shares of common stock to be issued as stock grants, or under stock option agreements. During February 2002, the Company issued 10,000 shares for compensation and 232,000 shares for services provided.
The exercise price of each stock option is not to be greater than the fair market value of the stock at the date of grant, or the par value of the stock at the date of grant. However, the Board, or Compensation Committee, at its discretion, may grant options with an exercise price less than fair market value at the date of grant, but not less than the greater of the par value of the stock or 50% of the fair market value. Fair market value is defined as the mean of the sale or bid prices on each of the five trading days immediately preceding the date as of which such determination is made.
Stock options expire on the earlier of (a) ten years form the date of
grant, (b) six months from the date an employee terminates employment
due to permanent disability, (c) the date of termination for an
employee for reasons other than retirement, disability of death
(however, may be extended by the Board for up to three years), or (d)
three months from the date an employee retires with permission from
the Board. The date at which the options may be exercised will be
determined by the Board at the time of grant. There were no options
outstanding under this Plan at February 28, 2002.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE F: INCOME TAXES
The components of the provision for income taxes for the fiscal years ended February 28, 2002 and 2001 are as follows:
2002 2001
--------- ---------
Current:
State $ 4,000 $ 1,600
Federal 0 0
Deferred:
State (12,122) (40,430)
Federal 38,425 (166,724)
Valuation allowance (26,303) 207,154
--------- ---------
Provision for income taxes $ 4,000 $ 1,600
========= =========
|
The reconciliation of the effective tax rates and U.S. statutory tax rates for the fiscal years ended February 28, 2002 and 2001 are as follows:
2002 2001
---- ----
Tax (benefit) of statutory rate (34)% (34)%
Deferred tax effect of goodwill
relating to Aqua Vision
Acquisition (12)% (12)%
Contributed executive services 12% 12%
Effect of state tax benefit (3)% (3)%
Other 4% 4%
Change in valuation allowance 33% 33%
----- -----
Effective tax Rate 0% 0%
===== =====
|
At February 28, 2002, the Company has net operating loss carry forwards, for income tax reporting purposes, of approximately $ 1,746,000 and $ 1,114,000 available to offset future federal and California taxable income, respectively. The federal carryforwards expire through 2021 and the California carryforwards expire through 2011.
At February 2002, the Company had available tax credit carry forwards comprised of federal and state research and experimentation credits of approximately $ 8,681 and $ 5,074, respectively. The research and experimentation credit carryforwards expire through 2020 for federal purposes and do not expire for California purposes.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE F: INCOME TAXES, continued
The components of the net deferred tax asset and (liability) for the fiscal years ended February 28, 2002 and 2001 are as follows:
2002 2001
--------- ---------
Net operating loss carryforward $ 582,780 $ 589,042
Depreciation and amortization 5,381 6,781
Inventory & bad debt reserves 84,637 79,066
Other 4,702 28,914
--------- ---------
677,500 703,803
Less: Valuation allowance (677,500) (703,803)
--------- ---------
Net deferred tax asset (liability) $ 0 $ 0
========= =========
|
NOTE G: COMMITMENTS AND CONTINGENCIES
The Company leases an office and production facility under an operating lease that expires in January 2003. Total rent expense amounted to approximately $96,000 and $99,000 for the fiscal years ended February 28, 2002 and 2001, respectively.
Future minimum lease payments are as follows:
Fiscal Year Ending February 28
2003 $ 92,250
=========
|
Legal Proceedings
During May 2001, Safewater Anywhere LLC filed a lawsuit against Seychelle Water Technologies, Inc., an officer of the Company and others in the Orange County Superior Court. The complaint alleges breach of fiduciary duty, constructive fraud, promissory fraud, rescission, constructive trust, unfair trade practices and conversion. The complaint sought unspecified damages and injunctive relief. During the fiscal year ended February 28, 2002, the Company
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE G: COMMITMENTS AND CONTINGENCIES, continued
filed a motion to have the matter set for arbitration / mediation. The court approved the Company's motion and arbitration / mediation is currently pending. The Company believes that the claims are without merit and intends to aggressively defend the case. Accordingly, no accrual has been made for potential damages.
In February 2002, Mr. Douglas Copp filed a lawsuit on behalf of himself and American Rescue Team International, Inc. against Seychelle Environmental Technologies, an officer of the Company and Nikken, in the U.S. District Court for the District of New Mexico. The Complaint, which is essentially a claim for royalty payments, alleges breach of contract, unfair trade practices, misappropriation of publicity, unjust enrichment, violation of the Lanham Act, and conspiracy. This Company believes that the claims are without merit and will aggressively defend the case. Accordingly, no accrual has been made for potential damages.
No other legal proceedings of a material nature to which the Company is a defending party are pending at February 28, 2002.
Other Commitments and Contingencies
The Company's current management believes that the Company and SWT's former management entered into certain contracts, agreements and transactions, which were not properly authorized or consummated. At the date of these consolidated financial statements, the Company is not aware of any formal claim relating to these contracts, agreements or transactions and believes that any such claims would be without merit. The Company cannot currently estimate the potential liability that would arise if such claim were to be made. Accordingly, no accrual has been made for these contingencies
NOTE H: RELATED PARTY TRANSACTIONS
As previously noted (Note D), during February 2002, the Company paid approximately $61,300 in legal fees of which $50,000 was accrued as of February 28, 2001 through the issuance of 232,000 shares of common stock. In connection with the issuance of 100,000 shares of this common stock, the Company negotiated with a board member to accept as full renumeration a similar number of shares valued at $0.25 per share rather than $0.50 per share value on the grant date. This decrease in aggregate share value of $25,000 was recorded to contributed capital.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE H: RELATED PARTY TRANSACTIONS, continued
During the fiscal year ended February 28, 2001, a board member's firm provided legal services for the Company for which the firm was granted 100,000 shares of common stock valued at $19,000. The board member was also granted 50,000 shares of common stock valued at $9,500. During May 2001, the Company issued these granted shares.
During May 2001, the Company additionally paid approximately $3,800 in other accrued expenses through the issuance of 20,000 shares of common stock.
