UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-30563
DELTA MUTUAL, INC.
(Name of small business issuer in its charter)
DELAWARE 14-1818394
--------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
|
(215) 258-2800
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK (par value $0.0001 per share)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to the filing requirements for the past 90 days. Yes |X| No |_|
Check if 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 or any amendment to this Form 10-KSB. |_|
Issuer's revenues for its fiscal year ended December 31, 2004: $-0-
Aggregate market value of the voting and non-voting common shares held by non-affiliates of the registrant as of April 12, 2005: $9,863,574 (See Item 5)
Number of shares outstanding of registrant's Common Stock, par value $.0001, as of April 12, 2005: 20,849,113 shares of Common Stock (See Item 11)
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
PART I
NOTE REGARDING FORWARD LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report contains historical information as well as forward-looking statements. Statements looking forward in time are included in this Annual Report pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to be materially different from any future performance suggested herein. We wish to caution readers that in addition to the important factors described elsewhere in this Form 10-KSB, the following forward-looking statements, among others, sometimes have affected, and in the future could affect, our actual results and could cause our actual consolidated results during 2004, and beyond, to differ materially from those expressed in any forward-looking statements made by or on our behalf.
Forward-looking statements include, but are not limited to, statements
under the following headings; (i) "Business Plan," about the development of
certain projects and business opportunities and the Company's attempts to
convert these plans and opportunities into operating businesses that generate
revenues and profits; (ii) "Business Plan," about the intentions of the Company
to fund its businesses and operations by borrowings and the successful placement
of debt and equity financings; (iii) "Results of Operations"; (iv) "Liquidity
and Capital Resources," about the Company's plan to raise additional capital;
(v) "Liquidity and Capital Resources," about the contingent nature of the
consummation of any agreements with its contracting, joint venture and
partnership parties.
ITEM 1. DESCRIPTION OF BUSINESS
Unless the context otherwise requires, the terms "the Company," "we," "our" and "us" refers to Delta Mutual, Inc., and, as the context requires, its consolidated subsidiaries.
GENERAL
We were incorporated under the name Delta Mutual, Inc. on November 17, 1999, in the State of Delaware. We have established business operations focused on providing construction and environmental technologies and services to specific geographic areas in Puerto Rico, the Middle East, and the Far East.
Our offices are located at 111 North Branch Street, Sellersville, PA 18960. Our telephone number is (215) 258-2800. Our common stock is quoted on the Over-the-Counter Electronic Bulletin Board under the symbol "DLTM".
Prior Operations
At the time of the Company's formation, prior Company management intended to provide mortgage services through the Internet to borrowers with substandard credit. In 2000, however, the market for the stock of Internet-based businesses deteriorated substantially and many such companies went out of business because they were unable to generate sufficient revenue and were unable to raise additional capital. From inception through December 31, 2002, prior to initiating our current plan of operations, we raised a limited amount of capital through the sale of our common stock. These funds were not sufficient to capitalize any of our planned business activities in that period.
In April 2001, Kelcon, Inc. ("Kelcon"), a company newly organized for the purpose by Kenneth A. Martin, acquired a controlling interest in us with a view to acquiring the assets of Enterprises Solutions, Inc. ("Enterprises") pursuant to an Agreement of Sale in exchange for shares of our common stock. Due to the death of Enterprises' president, the Agreement of Sale with Enterprises was terminated. In November 2002, Kelcon contracted for the sale of its 450,000 shares of our common stock to Mr. Gary T. Robinson, a New York businessman, pursuant to an agreement providing for a total purchase price of $275,000 in a private transaction. Mr. Robinson paid $50,000 of the purchase price in connection with the execution of the purchase agreement. We have viewed this transaction as representing a change in control of the Company. On June 11, 2003, Mr. Robinson resigned as Chief Executive Officer and Mr. Peter F. Russo was appointed to that office. On November 28, 2003, Mr. Robinson resigned as a director.
Business Plan
Since the change in control, new Company management has embarked upon a new mission and strategic direction, through the establishment of joint ventures and two limited partnerships. This structure is primarily for the establishment of business operations focused on providing construction and environmental technologies and services to specific geographic areas in Puerto Rico, the Middle East and the Far East. The Company, simultaneously, made a strategic decision to minimize its activities in Eastern Europe and to maintain a small passive investment in the area that can be expanded in the future should circumstances change.
Access to technologies for our proposed environmental remediation and housing construction activities has been secured primarily through strategic alliance agreements with the manufacturers and/or patent license holders. These agreements enable the Company, in most cases, to utilize the technology holder as the sub-contractor for the projects thereby minimizing the need for Company trained employees.
We have entered into strategic alliance agreements with several United States-based entities with technologies in the environmental technology field to support our activities in the Middle East and Far East.
On March 18, 2003 we entered into a Letter Of Intent with Hi Tech Consulting and Construction, Inc. to form a joint venture to provide environmental technology services for certain business sectors located in the Middle East and Africa. The joint venture agreement was concluded January 14, 2004, and the joint venture company, Delta-Envirotech, Inc., is based in the Commonwealth of Virginia and incorporated in the State of Delaware.
Middle East
On January 22, 2004, the Company announced the conclusion of a strategic alliance agreement between Delta-Envirotech, Inc. and ZAFF International, Ltd., an advanced technology company located in Saudi Arabia. The strategic alliance states that the two companies will jointly pursue projects related to soil and water reclamation requirements in the Middle East. Under the terms of the agreement, the strategic alliance is to transition to a joint venture as soon as possible within the formation and registration process of Saudi Arabia. On December 1, 2004, the Company announced that ZAFF International, Ltd., Delta's strategic partner, received its operating license from the Saudi Arabia environmental authorities to employ all soil, refinery waste and waste water technologies held by Delta for environmental recovery projects. ZAFF International, Ltd. is one of the first companies to be granted a multi-technology environmental license in Saudi Arabia. The technologies that will be deployed are related centrifugal recovery of oil from shorelines, sludge pools and other collection areas, thermal removal of non-hydrocarbon contamination from soil and water and oxygenation wastewater recovery systems. We believe that the potential in the Middle East is significant for energy and water recovery projects.
Far East
In April 2004, Delta-Envirotech, Inc. executed an agreement with the Indonesian government's technology authority, LIPI. The agreement outlines a joint cooperation between Delta-Envirotech, Inc. and a local Indonesian technology company to commence energy recovery and waste processing operations in Indonesia. The initial technology will be for separation of water and hydrocarbons through centrifuges, water cleaning using a reverse osmosis system, and removal of the remaining waste. Subsequent technology will be for the further centrifugal treatment of the recovered hydrocarbons to yield heavy pipeline grade crude oil. A local joint venture is being established to conduct the actual recovery and processing activities. The Company estimates a large market for environmental remediation in Indonesia, Malaysia, Singapore and the Philippines. Today, according to our estimates more than seven million tons of oil sludge are located in refineries, collection areas and storage pools in Indonesia.
Puerto Rico
On January 20, 2004, the Company announced the formation of a joint venture project to develop government sponsored, Section 124 low income housing in the Commonwealth of Puerto Rico. The development, Brisas Del Atlantico, has been approved for development under Section 124 of the Puerto Rico Housing Authority (Vivendes), which provides for government subsidized low-income housing. The Company is the General Partner and majority owner of a limited partnership that is the majority shareholder of Delta Developers Corp., a Puerto Rico corporation, formed to manage the construction and related activities required to build approximately 270 low income homes under Section 124. The Company will use insulated concrete form technology (ICF) to construct the houses. This technology allows for stronger and less expensive construction than conventional concrete block. ICF also incorporates insulation in its basic design that must be added with conventional construction. The necessary building permits have been submitted for approval and a real estate agency has been hired to sell the homes planned for construction. Due to events related to the ballot recount in the Puerto Rico gubernatorial election held November 2, 2004, the election of a new governor was not certified until late December 2004. These events have delayed the Company's permit approval process. Currently, we expect the building permits to be approved and presale of the homes to begin in the third quarter of 2005.
On December 9, 2004, the Company announced the formation of a second joint venture project to develop government sponsored, Section 124 low income housing in the Commonwealth of Puerto Rico. Using the same ownership structure as the first project, Delta Mutual, Inc. is the majority owner of Delta Developers Guayanilla Corp., a Puerto Rico corporation. The Company plans to build approximately 300 low income houses under Section 124. Demand for Section 124 low income housing exceeded 60,000 units, based on a 2000 study conducted for the Puerto Rico Bankers Association, which projected the shortage would continue to increase. The Company currently estimates the Section 124 low income housing market to be in excess of $6 billion.
COMPETITION
Until we have successfully obtained the full amount of debt or equity financing required to fund our projected business operations, it is difficult to compete with large, well-capitalized companies for environmental remediation governmental or private sector contracts. Many of these contracts require significant up-front expenditures on behalf of the firm awarded the contract.
There are many established environmental remediation companies that have significantly greater financial and personnel resources and technical expertise than we do. There are well-capitalized environmental services and technology companies as well as highly capitalized housing development companies in our target marketplaces that will continue to retain their dominance and competitive advantages over us.
Our planned housing construction activities in Puerto Rico also face intense competition from larger, better-financed developers and construction companies.
EMPLOYEES
Currently, we have five employees: Peter F. Russo, President and Chief Executive Officer; Martin G. Chilek, Vice President and Chief Financial Officer; Jerome Kindrachuk, Vice President--International; John Latza, Vice President-Puerto Rico Operations and Judith Dallas, Director, Administration. Assuming that we obtain the necessary funding to operate our planned businesses, we will hire several additional personnel to support our projected business operations.
RISK FACTORS
Our business is subject to numerous risk factors, including the following:
NO REVENUE AND MINIMAL ASSETS.
We have no revenues. The Company's ability to continue as a going concern is dependent upon its ability to obtain funds to meet its obligations on a timely basis, obtain additional financing or refinancing as may be required, and ultimately to attain profitability. There are no assurances that the Company will be able to obtain any additional financing or, if it is able to obtain additional financing, that such financing will be on favorable terms. The inability to obtain additional financing when needed would have a material adverse effect on operating results.
WE HAVE NOT OPERATED PROFITABLY SINCE INCEPTION, AND WE EXPECT TO INCUR LOSSES IN THE FUTURE. WE WILL BE REQUIRED TO RAISE SUBSTANTIAL AMOUNTS OF CAPITAL.
Our operations have not generated any revenue nor are they profitable. We have incurred net operating losses from the formation of our company through December 31, 2004, of $5,710,099 and expect that we will continue to incur operating losses in the future. In 2004, we generated no revenue, incurred operating expenses of $1,848,078 and had a net loss of $3,920,699. As of April 12, 2005, we had approximately $7,500 of cash on hand to fund operations. There is no assurance that we will operate profitably in the future. Failure to achieve or maintain profitability may materially and adversely affect the future value of our common stock.
We will have to obtain significant additional capital to continue development of our proposed business. There is no assurance that we will be able to obtain sufficient capital to develop our proposed environmental remediation and housing businesses and market our services successfully.
WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM OUR INDEPENDENT AUDITORS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING.
Our independent auditors have added an explanatory paragraph to their audit opinions, issued in connection with our financial statements, which states that our ability to continue as a going concern is uncertain due to our continued operating losses, the excess of our liabilities over our assets and uncertain conditions we face in our day-to-day operations. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION FOR OUR PROPOSED ENVIRONMENTAL REMEDIATION OPERATIONS.
Each aspect of our proposed environmental remediation business is subject to significant international governmental and U.S. federal, state and local environmental regulations. No assurances can be given that such environmental laws or regulations, or that future changes in environmental laws, regulations, or interpretations currently applicable to the Company or changes in the nature of the Company's operations, will not adversely impact our proposed operations or have a material adverse effect on the financial condition, operations and liquidity of the Company.
AS A HOUSING DEVELOPER WE FACE ECONOMIC AND MARKET RISKS.
Many factors which are beyond our control will affect our proposed business as a developer of housing, including, among others, general economic and real estate market conditions, competitive factors, the availability and cost of borrowed funds, real estate tax rates, federal and state income tax laws, operating expenses (including maintenance and insurance), energy costs, government regulations, including delays in acquiring or our inability to acquire required permits, and potential liability under and changes in environmental and other laws, as well as the successful management of the properties.
Our success as a developer of housing will also be subject to certain
additional risks including, but not limited to, (i) competition for existing and
future projects from other developers in the areas of our developed properties,
(ii) adverse changes in mortgage interest or terms of governmental financing,
(iii) possible adverse changes in general economic conditions and adverse local
conditions, such as competitive over-bidding, a decrease in employment or
adverse changes in real estate zoning laws, and (iv) other circumstances over
which we may have little or no control.
OUR MARKETS ARE VERY COMPETITIVE.
Virtually all of our current and potential competitors have significantly greater financial, marketing and technical resources than we have. As a result, they may be able to leverage a customer base, adapt more quickly to new technologies and changes in customer requirements, or devote greater resources to the promotion and sale of their services and products than we can.
WE DO NOT EXPECT TO PAY DIVIDENDS.
We have never paid dividends on our common stock. Current Company management anticipates that any earnings generated from our operations will be used to finance our working capital requirements, to develop services and products and for marketing. For the foreseeable future, cash dividends will not be paid to holders of our common stock.
VOLATILITY OF STOCK PRICE.
The market price of our common stock, as is the case for companies without established operations, is extremely volatile due to our uncertain future prospects and general market and economic conditions. During the fifteen month period ended April 12, 2005, the closing per share price of our common stock has fluctuated from $1.09 to $0.16 per share. Our common stock currently trades in the OTC Bulletin Board market.
"PENNY" STOCK REGULATION OF BROKER-DEALER SALES OF OUR SECURITIES.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in "penny stocks." Generally, penny stocks are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system). If our shares are traded for less than $5.00 per share, as they currently are, the shares will be subject to the SEC's penny stock rules unless: (1) our net tangible assets exceed $5,000,000 during our first three years of continuous operations or $2,000,000 after our first three years of continuous operations; or (2) we have had average revenue of at least $6,000,000 for the last three years. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prescribed by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. As long as our common stock is subject to the penny stock rules, the holders of the common stock may find it difficult to sell our common stock.
ITEM 2. DESCRIPTION OF PROPERTY.
We currently lease office space consisting of approximately 1,700 square feet in an office building located in Sellersville, Pennsylvania. We are obligated to pay a monthly rent of $650 as well as pay for the utilities serving the premises. Our lease is for a period of three years from March 1, 2003 to February 28, 2006. We anticipate that our current office space will accommodate our operations for the foreseeable future. We also rent, commencing in November 2004, an office located in McLean, Virginia consisting of approximately 150 square feet. We are obligated to pay a monthly rental of $1,100 under a month-to-month arrangement.
ITEM 3. LEGAL PROCEEDINGS.
We have no pending legal proceedings and are not aware of any threatened legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock has been quoted on the Over-the-Counter Bulletin Board operated by the National Association of Securities Dealers, since approximately February 1, 2001. Our shares are listed under the symbol "DLTM". The quotations in the table below reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not represent actual transactions.