A stockholder of the Company had outstanding advances as of February 28, 2001 of approximately $104,500. These stockholder advances accrue interest at 7.5 percent per annum and mature on dates ranging from November 2001 through January 2002. During the 2002 fiscal year, the Company repaid these stockholder advances. Additionally, the principle stockholder waived repayment of the accrued interest on the advances as of February 28, 2002. This reduction in accrued interest expense of approximately $1,900 was recorded to contributed capital.
During the 2001 fiscal year, an entity affiliated with an officer of the Company purchased tooling from the Company for $25,000 resulting in a gain on sale of approximately $8,000.
During March 2001, the Company sold discontinued inventory products to an affiliated entity of an officer of the Company for $12,000.
In connection with the repurchase of preferred stock, (Note E), the Company's principal stockholder loaned the Company $350,000. This loan bears interest at 10 percent and is repayable upon demand. During the 2002 fiscal year, the Company repaid approximately $60,400 in stockholder loans. Additionally, the principle stockholder waived repayment of the accrued interest on this note as of February 28, 2002. This reduction in accrued interest expense of approximately $27,700 was recorded to contributed capital.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE I: LOSS PER SHARE
February 28, 2002 February 28, 2001
----------------- -----------------
Numerator:
Net income (loss) $ 47,278 $ (878,742)
Preferred stock dividends (10) (114,760)
----------- -----------
Income (loss) available to common
stockholders $ 47,268 $ (993,502)
=========== ===========
Denominator:
Weighted average shares
Outstanding 9,043,925 8,772,289
=========== ===========
Basic and diluted profit (loss)
per share $ (0.00) $ (0.11)
=========== ===========
|
Options to purchase common stock were outstanding during the 2002 and 2001 fiscal years (see Note E) but were excluded in the computation of the diluted loss per share because their inclusion would have an anti-dilutive effect.
Also excluded from the computation of diluted loss per share because of their anti-dilutive effect was preferred stock convertible to approximately 5,587,000 shares of common stock at February 28, 2002.
NOTE J: SUBSEQUENT EVENTS
During May 2002, the Company completed negotiations for an agreement to acquire rights to Enviro Care Inc., as well as, all applicable intellectual properties, whereby the Company can sell various ozonation products. In connection with the agreement, the Company paid $5,000 in cash and granted 450,000 shares of common stock. The Company believes this agreement will open product markets including home, spas, agriculture, medical and other commercial and industrial applications.
During June 2002, the Company entered into an exclusive agreement with Heibei R.O. Environmental Technologies, whereby the Company can sell reverse osmosis-based products, which is currently being developed in China. The agreement shall be for a period of three years. The Company will be able to purchase Heibei products for cost plus fifteen percent. The Company believes this agreement offers the Company to expand into the home market with a product that is revolutionary and can be produced and sold at a price that is competitive to the market. Additionally, the Company believes the agreement will further enable distribution of portable filtration products.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 2002
NOTE J: SUBSEQUENT EVENTS, continued
On June 6, 2002, the Company entered into a License Agreement for a product known as the "Hand Pump Technology." The Company licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear(TM). The Company will pay a two percent royalty and a one- percent license of trademark fee on any sales using this technology during the term of the license. In connection with the license agreement, the Company granted the licensor 50,000 shares of common stock. The shares were issued during March 2002. The License Agreement is for an initial term of five years, with five successive five years renewals. The Company intends to market this technology in the United States and internationally.
ITEM 8. Disagreements With Accountants on Accounting and Financial Disclosure.
We did not have any disagreements on accounting and financial disclosures with our present accounting firm during the reporting period.
PART III
ITEM 9. Directors, Executive Officers, Promoters, and Control Persons; Compliance with Section 16(a) of the Exchange Act.
Our Directors and Executive Officers, their ages and positions held in the Company as of February 28, 2002 are as follows:
NAME AGE POSITION HELD
---- --- -------------
Carl Palmer 68 President, Chief Executive Officer
Treasurer and Director
Paul H. Lusby 46 Secretary and Director
Donald S. Whitlock 31 Director
Michelle Palmer 38 Vice President and Director
Kenneth Rawald 77 Vice President - Engineering
|
Our directors have served and will serve in such capacity until the next annual meeting of our shareholders and until their successors have been elected and qualified. The officers serve at the discretion of our directors.
Carl Palmer. Mr. Palmer has been the President, CEO and a director of the Company since January, 1998. He is the founder of our company, innovator of the complete line of Seychelle water filtration products and primary spokesperson worldwide. He personally oversees every aspect of operations. He is the inventor of thirteen patented products related to water purification. Mr. Palmer received a Bachelors Degree from Whittier College.
Paul H. Lusby. Mr. Lusby has been Secretary and a director of the Company since January, 1998. For the past eight years he has been a principal of the law firm of Cooper Kardaras & Kelleher LLP, formerly Cooper, Kardaras & Scharf LLP. He has a Juris Doctor from the University of Virginia and a Bachelor of Arts from the University of Virginia. He has been an active member of the California Bar since 1982. He is also the immediate past Chairman of the Board of Pacific Clinics, a non-profit organization dedicated to providing behavioral and mental health care to children and adults suffering from behavioral and mental health disorders.
Donald S. Whitlock. Mr. Whitlock has been a director of our Company since January, 1998. For the past eight years, he has been a principal of International Corporate Development, Ltd., an investment banking firm headquartered in Aspen, Colorado. Mr. Whitlock is a Fellow of the Aspen Institute. He has a Bachelors degree in Economics from Loyola Marymount College.
Michelle Palmer. Ms. Palmer has been Vice President of our Company since January, 1998 and a director since February, 2002. Her past and present responsibilities include all aspects of accounting, reporting, corporate structure, operational configurations, implementation of product lines. She was co-inventor of the Pres 2 Pure(TM) water filtration system. She received a Bachelor of Arts Degree from California State University, Long Beach.
Kenneth Rawald. Mr. Rawald has been a Vice President of Engineering since January, 1998. His primary responsibilities include product design and engineering, fixture design and assembly procedures. He provides necessary engineering drawings as well as presentation perspective sketches in various mediums for our Company and patent offices. He received a certification in Engineering from Pratt Institute.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 (the "34 Act") requires our officers and directors and persons owning more than ten percent of our Common Stock, to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Additionally, Item 405 of Regulation S-B under the 34 Act requires us to identify in our Form 10-KSB and proxy statement those individuals for whom one or more of the above referenced reports was not filed on a timely basis during the most recent fiscal year or prior fiscal years. Given these requirements, we have the following report to make under this section. We believe that none of our officers or directors were required to make filings during the last fiscal year.
ITEM 10. Executive Compensation.
The following table sets forth the Summary Compensation Table for the Chief Executive Officer and the compensated executive officers with salaries in excess of $100,000 per annum who were serving as executive officers at the end of the last three completed fiscal years. Compensation does not include minor business-related and other expenses paid by us. Such amounts in the aggregate do not exceed $10,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
---------------------------------- --------------------------------------------------
Awards Payouts
---------------------------------- --------------------------------------------------
Restricted All
Name and Salary Annual Other Stock LTIP Other
Principal Position(1)(2)(3) Year Compensation($) Bonus ($) Compensation ($)(1)(3) Award(s) Options/
--------------------------- ---- --------------- --------- ---------------------- ---------- --------
Carl Palmer 2002 $ 56,499 -- -- -- --
President(1) 2001 $ 13,600 -- -- -- --
2000 $ 12,000 -- -- -- --
Michelle Palmer 2002 $101,901 -- -- -- --
Vice President 2001 $101,901 -- -- -- --
2000 $101,901 -- -- -- --
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(1) The fair value of Mr. Palmer's compensation, for accounting purposes, was estimated at $56,499 for fiscal 2002, 2001 and 2000, of which $54,000; $58,400 and $60,000 respectively was treated as capital contribution. Mr. Palmer serves as our President on a full-time basis. On December 1, 2001, we entered into an employment agreement with Mr. Palmer, our President. The agreement is for five years and provides for a salary of $10,000 per year and a profit participation.
We have no compensation committee, retirement, pension, sharing, stock option, insurance or other similar programs but plan to establish such programs in the future, although there are no definitive plans to do so at this time.
During the 2002 fiscal year we issued 12,500 shares of our Common Stock as additional compensation to our employees for the 2002 fiscal year.
For the fiscal years 2002 and 2001, we paid health care insurance for our employees. We have no pension plan. We have no plans or agreements which provide compensation in the event of a change in control. We have no plans or agreements which provide compensation in the event of termination of employment.
We do not customarily pay members of our Board of Directors any fees for attendance or similar remuneration, but reimburse them for any out-of- pocket expenses incurred by them in connection with their activities.
In February, 2002, we issued Mr. Lusby 100,000 shares of Common Stock, as consideration for past services rendered as an officer of our company. Mr. Lusby is still due 50,000 shares for past services. During the fiscal year ended February 28, 2001, we granted Mr. Lusby an additional 50,000 shares of common stock and his law firm, a total of 100,000 shares of our common stock. These shares were issued in January, 2001.
Mr. Donald S. Whitlock, one of our directors and shareholders, was personally granted 17,000 shares of common stock valued at $1,700 in 2002 for past services rendered as a member of our Board of Directors.
We have no compensation committee, retirement, pension, sharing, stock option, insurance or other similar programs but plan to establish such programs in the future, although there are no definitive plans to do so at this time.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.
The following sets forth the number of shares of our $0.001 par value Common
Stock beneficially owned by (i) each person who, as of February 28, 2002, was
known by us to own beneficially more than five percent (5%) of our Common Stock;
(ii) our individual directors and (iii) our officers and directors as a group.
As of February 28, 2002, there were a total of 9,508,480 shares of Common Stock
issued and outstanding.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1)(2) CLASS ------------------- -------------------------- ---------- The TAM Irrevocable Trust 3,300,000(3) 34.7% 4012 S. Rainbow #K111 Las Vegas, NV 80103-2012 FTS Worldwide Corp. 1,320,009 13.9% 24 Route De Malagnon 1208 Geneva, Switzerland Carl Palmer(3) -0- -0- 32921 Calle Perfecto San Juan Capistrano, CA 92675 Donald S. Whitlock 69,000(5) .7% 720 East Hyman Ave., Suite 301 Aspen, CO 81611 Paul H. Lusby 152,500(6) 1.67% 141 East Walnut Street Pasadena, California 91103 Michelle Palmer 102,000(4) 1.1% 32921 Calle Perfecto San Juan Capistrano, CA 92675 Kenneth Rawald 67,000 .7% 32921 Calle Perfecto San Juan Capistrano, CA 92675 All officers and directors 390,500 4.1% as a Group (five persons) |
(1) All ownership is beneficial and of record, unless indicated otherwise.
(2) Beneficial owners listed above have sole voting and investment power with respect to the shares shown, unless otherwise indicated.
(3) The TAM Irrevocable Trust is an irrevocable trust for the benefit of certain family members of Mr. Carl Palmer. Mr. Palmer disclaims any beneficial ownership or interest in this Trust. In addition, this entity owns shares of our Series "AAA" Cumulative Convertible Preferred Voting Stock.
(4) Select Property Investments, LLC is a limited liability company owned by Ms. Michelle Palmer. This entity owns no common shares directly but owns shares of our Series "AAA" Cumulative Convertible Preferred Voting Stock.
(5) Does not include 4,700 shares owned of record by the wife of Mr. Whitlock. Mr. Whitlock disclaims any beneficial ownership or interest in these shares.