High Low
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2003: 1st Quarter 2.80 2.10
2nd Quarter 2.00 .65
3rd Quarter 1.35 .63
4th Quarter .95 .17
2004: 1st Quarter 1.09 0.49
2nd Quarter 0.79 0.16
3rd Quarter 0.35 0.17
4th Quarter 0.48 0.17
2005: 1st Quarter 0.69 0.28
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During the last two fiscal years, no cash dividends have been declared on Delta's common stock and current Company management does not anticipate that dividends will be paid in the foreseeable future. As of April 12, 2005, there were 77 record holders of our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchasers Principal Total Offering
Underwriter Price/Underwriting
Discounts
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 100,000 shares of common Private Investor NA $.50 per share/NA
stock
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 20,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.50 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 240,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.1667 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 100,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.25 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 100,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.25 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 288,638 shares of common Licensee NA Services under License
stock issued for Agreement valued at $.139
consulting services per share/NA
---------------------------------------------------------------------------------------------------------------------
May 23 and 800,000 shares of common Private Investors NA Purchase of $250,000
September 5, 2003 stock principal amount note,
valued at $.3125 per
share/NA
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 50,000 shares of common Private Investor NA Interest on loan valued at
stock, issued as payment $.275 per share/NA
of interest on
outstanding debt
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 37,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.405 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 3,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.50 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
May 23, 2003 50,000 shares of common Private Investor NA Interest on loan valued at
stock, issued as payment $.333 per share/NA
of interest on
outstanding debt
---------------------------------------------------------------------------------------------------------------------
July 23, 2003 37,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.405 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchasers Principal Total Offering
Underwriter Price/Underwriting
Discounts
---------------------------------------------------------------------------------------------------------------------
July 23, 2003 3,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.50 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
August 1, 2003 200,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.20 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
August 8, 2003 100,000 shares of common Private Investor NA $.50 per share/NA
stock
---------------------------------------------------------------------------------------------------------------------
August 11, 2003 50,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.4375 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
August 11, 2003 25,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.4375 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
August 11, 2003 15,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.4375 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
August 11, 2003 10,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.4375 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
August 22, 2003 250,000 shares of common Private Investor NA $.20 per share/NA
stock
---------------------------------------------------------------------------------------------------------------------
November 15, 2003 100,000 shares of common Private Investor NA $.125 per share/NA
stock
---------------------------------------------------------------------------------------------------------------------
November 15, 2003 100,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.085 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
November 21, 2003 50,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.035 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
November 21, 2003 50,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.035 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
December 15, 2003 10,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.085 per share/NA
consulting services
---------------------------------------------------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchaser Principal Total Offering
Underwriter Price/Underwriting
Discounts
---------------------------------------------------------------------------------------------------------------------
50,000 shares of
January 14, 2004 common stock Consultant NA $.0825 per share/NA
---------------------------------------------------------------------------------------------------------------------
400,000 shares of
January 24, 2004 common stock Private Investor NA $.125 per share/NA
---------------------------------------------------------------------------------------------------------------------
February 11, 2004 400,000 shares of Private Investor NA $.125 per share/NA
common stock
---------------------------------------------------------------------------------------------------------------------
200,000 shares of Private Investor
February 18, 2004 common stock NA $.125 per share/NA
---------------------------------------------------------------------------------------------------------------------
155,000 shares of Consultant
February 25, 2004 common stock NA $.16 per share/NA
---------------------------------------------------------------------------------------------------------------------
200,000 shares of Consultant
February 25, 2004 common stock NA $.10 per share/NA
---------------------------------------------------------------------------------------------------------------------
100,000 shares of Private Investor
February 26, 2004 common stock NA $.125 per share/NA
---------------------------------------------------------------------------------------------------------------------
140,000 shares of Private Investor
February 27, 2004 common stock NA $.137 per share/NA
---------------------------------------------------------------------------------------------------------------------
March 2, 2004 200,000 shares of Consultant NA $.25 per share/NA
common stock
---------------------------------------------------------------------------------------------------------------------
30,000 shares of
March 31, 2004 common stock Vendor NA $.30 per share/NA
---------------------------------------------------------------------------------------------------------------------
50,000 shares of
March 31, 2004 common stock Consultant NA $.0825 per share/NA
---------------------------------------------------------------------------------------------------------------------
200,000 shares of
April 14, 2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
400,000 shares of
April 16, 2004 common stock Consultant NA $.18/NA
---------------------------------------------------------------------------------------------------------------------
200,000 shares of
April 16, 2004 common stock Consultant NA $.18/NA
---------------------------------------------------------------------------------------------------------------------
100,000 shares of
May 5, 2004 common stock Employee NA $.14/NA
---------------------------------------------------------------------------------------------------------------------
60,000 shares of
May 5, 2004 common stock Employee NA $.14/NA
---------------------------------------------------------------------------------------------------------------------
25,000 shares of
May 5, 2004 common stock Employee NA $.14/NA
---------------------------------------------------------------------------------------------------------------------
35,000 shares of
May 5, 2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
35,000 shares of
May 5, 2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
200,00 shares of
May 6, 2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
100,000 shares of
May 6, 2004 common stock Consultant NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
100,000 shares of
May 11, 2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
$193,740 principal Private Investor NA $193,740/NA
amount of 4%
May 12, 2004 convertible note due
May 12, 2006
convertible into
1,549,920 shares of
common stock
---------------------------------------------------------------------------------------------------------------------
May 12, 2004 $129,160 principal Private Investor NA $129,160/NA
amount of 4%
convertible note due
May 12, 2006
convertible into
1,033,280 shares of
common stock
---------------------------------------------------------------------------------------------------------------------
May 25, 2004 60,000 shares of Private Investor NA $.125/NA
common stock
---------------------------------------------------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchaser Principal Total Offering
Underwriter Price/Underwriting
Discounts
---------------------------------------------------------------------------------------------------------------------
June 8, 2004 50,000 shares of Private Investor NA $.125/NA
common stock
---------------------------------------------------------------------------------------------------------------------
50,000 shares of
June 10, 2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
50,000 shares of
June 10,2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
30,000 shares of
June 10,2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
15,000 shares of
June 10,2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
15,000 shares of
June 10,2004 common stock Private Investor NA $.125/NA
---------------------------------------------------------------------------------------------------------------------
400,000 shares of
June 14, 2004 common stock Private Investor NA $.18/NA
---------------------------------------------------------------------------------------------------------------------
July 1, 2004 $157,000 principal Private Investor NA $157,000/NA
amount of 4%
convertible
promissory note due
December 31, 2006
convertible into
3,140,000 shares of
common stock
---------------------------------------------------------------------------------------------------------------------
July 16, 2004 $37,500 principal Private Investor NA $37,500/NA
amount of 4%
convertible
promissory note due
January 16, 2007
convertible into
750,000 shares of
common stock
---------------------------------------------------------------------------------------------------------------------
August 18, 2004 50,000 shares of Private Investor NA $.125/NA
common stock
---------------------------------------------------------------------------------------------------------------------
August 18, 2004 250,000 shares of Consultant NA $.125/NA
common stock
---------------------------------------------------------------------------------------------------------------------
AUGUST 30, 2004 100,000 shares of Private Investor NA $.125/NA
common stock
---------------------------------------------------------------------------------------------------------------------
August 31, 2004 200,000 shares of Private Investor NA $.125/NA
common stock
---------------------------------------------------------------------------------------------------------------------
September 7, 2004 100,000 shares of Consultant NA $.12/NA
common stock
---------------------------------------------------------------------------------------------------------------------
September 10, 2004 300,000 shares of Consultant NA $.12/NA
common stock