(6) In February, 2002, we issued Mr. Lusby 100,000 shares of Common Stock, as consideration for past services rendered as an officer of our company. Mr. Lusby is still due 50,000 shares for past services. During the fiscal year ended February 28, 2001, we granted Mr. Lusby an additional 50,000 shares of common stock and his law firm, a total of 100,000 shares of our common stock. These shares were issued in January, 2001. Mr. Lusby's law firm, Cooper Kardaras & Kelleher, LLP, owns a total of 200,000 shares of our common stock.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into a Purchase Agreement and an Amended Purchase Agreement for the acquisition of Aqua Vision International, a private California entity controlled by the TAM Irrevocable Trust and Select Property Investments, LLC. The TAM Irrevocable Trust is an irrevocable trust for the benefit of certain family members of Mr. Carl Palmer. Mr. Palmer disclaims any beneficial ownership or interest in this Trust. Select Property Investments, LLC is a limited liability company owned by Ms. Michelle Palmer. Mr. Palmer also disclaims any beneficial ownership or interest in this limited liability company. Under the terms of these agreements, these entities received 8,000 shares of Series "AAA" Cumulative Convertible Preferred Voting Stock.
From its inception through its acquisition by Seychelle Environmental Technologies, Inc. on January 30, 1998, Seychelle Water Technologies, Inc. spent most of its time and effort to raise funds to finance the common venture and to market Aqua Vision products. The owners of both companies at the time came to believe that both organizations would mutually profit from an affiliation between the two companies. Mr. Palmer negotiated the transaction as an agent of Aqua Vision. The original Purchase Agreement was negotiated by Seychelle Water Technologies, Inc. Seychelle Environmental Technologies, Inc. acquired Aqua Vision the day after the Seychelle Environmental Technologies, Inc. transaction. The original Purchase Agreement and the Amended Purchase Agreement were approved by the Board of Directors of SET after the January 30, 1998 acquisition. Mr. Palmer was a member of the Board of Directors but did not participate in the voting.
In February, 2002, we issued Mr. Lusby 100,000 shares of Common Stock, as consideration for past services rendered as an officer of our company. Mr. Lusby is still due 50,000 shares for past services. During the fiscal year ended February 28, 2001, we granted Mr. Lusby an additional 50,000 shares of common stock and his law firm, a total of 100,000 shares of our common stock. These shares were issued in January, 2001.
Mr. Donald S. Whitlock, one of our directors and shareholders, provided advice to us, through a firm with which he is associated, on capitalization and business development matters during the 1998 and 1999 fiscal years. The firm with which he is associated was issued 559,266 shares at inception and was paid $54,478 and $150,451, respectively. In 2000, he was personally granted 40,000 shares of common stock valued at $20,000 for past services rendered as a member of our Board of Directors. In 2002, he was personally granted 17,000 shares of common stock for past services rendered as a member of our Board of Directors.
During the fiscal year ended February 28, 2001, The TAM Irrevocable Trust, on of our principal shareholders, advanced $110,000 to us, of which $20,000 was repaid prior to the fiscal year end. These advances were to accrue interest at a rate of 7.5% per annum and mature on dates ranging
from November, 2001 to January, 2002. The interest through the end of the fiscal year has been waived.
During the fiscal year ended February 28, 2001, The TAM Irrevocable Trust, on of our principal shareholders, purchased tooling from us for $25,000.
In April 2001, we repurchased and retired all of our issued and outstanding Series A 13.5% Non-Voting, Cumulative Preferred Stock, $.01 par value per share. This retirement eliminated all accrued dividends on this Stock. This repurchase was combined with a comprehensive settlement agreement, for the benefit of all parties, with the beneficial owner of the Preferred Stock. The TAM Irrevocable Trust, on of our principal shareholders, loaned us $350,000.00 at 10% simple interest, repayable upon demand, to finance the transaction. The accrued interest through the end of the fiscal year on this note has been waived.
On February 28, 2002, we entered into an employment agreement with Mr. Palmer, our President. The agreement is for five years and provides for a salary of $10,000 per year and a profit participation.
PART IV
ITEM 13. Exhibits and Reports on Form 8-K.
(a) The following financial information is filed as part of this report:
(1) Financial Statements
(2) Schedules
(3) Exhibits. The following exhibits required by Item 601 to be filed
herewith are incorporated by reference to previously filed
documents:
Exhibit No. Description
2A* Plan of Exchange between Seychelle Environmental Technologies,
Inc. and Seychelle Water Technologies, Inc.
3A* Articles of Incorporation
3B* Articles of Merger of Royal Net, Inc. into Seychelle
Environmental Technologies, Inc
3C* Amendment to Articles of Incorporation re: Series "A" Preferred
Stock
3D* Amendment to Articles of Incorporation re: Series "AA" Preferred
Stock
3E* Amendment to Articles of Incorporation re: Series "AAA"
Preferred Stock
3F* Bylaws
10A* Purchase Agreement with Aqua Vision
10B* Amended Purchase Agreement with Aqua Vision
10C* Consulting Agreement with Mr. Stan Esecson
10D* Consulting Agreement with Mr. Pat Boone
10E Purchase Agreement with Aqua Gear
10F Employment Contract with Carl Palmer
----------
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* Previously filed
(b) Reports on Form 8-K. The Company filed one report on Form 8-K, dated February 19, 2002, announcing the appointment of Michelle Palmer to our Board of Directors.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
Dated: 6/14/02 By: /s/ Carl Palmer
--------------------------------------
Carl Palmer
President
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
CHIEF FINANCIAL OFFICER
Dated: 6/14/02 By: /s/ Carl Palmer
--------------------------------------
Carl Palmer
Treasurer and Director
Dated: 6/14/02 By: /s/ Paul H. Lusby
--------------------------------------
Paul H. Lusby
Secretary and Director
Dated: 6/14/02 By: /s/ Donald S. Whitlock
--------------------------------------
Donald S. Whitlock
Director
Dated: 6/14/02 By: /s/ Michelle Palmer
--------------------------------------
Michelle Palmer
Director
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2A* Plan of Exchange between Seychelle Environmental Technologies,
Inc. and Seychelle Water Technologies, Inc.