---------------------------------------------------------------------------------------------------------------------
September 16, 2004 125,000 shares of Consultant NA $.05/NA
common stock
---------------------------------------------------------------------------------------------------------------------
September 20, 2004 100,000 shares of Consultant NA $.12/NA
common stock
---------------------------------------------------------------------------------------------------------------------
September 20, 2004 $301,500 principal Private Investors NA $301,500/NA
amount of 6%
convertible
promissory notes due
September 16, 2006,
convertible into an
aggregate of
6,030,000 shares of
common stock
---------------------------------------------------------------------------------------------------------------------
September 20, 2004 Warrants to purchase Private Investors NA NA/NA
an aggregate of
6,030,000 shares of
common stock issued
in connection with
the sale of the 6%
convertible
promissory notes
---------------------------------------------------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------------------
September 23, 2004 $10,000 principal Private Investor NA $10,000/NA
amount of 6%
convertible
promissory note due
September 22, 2006,
convertible into an
aggregate of 200,000
shares of common stock
---------------------------------------------------------------------------------------------------------------------
September 23, 2004 Warrants to purchase Private Investor NA NA/NA
an aggregate of
200,000 share of
common stock issued
in connection with
the sale of the 6%
convertible
promissory note
---------------------------------------------------------------------------------------------------------------------
September 27, 2004 $20,000 principal Private Investor NA $20,000/NA
amount of 6%
convertible
promissory note due
September 26, 2006,
convertible into an
aggregate of 400,000
shares of common stock
---------------------------------------------------------------------------------------------------------------------
September 27, 2004 Warrants to purchase Private Investor NA NA/NA
an aggregate of
400,000 shares of
common stock issued
in connection with
the sale of the 6%
convertible
promissory note
---------------------------------------------------------------------------------------------------------------------
October 4, 2004 750,000 shares of Consultant NA $0.05/NA
common stock
---------------------------------------------------------------------------------------------------------------------
October 19, 2004 $25,000 principal Private Investor NA $25,000/NA
amount of 6%
convertible promissory
note due October 18,
2006, convertible into
an aggregate of
500,000 shares of
common stock
---------------------------------------------------------------------------------------------------------------------
October 19, 2004 Warrants to purchase Private investor NA NA/NA
an aggregate of
500,000 shares of
common stock issued in
connection with the
sale of the 6%
convertible promissory
note
---------------------------------------------------------------------------------------------------------------------
October 22, 2004 250,000 shares of Consultant NA $0.1415/NA
common stock
---------------------------------------------------------------------------------------------------------------------
November 2, 2004 $12,500 principal Private investor NA $12,500/NA
amount of 6%
convertible promissory
note due November 1,
2006, convertible into
an aggregate of
250,000 shares of
common stock
---------------------------------------------------------------------------------------------------------------------
November 1, 2004 250,000 shares of Consultant NA $0.125/NA
common stock
---------------------------------------------------------------------------------------------------------------------
November 2, 2004 Warrants to purchase Private investor NA NA/NA
an aggregate of
250,000 shares of
common stock issued in
connection with the
sale of the 6%
convertible promissory
note
---------------------------------------------------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------------------
November 5, 2004 $25,000 principal Private investor NA $25,000/NA
amount of 6%
convertible promissory
note due November 4,
2006, convertible into
an aggregate of
500,000 shares of
common
stock
---------------------------------------------------------------------------------------------------------------------
November 5, 2004 Warrants to purchase Private investor NA NA/NA
an aggregate of
500,000 shares of
common stock issued in
connection with the
sale of the 6%
convertible promissory
note
---------------------------------------------------------------------------------------------------------------------
November 8, 2004 500,000 shares of
Common Stock issued Private investor NA $25,000/NA
upon conversion of a
promissory note in the
principal amount of
$25,000
---------------------------------------------------------------------------------------------------------------------
November 9,2004 250,000 shares of Consultant NA $0.10/NA
common stock
---------------------------------------------------------------------------------------------------------------------
November 15, 2004 45,000 shares of Consultant NA $0.12/NA
common stock
---------------------------------------------------------------------------------------------------------------------
November 16, 2004 250,000 shares of Consultant NA $0.15/NA
common stock
---------------------------------------------------------------------------------------------------------------------
November 19, 2004 403,951 shares of Private Investor NA $20,000/NA
common stock issued
upon conversion of a
promissory note in the
principal amount of
$20,000 (including
accrued interest)
---------------------------------------------------------------------------------------------------------------------
November 23, 2004 502,887 shares of Private Investor NA $25,000/NA
common stock issued
upon conversion of a
promissory note in the
principal amount of
$25,000 (including
accrued interest)
---------------------------------------------------------------------------------------------------------------------
November 25, 2004 $50,000 principal Private Investor NA $50,000/NA
amount of 6% (settlement)
convertible promissory
notes due November 24,
2006, convertible into
an aggregate of 1,00000
shares of common stock
---------------------------------------------------------------------------------------------------------------------
November 25, 2004 Warrants to purchase an Private Investor NA NA/NA
aggregate of 1,000,000 (settlement)
shares of common stock
issued in connection
with the sale of the 6%
convertible promissory
notes
---------------------------------------------------------------------------------------------------------------------
November 26, 2004 412,000 shares of Private Investor NA $0.17/NA
common stock (settlement)
---------------------------------------------------------------------------------------------------------------------
|
---------------------------------------------------------------------------------------------------------------------
December 6, 2004 150,000 shares of Private Investor NA $.10 per share/NA
common stock issued
upon exercise of
outstanding common
stock purchase warrant
---------------------------------------------------------------------------------------------------------------------
December 7, 2004 200,000 shares of Private Investor NA $.10 per share/NA
common stock issued
upon exercise of
outstanding common
stock purchase warrant
---------------------------------------------------------------------------------------------------------------------
December 13, 2004 150,000 shares of Private Investor NA $.10 per share/NA
common stock issued
upon exercise of
outstanding common
stock purchase warrant
---------------------------------------------------------------------------------------------------------------------
December 15, 2004 54,055 shares of Private Investor NA $.185 per share/NA
common stock
---------------------------------------------------------------------------------------------------------------------
December 22, 2004 300,000 shares of Private Investor NA $.10 per share/NA
common stock issued
upon exercise of
outstanding common
stock purchase warrant
---------------------------------------------------------------------------------------------------------------------
|
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes thereto and the other financial information included elsewhere in this report.
Certain statements contained in this report, including, without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import, constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including our ability to create, sustain, manage or forecast our growth; our ability to attract and retain key personnel; changes in our business strategy or development plans; competition; business disruptions; adverse publicity; and international, national and local general economic and market conditions.
GENERAL
We were incorporated in the State of Delaware on November 17, 1999 and will require additional capital to execute our planned business operations.
RESULTS OF OPERATIONS
During the fiscal year ended December 31, 2004 we incurred a net loss of $3,920,699, because we had no revenue to offset operating expenses. The loss in fiscal 2004 was primarily attributable to general and administrative expenses of approximately $1,848,000 including professional fees in the approximate amount of $366,100, gain on minority interest share of consolidated losses of $101,644, write down of joint venture of $33,799, interest element of warrant issue of $2,112,500 and interest expense of about $28,000. From inception (November 17, 1999) to December 31, 2004, we had a net loss of $5,710,099.
The Independent Auditors' Report and Note 1 of the Notes to Financial Statements accompanying this report state that substantial doubt has been raised about our ability to continue as a going concern. Our present business operations do not generate any revenue with which to cover our expenses. We will have to raise capital through the placement of our securities in order to remain viable. We are continuing to incur management and administrative costs, professional fees and other expenses. If we are unable to raise capital we will be unable to fund our plan of operations. Because we will continue to incur net losses, we may have to cease operations entirely. This factor, among others, raises substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to obtain funds to meet our obligations on a timely basis, obtain additional financing or refinancing as may be required, and ultimately to attain profitability. There are no assurances that we will be able to obtain any additional financing or, if we are able to obtain additional financing, that such financing will be on terms favorable to us. The inability to obtain additional financing when needed would have a material adverse effect on our operating results.
2004 COMPARED TO 2003
The net loss increased from approximately $1,250,000 in 2003 to approximately $3,921,000 for the twelve months ended December 31, 2004.
The items of significant increase or decrease in the twelve months ended December 31, 2004 over the comparable period of the prior year were an increase in general and administrative expense from approximately $1,210,000 in 2003 to approximately $1,848,000, gain on minority share of consolidated losses of $101,644, write down of joint venture of $33,799, for the twelve months ended December 31, 2004, interest element of warrant issue of $2,112,500 and a decrease in interest expense from approximately $40,000 in 2003 to approximately $28,000 for the twelve months ended December 31, 2004.
PLAN OF OPERATION
We have established joint venture subsidiaries and two limited partnerships, primarily to establish business operations focused on providing construction and environmental technologies and services in Puerto Rico, the Middle East and the Far East.