3A* Articles of Incorporation
3B* Articles of Merger of Royal Net, Inc. into Seychelle
Environmental Technologies, Inc
3C* Amendment to Articles of Incorporation re: Series "A" Preferred
Stock
3D* Amendment to Articles of Incorporation re: Series "AA" Preferred
Stock
3E* Amendment to Articles of Incorporation re: Series "AAA"
Preferred Stock
3F* Bylaws
10A* Purchase Agreement with Aqua Vision
10B* Amended Purchase Agreement with Aqua Vision
10C* Consulting Agreement with Mr. Stan Esecson
10D* Consulting Agreement with Mr. Pat Boone
10E Purchase Agreement with Aqua Gear
10F Employment Contract with Carl Palmer
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* Previously filed
Exhibit 10E- License Agreement
Agreement License
This License Agreement (the "Agreement") is entered into by and between Gary Hess 27681 Alarcon Mission Viejo, Ca 92691 ("Licensor") and Seychelle Environmental Technologies 32921 Calle Prefecto, San Juan Capistrano, Ca 92675 ("Licensee") (Licensor and Licensee are collectively referred to herein as "the parties"), with reference to the following facts:
A. Licensor is the owner of certain proprietary rights to an invention referred to as "hand held Pump technology".
B. Licensee desires to license certain rights in the invention.
NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows:
1.0 THE PROPERTY.
The "Property" refers to the invention(s) described in U.S. Patent No. 6,136,188, a true and correct copy of which is attached hereto as Exhibit "A".
1.1 PATENTS & IMPROVEMENTS.
The Property is defined as the invention(s) described in U.S. Patent No. 6,136,188 and any improvements, reissues or extensions, as well as any continuations, divisions, or substitute U.S. patent applications that shall be based on the patent(s); and any patent applications corresponding to the above-described patent(s) and patent applications that are issued, filed or to be filed in any and all foreign countries.
1.2 PATENTS AND COPYRIGHT, TRADE SECRETS AND TRADEMARKS.
The "Property" refers to all inventions described in U.S. Patent No. 6,136,188 and to all other proprietary rights, including but not limited to copyrights, trade secrets, formulas, research data, know-how and specifications related to the invention or derived from the license property commonly known as "hand held Pump technology" as well as the AquaGear trademark rights and associated good will.
2.0 LICENSED PRODUCTS.
"Licensed Products" are defined as any products sold by the Licensee that incorporates the Property.
3.0 GRANT OF RIGHTS.
Licensor grants to Licensee the exclusive right to make, use and sell the Property solely in association with the manufacture, sale, use, promotion or distribution of the Licensed Products.
4.0 SUBLICENSE.
Licensee may sublicense the rights granted pursuant to this agreement provided: Licensee obtains Licensor's prior written consent to such sublicense and Licensor receives such revenue or royalty payment as provided in the Payment section below. Any sublicense granted in violation of this provision shall be void.
5.0 RESERVATION OF RIGHTS.
Licensor expressly reserves all rights other than those being conveyed or granted in this Agreement.
6.0 TERRITORY. [STATEMENT OF TERRITORY]
The rights granted to Licensee are world-wide (the "Territory").
7.0 TERM.
This Agreement shall commence upon the latest signature date, (the "Effective Date") and shall extend for a period of five (5) years (the "Initial Term"). Following the Initial Term, this agreement shall automatically renew under the same terms and conditions for five (5) consecutive five year periods. (the "Renewal Terms") unless Licensee provides written notice of its intention not to renew this agreement within thirty days before the expiration of the then current term. In no event shall the Agreement extend longer than the date of expiration of the longest living patent or last remaining patent application listed in the definition of the Property.
8.0 ROYALTIES.
All royalties ("Royalties") provided for under this Agreement shall accrue when the items giving rise to the Royalties are sold, shipped, distributed, billed or paid for, whichever occurs first.
9.0 NET SALES.
"Net Sales" are defined as Licensee's gross sales of Licensed Products (i.e., the gross invoice amount billed customers) less quantity discounts and returns actually credited. A quantity discount is a discount made at the time of shipment. No deductions shall be made for cash or other discounts, for commissions, for uncollectible accounts, or for fees or expenses of any kind which may be incurred by the Licensee in connection with the sale of Licensed Products.
10. LICENSED PRODUCT ROYALTY.
Licensee agrees to pay a Royalty of two (2%) percent of all Net Sales of Licensed Products ("Licensed Product Royalty").
10.1 LICENSE OF TRADE SECRETS.
Licensee agrees to pay a Royalty of one (1%) percent of all Net Sales revenue of all product sold or marketed under the AquaGear trade name.
10.2 ROYALTIES ON SPIN OFFS.
Licensee agrees to pay a Royalty in an amount to be mutually determined and agreed ("Spin Off Product Royalty") for all Net Sales of "Spin Off Products."A"Spin-Off Product" is any product that is directly derived from, based on, or adapted from a Licensed Product that does not meet the definition of a Licensed Product.
10.3 ADJUSTMENT OF ROYALTIES FOR THIRD PARTY LICENSES.
In the event that any Licensed Product (or other items for which Licensee
pays Royalties to Licensor) incorporates third party character licenses,
endorsements, or other proprietary licenses, Licensor agrees to adjust the
Royalty rate to bear a pro rata percent of such third party licenses. A
Licensee shall notify Licensor of any such third party licenses prior to
manufacture. Third party licenses shall not include licenses accruing to an
affiliate, associate or subsidiary of Licensee.
11.0 PAYMENTS AND STATEMENTS TO LICENSOR.
Within thirty days after the end of each calendar quarter (the "Royalty
Period"), an accurate statement of Net Sales of Licensed Products along
with any royalty payments or sublicensing revenues due to Licensor shall be
provided to Licensor, regardless of whether any Licensed
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Products were sold during the Royalty Period. All payments shall be paid in
United States currency drawn on a United States bank. The acceptance by
Licensor of any of the statements furnished or royalties paid shall not
preclude Licensor from questioning the correctness of any payments or
statements in accordance with paragraph 12.0 below.
12.0 AUDIT.
Licensee shall keep accurate books of account and records covering all
transactions relating to the license granted in this Agreement for a period
of three years. Licensor shall have the right to audit such records at any
time within such three year period.
13.0 LATE PAYMENT.
Time is of the essence with respect to all payments to be made by Licensee
under this Agreement. If Licensee is late in any payment provided for in
this Agreement, Licensee shall pay interest on the payment from the date
due until paid at the rate of 1.0% per month.