Puerto Rico
The Company formed majority owned joint ventures in Puerto Rico to manage the construction and related activities required to build low income homes in Puerto Rico under the Federal Government's Section 124 low income housing program. In December 2003, the Company secured the purchase rights to 36 acres that are designated Section 124 eligible. Approximately 270 low income homes are planned for construction on this property. The necessary building permits have been submitted for approval and a real estate agency has been hired to sell the homes planned for construction. Due to events related to the ballot recount in the Puerto Rico gubernatorial election held November 2, 2004, the election of a new governor was not certified until late December 2004. These events have delayed the Company's permit approval process. Currently, we expect the building permits to be approved and presale of the homes to begin in the third quarter of 2005.
The Company formed a second majority owned joint venture in Puerto Rico in December 2004, to manage construction and related activities required to build approximately 300 additional homes under the Section 124 low income housing program. We secured the rights to an additional 40 acre tract for the second project in December, 2004.
Middle East and Far East
The Company intends to establish local operating joint ventures in specific countries in the Middle East and the Far East primarily aimed at soil and water reclamation primarily related to oil contamination recovery. The initial step of forming strategic alliances leading to joint ventures, has been established with local organizations in Saudi Arabia and Indonesia.
Central and Eastern Europe
The Company has made a strategic decision to minimize its activities in Eastern Europe and to maintain a small passive investment in the area that can be expanded in the future should circumstances change.
FUNDING
We are currently dependent on equity investments or borrowing from private investors to pay our operating expenses. There are no assurances that such investors will continue to advance funds or invest in the Company's securities. In the event we are unable to obtain additional capital or funding we may be unable to pursue our business plans. We anticipate that we will be required to raise capital in the approximate amount of $3,000,000 in the next 12 months in order to continue to fund our limited operations and to finance our planned business operations.
LIQUIDITY
We have no current operations that have generated any revenue. We must rely entirely on private placements of Company stock or debt to pay operating expenses.
At December 31, 2004 and 2003, we had working capital deficits of $370,546 and $623,423, respectively. The decrease in our working capital deficit is a result of the net loss incurred during the year ended December 31, 2004, partially offset by the increase in cash and refundable deposits. Since we have no source of revenue, our working capital deficit will continue to increase as we incur additional operating expenses. Presently, we have no external sources of cash and we are dependent upon loans from private investors and private placements of our stock for funding.
In 2004, we raised $276,250 of equity capital, through the sale of 2,544,055 shares of common stock. In addition, we borrowed $961,400 from outside lenders to provide financing for our activities.
ASSETS
At December 31, 2004, we had total assets of $441,444, compared to total assets of $84,702 at December 31, 2003. The increase in assets as of December 31, 2004 was due to an increase in cash, an increase in deposits, an increase in fixed assets and capitalized pre-construction cost payments.
CRITICAL ACCOUNTING ISSUES
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires the Company to make estimates and judgments that effect the reported amount of assets, liabilities, and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to intangible assets, income taxes and contingencies and litigation. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Other Matters
Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan. The Company adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on the Company's result of operations or financial position.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", and interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN No. 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. This interpretation clarifies that a guarantor is required to recognize, at the inception of certain types of guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted FIN No. 45 on January 1, 2003. The adoption of FIN No. 45 did not have a material impact on the Company's results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123". SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. It also requires disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual and interim periods beginning after December 15, 2002. The Company will continue to account for stock-based employee compensation under the recognition and measurement principle of APB Opinion No. 25 and related interpretations. The Company complied with the additional annual and interim disclosure requirements effective December 31, 2002 and September 30, 2003.
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities," which addresses consolidation by business enterprises of variable interest entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The objective of Interpretation No. 46 is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not have any variable interest entities, and, accordingly, adoption is not expected to have a material effect on the Company's results or operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after September 30, 2003, and for hedging relationships designated after September 30, 2003. Adoption of this statement did not have a material impact on the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Financial Instruments with the Characteristics of Both Liabilities and Equities". SFAS No. 150 establishes standards regarding the manner in which an issuer classifies and measures certain types of financial instruments having characteristics of both liabilities and equity. Pursuant to SFAS No. 150, such freestanding financial instruments (i.e. those entered into separately from an entity's other financial instruments or equity transactions or that are legally detachable and separately exercisable) must be classified as liabilities or, in some cases, assets. In addition, SFAS No. 150 requires that financial instruments containing obligations to repurchase the issuing entity's equity shares and, under certain circumstances, obligations that are settled by delivery of the issuer's shares be classified as liabilities. The Statement is effective for financial instruments entered into or modified after May 31, 2003 and for other instruments at the beginning of the first interim period after June 15, 2003. Management believes adopting this statement will not have a material effect on the statement of operations or financial position.
In December 2003, the FASB issued SFAS No. 132(R), "Employer's Disclosure about Pensions and Other Postretirement Benefits" (revised). SFAS No. 132(R) retains disclosure requirements of the original SFAS No. 132(R) and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefit cost. SFAS No. 132(R) is effective for fiscal years ending after December 15, 2003, except that certain disclosures are effective for fiscal years ending after June 15, 2004. Interim period disclosures are effective for interim periods beginning after December 15, 2003. The adoption of SFAS No. 132(R) did not have a material effect on the Company's results of operations or financial position.
In November 2004 the FASB issued SFAS No. 151, an amendment to ARB No. 43 chapter 4 "Inventory Costs". SFAS No. 151 requires that abnormal costs of idle facility expenses, freight, handling costs and wasted material (spoilage) be recognized as current-period charges. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. Adoption of SFAS No. 151 is not expected to have a material impact on the Company's results of operations or financial position.
In December 2004, the FASB issued SFAS No. 153 an amendment of APB Opinion No.
29 "Exchanges of Nonmonetary Assets". SFAS No. 153 amends APB Opinion No. 29 by
eliminating the exception under APB No. 29 for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material effect on the Company's financial position or
results of operations.
In December 2004, the FASB staff issued FASB Staff Position ("FSP") FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" to provide guidance on the application of Statement 109 to the provision within the American Jobs Creations Act of 2004 (the "Act") that provides tax relief to U.S. domestic manufacturers. The FSP states that the manufacturers, deduction provided for under the Act should be accounted for as a special deduction in accordance with Statement 109 and not as a tax rate reduction. The FSP is effective upon issuance. The adoption of FAS 109-1 could have a material effect on the Company's results of operations or financial position.
In December 2004, the FASB staff issued FSP No. FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the American Jobs Creation Act of 2004" to provide accounting and disclosure guidance for the repatriation provisions included in the Act. The Act introduced a special limited-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer as more fully described in Note 8 of Notes to Consolidated Financial Statements. The FSP is effective upon issuance. The adoption of FAS 109-2 could have a material effect on the Company's results of operations and financial position.
In December 2004, the Financial Accounting Standard Board ("FASB") issued Statement on Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment" (revised), that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the reward. The statement also amends SFAS No. 95, "Statement of Cash Flows", to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. SFAS No. 123(R) is effective as to the Company as of the beginning of the first interim period that begins after June 15, 2005. The Company is currently evaluating its position and will make its determination to account for the compensation costs either prospectively or retroactively at the time of adoption. The adoption of SFAS 123(R) is expected to have a material effect on the Company's results of operations.
Quantitative and Qualitative Disclosures About Market Risk
Fair Value of Financial Instruments - The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments". The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The Company has not entered into, and does not expect to enter into, financial instruments for trading or hedging purposes. The Company does not currently anticipate entering into interest rate swaps and/or similar instruments.
The Company's carrying values of cash, marketable securities, accounts receivable, accounts payable and accrued expenses are a reasonable approximation of their fair value.
ITEM 7. FINANCIAL STATEMENTS.
The Company's Financial Statements and Notes to Financial Statements are attached hereto as Exhibit A and incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's independent auditors during the last two years.
ITEM 8A. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures:
Based on their evaluation as of the close of the fiscal year covered by this report, Peter F. Russo, our Chief Executive Officer, and Martin G. Chilek, our Chief Financial Officer, have concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in this Annual Report on Form 10-KSB. There have been no changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.
Limitations on the effectiveness of controls:
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
ITEM 8B. OTHER INFORMATION.
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
DIRECTORS AND EXECUTIVE OFFICERS
As of the date of this report, the executive officers and director of Delta Mutual, Inc. were as follows:
NAME AGE TITLE(S)
---------- -------- ------------
Peter F. Russo 62 President, CEO, Secretary and
Director
Martin G. Chilek 54 Vice President, Chief
Financial Officer and Assistant
Secretary
Jerome Kindrachuk 60 Vice President--International
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Peter F. Russo joined the Company on March 11, 2003 as President and a director, and was elected Chief Executive Officer in June 2003. Mr. Russo had been an independent consultant to several private businesses during the period from August 2001 until he joined the Company. In that capacity, he developed business and operating strategies and plans for a start-up, new concept modular housing company focused on the affordable housing market. In that assignment, he developed proposals for low-income housing projects under the federal Section 42 tax credit program in Philadelphia, Baltimore and Washington D.C. In another assignment, Mr. Russo was instrumental in structuring a new U.S. holding company with affiliated real estate service operations in Europe. From June 2000 to July 2001, Mr. Russo served as President and Chief Operating Officer for Bartram Healthcare Financial Services, Inc., a start-up healthcare services company providing financial systems and services. From January 1998 to June 2000, Mr. Russo was an independent consultant for projects that included the development of new market penetration strategies in various regions of the former Yugoslavia, that included securing a U.S. export grant and providing environmental technologies to Eastern European power generating stations.
Martin G. Chilek joined the Company as Vice President and CFO in January 2004. Prior to joining the Company, from June 2003 to December 2003, he was an independent consultant providing transitional management, strategic planning and financial management services to privately held and public companies. During the past five years, Mr. Chilek also served as Vice President-Operations of MicroTech Leasing Corporation from October 2000 through May 2003. From October 1999 through October 2000, Mr. Chilek was employed by Acquisitions Management Services, Inc., a merger and acquisitions services company, as Director of Business Development. Mr. Chilek filed for personal bankruptcy in February 2000, and discharged in July 2000, as a protective measure due to stockholder suits following the bankruptcy of U.S. Physicians, Inc. in October 1998. Mr. Chilek was Senior Vice President-Administration of U.S. Physicians, Inc. at the time it filed its petition in bankruptcy.
Jerome Kindrachuk joined the Company in July 2003 as Vice President-Finance and Administration and in January 2004 was appointed as Vice President- International and an officer of the Company. Prior to joining the Company, Mr. Kindrachuk served, from March 2002 to September 2002, as director of finance for CEVA International, Inc., a company that provided environmental services and technologies to countries in Central and Eastern Europe. From October 2002 to June 2003, Mr. Kindrachuk was a consultant to the Company for market penetration strategies in Eastern Europe. During the past five years, he also served as Chief Executive Officer of Winner Automotive Group from February 2000 to February 2002.
Our directors are elected by the stockholders and our officers are appointed by our board of directors. Our officers hold office until their successors are elected and qualified. Vacancies in our board are filled by the board itself. There are currently two vacancies on our board of directors.
We do not have an audit committee, although we intend to establish such a committee, with an independent "financial expert" member as defined in the rules of the Securities and Exchange Commission.
There are no family relationships between any of our executive officers and/or directors.
We have a corporate code of conduct in place, which provides for internal procedures concerning the reporting and disclosure of corporate matters that are material to our business and to our stockholders. Our corporate code of conduct includes a code of ethics for our officers and employees as to workplace conduct, dealings with customers, compliance with laws, improper payments, conflicts of interest, insider trading, company confidential information, and behavior with honesty and integrity.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Number Transactions Known Failures
Of late Not Timely To File a
Name and principal position Reports Reported Required Form
--------------------------- ----------- ------------ --------------
Peter F. Russo, President 1
Martin G. Chilek, CFO 1
Jerome Kindrachuk, Vice President 1
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ITEM 10. EXECUTIVE COMPENSATION
Annual Compensation Awards Payouts
------------------------------------------------- -------------------------- ---------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other Restricted Securities
and Year Annual Stock Underlying LTIP All Other
Principal Salary Bonus Comp. Awards Options/ Payouts Comp.
Position (1) ($) ($) ($) ($) SARs(#) ($) ($)
------------- ---- ------- ----- ------ ---------- ---------- ------ ---------
Peter F. 2004 $57,588 $9,000
Russo 2003 $31,800 $6,000 $31,938
President (2)
Martin G.
Chilek 2004 $64,700 $16,000
Jerome
Kindrachuk 2004 $42,738 $9,000 $13,612
Gary T. 2003 $20,000 $93,625
Robinson (2)
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(1) Fiscal years ended December 31, 2003 and 2004.
(2) The other compensation for Peter F. Russo was fees for consulting work
completed prior to his employment. The restricted stock value for Gary T.
Robinson was for compensation earned during his tenure as CEO.
None of our officers or directors received any compensation for services from our date of inception (November 17, 1999) to December 31, 2002.
EMPLOYMENT AGREEMENTS
On March 11, 2003, we entered into a contract with Peter F. Russo to serve as President. It provides for three years' employment from March 11, 2003, at a salary of $10,000 per month through June 30, 2003, and $15,000 per month thereafter, payable in bi-monthly installments, plus benefits. An Amendment was made to the contract to reduce his compensation to $6,500 per month effective January 1, 2004. We also have an employment contract with Jerome Kindrachuk, effective July 2003 prior to Mr. Kindrachuk's appointment as an officer of the Company. It provides for three years' employment from July 1, 2003, at a salary of $10,000 per month, payable in bi-monthly installments, plus benefits. An amendment was made to the contract to reduce compensation to $6,000 per month effective January 1, 2004. All other officers are employed by us on an at will basis, and the terms and conditions of employment are subject to change.
DIRECTORS' COMPENSATION
We do not compensate directors in their capacity as such nor do we compensate our directors for attendance at meetings. We do reimburse our officers and directors for reasonable expenses incurred in the performance of their duties.
COMPENSATION PLANS
STOCK OPTION PLANS
In December 2001, the Company's stockholders approved a stock option plan entitled the 2001 Employee Stock Option Plan (the "2001 Plan"), pursuant to which 2,000,000 shares of common stock were reserved for issuance, and in August 2004, our stockholders approved the 2004 Stock Option Plan (the "2004 Plan"), pursuant to which 10,000,000 shares of common stock were reserved for issuance. As of December 31, 2004, 613,000 shares of common stock remained available for issuance of options under the 2001 Plan; as of March 28, 2005, all shares under that Plan had been issued.
The 2004 Plan authorizes the Board of Directors (the "Board"), or a committee
comprised of non-employee directors ("Committee"), to grant, over a 10-year
period, options to purchase up to 10,000,000 shares of the Company's common
stock. Persons eligible to receive options under the Plan include key employees
and directors who are also employees of the Company or any subsidiary, and
consultants to the Company or any subsidiary, as determined by the Board or
Committee. The persons to be granted options under the Plan and the number and
purchase price of the shares represented by each option, the time or times at
which the options may be exercised, and the terms and provisions of each option
(which need not be uniform for all options) will be determined by the Board or
Committee. The purchase price per share may not be less than 100% of the fair
market value of the Company's stock at the time of grant. The purchase price may
be paid in cash or common stock of the Company held for at least six months with
a market value equal to that of the shares being acquired or, in the discretion
of the board or committee, any combination of these. Options granted under the
Plan may be in the form of "incentive stock options" which qualify as such under
Section 422 of the Internal Revenue Code or non-qualified stock options which do
not meet the criteria for incentive stock options under Section 422. The tax
treatment afforded stock options qualifying as incentive stock options is
generally more favorable to employees than that afforded to non-qualified stock
options, in that the exercise of an incentive stock option does not require the
optionee to recognize income for federal income tax purposes at the time of
exercise. (The difference between the exercise price of the incentive stock
option and the fair market value of the stock at the time of purchase is,
however, an item of tax preference which may require payment of an alternative
minimum tax.)