14.0 LICENSOR WARRANTIES.
Licensor warrants that it has the power and authority to enter into this
Agreement and has no knowledge as to any third party claims regarding the
proprietary rights in the Property which would interfere with the rights
granted under this Agreement.
15.0 INDEMNIFICATION BY LICENSOR.
Licensor shall indemnify Licensee and hold Licensee harmless from any
damages and liabilities (including reasonable attorneys' fees and costs),
arising from any breach of Licensor's warranties as defined in Licensor's
Warranties, above, provided: (a) such claim, if sustained, would prevent
Licensee from marketing the Licensed Products or the Property; (b) such
claim arises out of the Property as disclosed to the Licensee, and not out
of any change in the Property made by Licensee or a vendor; (c) Licensee
gives Licensor prompt written notice of any such claim; and (d) such
indemnity shall only be applicable in the event of a final decision by
final settlement or by a court of competent jurisdiction from which no
right to appeal exists.
16.0 INDEMNIFICATION BY LICENSEE.
Licensee shall indemnify Licensor and hold Licensor harmless from any
damages and liabilities (including reasonable attorneys' fees and costs),
(a) arising out of any alleged defects or failures to perform of the
Licensed Products or any product liability claims or use of the Licensed
Products; and (b), any claims arising out of advertising, distribution or
marketing of the Licensed Products, excluding in each case any claims for
which Licensor is liable under Paragraph 15.0 above.
16.1 LIMITATION OF LICENSOR LIABILITY.
Licensor's maximum liability to Licensee under this Agreement, regardless
on what basis liability is asserted, shall in no event exceed the total
amount paid to Licensor under this Agreement. Licensor shall not be liable
to Licensee for any incidental, consequential, punitive or special damages.
17.0 INFRINGEMENT AGAINST THIRD PARTIES.
In the event that either party learns of imitations or infringements of the
Property or Licensed Products, that party shall notify the other in writing
of the infringements or imitations. Licensor shall have the right to
commence lawsuits against third persons arising from infringement of the
Property or Licensed Products. In the event that Licensor does not commence
a lawsuit against an alleged infringer within sixty days after notification
by Licensee, Licensee may commence a lawsuit against the third party.
Before the filing suit, Licensee shall obtain the written consent of
Licensor to do so and such consent shall not be unreasonably withheld.
Licensor will cooperate fully and in good faith with Licensee for the
purpose of securing and preserving Licensee's rights to the Property. Any
recovery (including, but not limited to a judgment, settlement or licensing
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agreement included as resolution of an infringement dispute) shall be
divided equally between the parties after deduction and payment of all
costs, expenses and attorneys' fees incurred by the party bringing the
lawsuit.
18.0 EXPLOITATION.
Licensee agrees to use commercially reasonable efforts to manufacture,
distribute and sell Licensed Products in commercially reasonable quantities
during the term of this Agreement and to commence such manufacture,
distribution and sale on or before September 2002. This is a material
provision of this Agreement.
19.0 INSURANCE.
Licensee shall, throughout the Term, obtain and maintain, at its own
expense, standard product liability insurance coverage, naming Licensor as
additional named insured. Such policy shall provide protection against any
claims, demands and causes of action arising out of any alleged defects or
failure to perform of the Licensed Products or any use of the Licensed
Products. The amount of coverage shall be a minimum of 3 million dollars.
The provisions of this section shall survive termination for three years.
20.0 CONFIDENTIALITY.
The parties acknowledge that each may be furnished or have access to
confidential information that relates to each other's business (the
"Confidential Information"). In the event that Information is in written
form, the disclosing party shall label or stamp the materials with the word
"Confidential" or some similar warning. In the event that Confidential
Information is transmitted orally, the disclosing party shall promptly
provide a writing indicating that such oral communication constitutes
Confidential Information. The parties agree to maintain the Confidential
Information in strictest confidence for the sole and exclusive benefit of
the other party and to restrict access to such Confidential Information to
persons bound by this Agreement, only on a need-to-know basis. Neither
party, without prior written approval of the other, shall use or otherwise
disclose to others, or permit the use by others of the Confidential
Information.
21.0 TERMINATION.
This Agreement terminates at the end of five (5) years (the "Initial Term")
unless renewed pursuant to Paragraph 7.0 above. In no event shall the
Agreement extend longer than the date of expiration of the longest-living
patent (or patents) or last-remaining patent application listed in the
definition of the Property.
22.0 LICENSOR'S RIGHT TO TERMINATE.
Licensor shall have the right to terminate this Agreement for the following
reasons:
(a) Licensee fails to pay Royalties when due or fails to accurately report
Net Sales, as defined in the Payment Section of this Agreement, and such
failure is not cured within thirty days after written notice from the
Licensor;
(b) Licensee fails to introduce the product to market by September 2002 or
to offer Licensed Products in commercially reasonable quantities during any
subsequent year;
(c) Licensee fails to maintain confidentiality regarding Licensor's trade
secrets and other Information;
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(d) Licensee assigns or sublicenses in violation of the Agreement; or
(e) Licensee fails to maintain or obtain product liability insurance as required by the provisions of this Agreement.
23. EFFECT OF TERMINATION.
Upon termination of this Agreement, all Royalty obligations accrued through the date of termination as established in the Payments Section shall immediately become due. After the termination of this license, all rights granted to Licensee under this Agreement shall terminate and revert to Licensor, and Licensee will refrain from further manufacturing, copying, marketing, distribution, or use of any Licensed Product or other product which incorporates the Property. Within thirty days after termination, Licensee shall deliver to Licensor a statement indicating the number and description of the Licensed Products which it had on hand or is in the process of manufacturing as of the termination date. Licensee, may dispose of the Licensed Products covered by this Agreement for a period of six months after termination or expiration except that Licensee shall have no such right in the event this Agreement is terminated according to the Licensor's Right to Terminate, above. At the end of the post-termination sale period, Licensee shall furnish a royalty payment and statement as required under the Payment Section.