Options granted under the Plan are, generally, transferable only by will or by the laws of descent and distribution, and may be exercised during the lifetime of the optionee only by the optionee or by his legal representative in the event of his disability. In its sole discretion, however, the Board or Committee may permit an optionee to make certain transfers of non-qualified stock options, provided that the transfers are to "family members" and are not for value, as defined in the General Instructions to Form S-8 under the Securities Act of 1933.
The term of each option cannot be more than 10 years from the date of grant, and options can be exercised only during the participant's employment with the Company or one of its subsidiaries. If any option expires or is terminated prior to its exercise in full and prior to the termination of the Plan, the shares subject to such unexercised option will be available for the grant of new options under the Plan. Further, any shares used as full or partial payment by an optionee upon exercise of an option may subsequently be used by the Company to satisfy other options granted under the Plan, subject to the limitation on the total number of shares authorized to be issued under the Plan.
The Plan permits an outstanding option to be exercised after termination of employment only to the extent that the option was exercisable on the date of termination but in no event beyond the original term of the option (i) within one year by the estate or rightful heir(s) of the optionee if the optionee's employment is terminated due to the optionee's death; (ii) within one year after the date of such termination if the termination is due to the optionee's Disability (as defined in the Plan); or (iii) within three months after the date of such termination if the termination was due to the optionee's Retirement (as defined in the Plan) or was for reasons other than death or Disability and other than "for cause" (as defined in the Plan). Upon termination of an optionee's employment "for cause," any unexercised options held by the optionee will be forfeited.
Unexercised options will terminate in the event of the Company's dissolution, liquidation, or sale of all or substantially all of its assets. In the event of our merger with another corporation, the option would be assumed or an equivalent option substituted by the successor corporation or, if such successor corporation does not agree to assume the option or substitute an equivalent option, the Board can provide for the option holder to have the right to exercise the option as to all of the optioned shares, including shares as to which the option would not otherwise be exercisable. The number of shares subject to options and the option prices will be appropriately adjusted in the event of changes in our outstanding common stock by reason of stock dividends, recapitalizations, mergers, consolidations, stock splits and combinations of shares, and the like. The Board may at any time terminate or modify the Plan except, that without further approval of the stockholders, the Board may not make any changes to the Plan which would materially increase the number of shares that may be issued under the Plan, materially modify the eligibility requirements for participation in the Plan, or require stockholder approval under the Delaware General Corporation Law, the Exchange Act, or the Internal Revenue Code.
The 2004 Plan gives the Board the power to issue a restricted stock award to an Employee representing shares of Common Stock that are issued subject to such restrictions on transfer and other incidents of ownership and such forfeiture conditions as the Board may determine ("Restricted Shares"). In connection with issuance of any Restricted Shares, the Board may (but shall not be obligated to) require the payment of a specified purchase price (which price may be less than Fair Market Value as defined in the Plan).
We have not adopted any other deferred compensation, pension, profit sharing, stock option plan or programs for the benefit of our officers or employees. During the second quarter of 2003, the Company established a health insurance benefit plan that is offered to all employees. During the third quarter of 2004, the Company made a dental insurance plan available to all employees.
Option/SAR Grants in Last Fiscal Year
Individual Grants
----------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Percent of Exercise or
Securities Total Base Price Expiration
Name Underlying Options/SARSs ($/Sh) Date
Options/SARS Granted to
Granted Employee in
Fiscal Year
----------------------------------------------------------------------------------------------------------
Peter F. Russo (1) 2,500,000 38.5 $0.25 11/19/09
----------------------------------------------------------------------------------------------------------
Martin G. Chilek 1,750,000 26.9 $0.25 11/19/09
(2)
----------------------------------------------------------------------------------------------------------
Jerome Kindrachuk 750,000 11.5 $0.25 11/19/09
(3)
----------------------------------------------------------------------------------------------------------
|
(1) The options are exercisable as to 16 percent of the shares covered by each option immediately upon grant of the option; the option grant became exercisable as to an additional 16 percent on January 3, 2005; and becomes exercisable as to an additional 68 percent on January 3, 2006.
(2) The options are exercisable as to 23 percent of the shares covered by each option immediately upon grant of the option; the option grant became exercisable as to an additional 23 percent on January 3, 2005; and becomes exercisable as to an additional 54 percent on January 3, 2006.
(3) The options are exercisable as to 33 percent of the shares covered by each option immediately upon grant of the option; the option grant became exercisable as to an additional 33 percent on January 3, 2005; and becomes exercisable as to an additional 33 percent on January 3, 2006.
The following table summarizes the number and value of unexercised options held by our executive officers as of December 31, 2004.
FISCAL YEAR-END OPTION VALUES
----------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Option/
Options/SARS At SARs at Fiscal
Fiscal Year-End (#) Year-End ($)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
--------------------------- -------------------- --------------------- ------------------------ ----------------------
Peter F. Russo - - 2,500,000/0 1,200,000/0
400,000/2,100,000 192,000/1,008,000
Martin G. Chilek 1,750,000/0 840,000/0
400,000/1,350,000 192,000/648,000
Jerome Kindrachuk 750,000/0 360,000/0
250,000/500,000 120,000/240,000
|
The above value has been calculated based on closing price of the common stock as quoted on the OTC Bulletin Board on December 31, 2004.
No officer or director exercised any options in the fiscal year ended December 31, 2004.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information, as of April 12, 2005, with respect to the beneficial ownership of the Company's Common Stock by each person known by the Company to be the beneficial owner of more than five percent (5%) of the outstanding Common Stock and by directors and officers of the Company, both individually and as a group:
Name and Address of Beneficial Owner Number of Shares Owned Percentage**
Beneficially
Peter F. Russo 900,000(1) 4.16
Martin G. Chilek 900,000(2) 4.16
Jerome A. Kindrachuk 600,000(3) 2.81
All Officers and Directors as a Group 2,400,000 10.46
T&T Asset Management 2,925,000(4) 13.21
J. Friedman & Sons 2,700,638(5) 11.82
United Charities of America 1,202,877(6) 5.63
Sophie Angelastri 1,840,751(7) 8.26
Nice Holdings, Ltd. 2,400,000 (8) 10.32
Neil Berman 6,255,120(9) 23.83
Ivano Angelastri 1,400,000(10) 6.71
The Divergence Fund, LP 1,700,000(11) 7.54
|
** Based on 20,849,113 shares outstanding on April 12, 2005.
(1) In addition to 100,000 shares owned directly, Mr. Russo holds options expiring November 19, 2009 to purchase an aggregate of 2,500,000 shares of common stock at an exercise price of $.25 per share, of which options to purchase 800,000 shares are presently exercisable.
(2) In addition to 100,000 shares owned directly, Mr. Chilek holds options expiring November 19, 2009 to purchase an aggregate of 1,750,000 shares of common stock at an exercise price of $.25 per share, of which options to purchase 800,000 shares are presently exercisable.
(3) In addition to 100,000 shares owned directly, Mr. Kindrachuk holds options expiring November 19, 2009 to purchase an aggregate of 750,000 shares of common stock at an exercise price of $.25 per share, of which options to purchase 500,000 shares are presently exercisable.
(4) In addition to 1,625,000 shares owned directly, T&T Asset Management holds notes convertible into 800,000 shares of common stock at a conversion price of $0.05 per share and warrants expiring March 31, 2006 to purchase 500,000 shares of common stock at an exercise price of $0.10 per share.
(5) In addition to 700,638 shares owned directly, J.Friedman & Sons holds notes convertible into 1,000,000 shares of common stock at a conversion price of $0.05 per share and warrants expiring March 31, 2006 to purchase 1,000,000 shares of common stock at an exercise price of $0.10 per share.
(6) In addition to 702,877 shares owned directly, United Charities of America holds warrants expiring March 31, 2006 to purchase 500,000 shares of common stock at an exercise price of $0.10 per share.