24.0 DISPUTE RESOLUTION.
24.1 MEDIATION & ARBITRATION.
The parties agree that every dispute or difference between them, arising
under this Agreement, shall be settled first by a meeting of the parties
attempting to confer and resolve the dispute in a good faith manner. If the
parties cannot resolve their dispute after conferring, any party may
require the other parties to submit the matter to non-binding mediation,
utilizing the services of an impartial professional mediator approved by
all parties. If the parties cannot come to an agreement following
mediation, the parties agree to submit the matter to binding arbitration at
a location mutually agreeable to the parties. The arbitration shall be
conducted on a confidential basis pursuant to the Commercial Arbitration
Rules of the American Arbitration Association. Any decision or award as a
result of any such arbitration proceeding shall include the assessment of
costs, expenses and reasonable attorney's fees and shall include a written
record of the proceedings and a written determination of the arbitrators.
Absent an agreement to the contrary, any such arbitration shall be
conducted by an arbitrator experienced in intellectual property law. The
parties reserve the right to object to any individual who shall be employed
by or affiliated with a competing organization or entity. In the event of
any such dispute or difference, either party may give to the other notice
requiring that the matter be settled by arbitration. An award of
arbitration shall be final and binding on the parties and may be confirmed
in a court of competent jurisdiction.
25.0 GOVERNING LAW.
This Agreement shall be governed in accordance with the laws of the State
of California.
26.0 JURISDICTION.
The parties consent to the exclusive jurisdiction and venue of the federal
and state courts located in Orange County, California in any action arising
out of or relating to this Agreement. The parties waive any other venue to
which either party might be entitled by domicile or otherwise.
27.0 WAIVER.
The failure to exercise any right provided in this Agreement shall not be a
waiver of prior or subsequent rights
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28.0 INVALIDITY.
If any provision of this Agreement is invalid under any applicable statute
or rule of law, it is to be considered omitted and the remaining provisions
of this Agreement shall in no way be affected.
29.0 ENTIRE UNDERSTANDING.
This Agreement expresses the complete understanding of the parties and
supersedes all prior representations, agreements and understandings,
whether written or oral. This Agreement may not be altered except by a
written document signed by both parties.
30.0 ATTACHMENTS & EXHIBITS.
The parties agree and acknowledge that all attachments, exhibits and
schedules referred to in this Agreement are incorporated in this Agreement
by reference.
31.0 NOTICES.
Any notice or communication required or permitted to be given under this
Agreement shall be sufficiently given when received by certified mail,
facsimile transmission or overnight courier.
32.0 NO JOINT VENTURE.
Nothing contained in this Agreement shall be construed to place the parties
in the relationship of agent, employee, franchisee, officer, partners or
joint ventures. Neither party may create or assume any obligation on behalf
of the other.
33.0 ASSIGNABILITY.
Licensee may not assign or transfer its rights or obligations pursuant to
this Agreement without the prior written consent of Licensor. Any
assignment or transfer in violation of this section shall be void.
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Each party has signed this Agreement through its authorized representative. The parties, having read this Agreement, indicate their consent to the terms and conditions by their signature below.
"LICENSOR":
Date: By: /s/
-------------------------------- ---------------------------------
Its:
-----------------------------
Date: By:
-------------------------------- ---------------------------------
Its:
-----------------------------
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"LICENSEE":
Date: By: /s/
-------------------------------- ---------------------------------
Carl Palmer, President
Date: By:
-------------------------------- ---------------------------------
Paul H. Lusby, Secretary
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Exhibit 10F- Employment Agreement
EMPLOYMENT CONTRACT
STATE OF CALIFORNIA )(
COUNTY OF ORANGE )(
This AGREEMENT, made this 1st day of December, 2001, is between SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC. having a principal place of business 32921 Calle Perfecto, San Juan Capistrano, CA 92675 hereinafter referred to as the "Employer", and Carl W. Palmer of 151 Peralta Hills Drive, Anaheim CA 92807 hereinafter referred to as (key) "Employee".
ARTICLE I
TERMS OF EMPLOYMENT
The Employer hereby employs the Employee and the Employee hereby accepts employment with the Employer for a period of five (5) years; however, this Agreement may be terminated earlier as hereinafter provided. Upon expiration of the initial term, all terms and provisions of this Agreement shall be automatically renewed for successive one-year terms unless either the Employer or the Employee gives written notice of non-renewal.
ARTICLE II
DUTIES OF EMPLOYEE
2.01 The Employee is hereby employed as CEO & President and shall work at the Corporate Offices of the Employer and at such other place or places as may be directed by the Employer. The duties to be performed by the Employee shall be determined from time to time by the Board of Directors of the Employer, such duties and authority conferred to coincide with those common to employees in similar capacities in similar industries.
2.02 The duties of the Employee may be changed from time to time by the mutual consent of the
Employer and the Employee without resulting in a cancellation of this Contract. Notwithstanding any such change, the employment of the Employee shall be construed as continuing under this Agreement as modified.
2.03 If the Employee at any time during the term of this Agreement shall be unable because of personal injury or illness to perform his duties under this Contract, the Employer may assign the Employee to other reasonable and like duties and the compensation to be paid will remain the same as contractually agreed. If the Employee is unwilling to accept the modification in duties made by the Employer, this Contract shall terminate immediately.
2.04 The Employee during the term of this Contract may engage in any other business or professional activity that takes time away from required management duties and responsibilities without prior consent of the Board of Directors.
ARTICLE III
COMPENSATION
3.01 As base compensation for services rendered under this Agreement, the Employee shall be entitled to receive from the Employer compensation equal to $10,000.00 per annum, payable annually on the closing day of the Employer's fiscal year end, prorated for any partial employment period, or such other base compensation as from time to time may be established by the parties subsequent to the execution of this Agreement in writing as an amendment to this paragraph of this Agreement, incorporating in such amendment by reference all of the provisions of this Agreement along with provisions specifying manner of payment.
3.02 As additional compensation for services rendered hereunder, the Employee shall be entitled to receive one percent of the net after tax profits of Employer as reported in the Employer's Form 10K. The Employee shall be entitled to receive his share of these funds upon the filing of the Employer's 10K.
ARTICLE IV.
EMPLOYEE BENEFITS AND BONUSES
4.01 The Employer agrees to include the Employee in any hospital, surgical, medical, dental, vision or other similar plan presently in effect or adopted by the Employer if desired by Employee and if he is not similarly covered by another plan.
4.02 The Employer agrees to include the Employee under all Employer implemented employee benefit programs including, but not limited to, life insurance, disability insurance, accidental death, dismemberment insurance, IRA or KEOGH plans and retirement plans among others.
4.03 The Employee shall be entitled to annual vacation leave of twenty-five (25) working days in each year, including the first year, at full pay. The Employee shall be entitled to holidays with full pay in accordance with current Employer holiday policy. The Employer shall be entitled to sick leave with full pay in accordance with current Employer sick leave policy.
4.04 If the Employee becomes disabled during the employment term because of sickness, physical or mental disability, or for any reason, so that he is unable to perform his duties hereunder, the Employer agrees to continue the Employee's base salary at 100%. But at its discretion, after a three (3) month's period, the Board of Directors can assign this Employee to other duties. After six (6) months, if the same condition exists, then the Executive Committee can look at the possibility of separation.
4.05 On Employee's dismissal by the Employer, other than for cause as defined in Paragraph 7.01 hereof, the Employee shall receive a cash severance payment in an amount equal to the balance due under this Agreement up to the time of dismissal plus not less than six (6) months' base salary. Employee shall not be entitled to receive any other compensation subsequent to the termination date hereof. On dismissal for cause, Employee shall receive a cash severance payment in an amount equal to one (1) month's salary.
4.06 Employee is eligible to participate in any stock bonus or options program as may be established by the Employer from time to time.
ARTICLE V
EMPLOYEE EXPENSES AND TRANSPORTATION
5.01 The Employee is authorized to incur reasonable business expenses for promoting the business of the Employer, including expenditures for entertainment, meals and travel. (Receipts for such travel expenses are required.)
ARTICLE VI
EMPLOYEE OBLIGATION
6.01 The employment of the Employee shall continue only as long as the services rendered by the Employee are satisfactory to the Board of Directors of Employer, regardless of any other provisions contained in this Agreement. The Board shall be the sole judge as to whether the services of the Employee are satisfactory.
ARTICLE VII
TERMINATION
7.01 If the Employee willfully refuses to perform without good cause or habitually neglects the duties which he is required to perform under the terms of this Agreement, the Employer may, at its option, terminate this Agreement by giving written notice of termination to the Employee without prejudice to any other remedy to which the Employer may be entitled either at law, in equity, or under this Agreement. The Board must notify employee of willful refusal to perform or habitual neglect of duty in writing, giving employee thirty days in which to correct the problems. Termination pursuant to this paragraph shall be strictly for cause.
7.02 In the event of the termination of this Agreement, prior to the completion of the term of employment specified herein, the Employee shall be entitled to the compensation as provided for in Paragraphs 3.01 and 4.05 herein.
7.03 In the event of the termination of this Agreement for cause or voluntarily by Employee prior to the completion of the term of employment specified herein, the Employee shall automatically forfeit any rights that he may have under the stock and cash bonus provisions hereof. (All stock vested to that date, however, will be stock owned by Employee or his/her assignees)
7.04 In the event of a breach of this Agreement by either the Employer or the Employee resulting in damages to the other party, the damaged party may recover from the party breaching the Agreement any and all damages that may be sustained, including any and all legal and attorneys' fees, etc.
7.05 This Agreement may be terminated by the Employee by giving thirty (30) days written notice of termination to the Employer. Such termination shall become effective on the date set forth in the notice to the Employer. Upon such voluntary termination by Employee, Employee shall be entitled to one month's base salary as severance pay. By voluntary termination, Employee forfeits any right he may have to additional stock options and cash bonuses. Options earned will remain with employee until exercised or expired.
ARTICLE VIII
GENERAL PROVISIONS
8.01 Any notices to be given hereunder by either party to the other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses appearing in the introductory paragraph of this Agreement, but each party may change his address by written notice
in accordance with this paragraph. Notices delivered personally shall be deemed communicated as of actual receipt; mailed notices shall be deemed communicated as of five (5) days after mailing.
8.02 This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of the Employee by the Employer and contains all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever.
8.03 This Agreement shall be governed by and construed in accordance with the laws of the State of California.
8.04 If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs, and necessary disbursements in addition to any other relief to which he may be entitled.
8.05 If the Employee dies prior to the expiration of the term of employment, any monies that may be due him from the Employer under this Agreement as of the date of his death shall be paid to his executors, administrators, heirs, personal representatives, successors, and assigns as may be decided by a will, Trust or a Probate Court.
8.06 Employee agrees that he will not make any arrangements to obligate the Employer to any long-term financial commitments without the expressed permission of the Board of Directors.
8.07 Employee agrees to keep completely confidential the names of any of Employer's banks, lending institutions, investors, corporations, individuals or groups of individuals, lenders or borrowers, buyers or sellers. Such identity shall remain confidential during the duration of this contract and for two years after termination, and shall include telephone numbers, addresses, & telex
numbers, other pertinent information, etc. not to be used malevolently against or in competition with Employer.
8.08 It is understood that Employee or Employer cannot be considered or adjudged to be in violation of this Agreement when the violation is involuntary due to situations beyond their control such as acts of God or civil disturbances.
8.09 This Contract shall in no way be construed as being an agreement of partnership in such a way that any of the individual Parties to this Agreement shall have any claim against any separate dealings, ventures or assets of any other Party nor shall any party be liable for any other Party's commitments or liabilities in business or personal dealings or situations.
8.10 In the event that any provision of this Contract shall finally be determined to be invalid or unlawful, such provision shall be deemed to be severed from this Agreement, but every other provision of this Agreement shall remain in full force and effect,.
EXECUTED at Orange County, CA, on the day and year first above written.
EMPLOYER: EMPLOYEE:
By: /s/ By: /s/
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Carl W. Palmer, President Carl W. Palmer
By: /s/
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Paul H. Lusby, Secretary
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