(7) In addition to 403,951 shares owned directly, Ms. Angelastri holds notes convertible into 1,033,280 shares of common stock at a conversion price of $.125 per share and warrants expiring March 31, 2006 to purchase 400,000 shares of common stock at an exercise price of $0.10 per share. Ms. Angelastri disclaims any beneficial ownership of shares of common stock held by her husband Ivano Angelastri.
(8) Nice Holdings, Ltd., holds notes convertible into 1,200,000 shares of common stock at a conversion price of $0.05 per share and warrants expiring March 31, 2006 to purchase 1,200,000 shares of common stock at an exercise price of $0.10 per share.
(9) In addition to 855,200 shares owned directly, Neil Berman holds notes convertible into 1,549,920 shares of common stock at a conversion price of $0.125 per share, notes convertible into 3,620,000 shares at a conversion price of $0.05 per share, and warrants expiring March 31, 2006 to purchase 230,000 shares of common stock at an exercise price of $0.10 per share.
(10) Mr. Angelastri disclaims any beneficial ownership of shares of common stock, convertible notes and warrants held by his wife Sophie Angelastri. (11) The Divergence Fund, LP holds notes convertible into 1,000,000 shares of common stock at a conversion price of $0.05 per share and warrants expiring March 31, 2006 to purchase 700,000 shares of common stock at an exercise price of $0.10 per share.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information with respect to our common stock issued and available to be issued under outstanding options, warrants and rights as of December 31, 2004.
----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
----------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 6,500,000 $0.25 4,113,000
approved by security holders
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders
----------------------------------------------------------------------------------------------------------------------
Total 6,500,000 4,113,000
----------------------------------------------------------------------------------------------------------------------
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 6, 2003 the Company entered into a consulting agreement with M.U.R.G. LLC ("M.U.R.G."), a Florida-based real estate consulting firm. The consultant was to provide advisor services in connection with a proposed construction of approximately 500 homes in Puerto Rico by the Company. We advanced M.U.R.G. $100,000 against its future commission compensation and M.U.R.G. delivered to us its promissory note payable on demand with interest accruing at the rate of 5% per annum. Gary T. Robinson, Former Chief Executive Officer and Former Chairman of the Board, loaned the Company $100,000 that enabled us to make the advance to M.U.R.G. The project did not go forward and on June 16, 2003 Mr. Robinson agreed to assume the promissory note from M.U.R.G. and eliminate the loan amount due him from the Company.
On March 11, 2003, we entered into a contract with Peter F. Russo to serve as President. It provides for three years' employment from March 11, 2003, at a salary of $10,000 per month through June 30, 2003, and $15,000 per month thereafter, payable in bi-monthly installments, plus benefits. On September 20, 2004 the contract was amended to adjust the salary to $6,500 per month effective January 1, 2004. Certain benefits were also eliminated effective the same dates. We also have an employment contract with Jerome Kindrachuk effective July 2003, prior to Mr. Kindrachuk's appointment as an officer of the Company. It provides for three years' employment from July 1, 2003, at a salary of $10,000 per month, payable in bi-monthly installments, plus benefits. On September 22, 2004 the contract was amended to adjust salary to $6,000 per month effective January 1, 2004. Certain benefits were also eliminated effective the same dates.
During the first quarter of 2004, the Company paid consulting fees to Jerome Kindrachuk of $13,612 for services rendered prior to his employment. The following officers of the Company were issued shares of common stock under the 2001 Employee Stock Option Plan as follows:
-------------------------------------------------------------------------------------------------------------
Name Date of Issuance Number of Shs. Per Share
Valuation
-------------------------------------------------------------------------------------------------------------
Peter F. Russo December 10, 2004 50,000 $0.18
-------------------------------------------------------------------------------------------------------------
Martin G. Chilek January 14, 2004 89,500 $0.078
December 10, 2004 50,000 $0.18
-------------------------------------------------------------------------------------------------------------
Jerome Kindrachuk December 10, 2004 50,000 $0.18
-------------------------------------------------------------------------------------------------------------
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ITEM 13. EXHIBITS.
Exhibit No. Description of Exhibits
------------ ---------------------------------------------------------------
3.1 Articles of Incorporation of the Company, as currently in
effect, incorporated herein by reference to Exhibit 3.1 to
Amendment No. 1 to the Company's Registration Statement on Form
10-SB filed with the Commission on June 15, 2000.
3.1a Amendment to Certificate of Incorporation, filed September 1,
2004. Incorporated herein by reference to Exhibit 3.1a to the
Company's Current Report on Form 8-K, filed with the Commission
on September 3, 2004.
3.1b Form of Restatement of Certificate of Incorporation of Delta
Mutual, Inc., as amended. Incorporated herein by reference to
Exhibit 3.1b to the Company's Quarterly Report on Form 10-QSB,
filed with the Commission on November 15, 2004.
3.2 By-Laws of the Company. Incorporated herein by reference to
Exhibit 3.2 to Amendment No. 1 to the Company's Registration
Statement on Form 10-SB filed with the Commission on June 15,
2000.
3.2a Amendment to Article III, Section I of the By-Laws.
Incorporated herein by reference to the Company's quarterly
report on Form 10-QSB, filed with the Commission on November
21, 2000.
|
4.1 Delta Mutual, Inc. 2001 Employee Stock Option Plan,
incorporated herein by reference to Appendix B to the Company's
definitive Information Statement pursuant to Section 14C of the
Exchange Act, filed with the Commission on November 9, 2001.
4.2 Delta Mutual, Inc. 2001 Employee Stock Option Plan, as amended
December 1, 2003.
4.2a Delta Mutual, Inc. 2004 Stock Option Plan. Incorporated herein
by reference to Exhibit B to the Company's Definitive Proxy
Statement, filed with the Commission on June 16, 2004.
4.3 Form of 6% Convertible Promissory Notes of the Company due
2006. Incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K, filed with the Commission on
September 24, 2004.
4.4 Form of Warrants to purchase shares of Common Stock, of the
Company issued to the purchasers of the Company's 6%
Convertible Promissory Notes. Incorporated by reference to
Exhibit 4.4 to the Company's Current Report on Form 8-K, filed
with the Commission on September 24, 2004.
4.5 4% Convertible Promissory Note of the Company due May 2006
issued in the principal amount of $129,160 on May 12, 2004.
Incorporated herein by reference to Exhibit 4.5 to the
Company's Quarterly Report on Form 10-QSB, filed with the
Commission on November 15, 2004.
4.6 Convertible Promissory Note of the Company due May 2006 issued
in the principal amount of $193,740 on May 12, 2004.
Incorporated herein by reference to Exhibit 4.6 to the
Company's Quarterly Report on Form 10-QSB, filed with the
Commission on November 15, 2004.
4.7 4% Convertible Promissory Note "A" of the Company due December
2006 issued in the principal amount of $157,000 on July 1,
2004. Incorporated herein by reference to Exhibit 4.7 to the
Company's Quarterly Report on Form 10-QSB, filed with the
Commission on November 15, 2004.
4.8 4% Convertible Promissory Note "B" of the Company due January
2007 issued in the principal amount of $37,500 on July 16,
2004. Incorporated herein by reference to Exhibit 4.8 to the
Company's Quarterly Report on Form 10-QSB, filed with the
Commission on November 15, 2004.
|
4.9 6% Promissory note of the Company due December 2005 issued in
the principal amount of $71,731.29 on March 22, 2005.
Incorporated herein by reference to Exhibit 4.9 to the
Company's current report on Form 8K filed with the Commission
on March 25, 2005.
4.10 8% Promissory note of the Company due October 2, 2005 issued in
the principal amount of $210,655.04 on April 5, 2004.
Incorporated herein by reference to Exhibit 4.10 to the
Company's current report on Form 8K filed with the Commission
on April 11, 2005.
10.1 Agreement of Sale with Enterprises Solutions, Inc. dated May
11, 2001, and amendments. Incorporated herein by reference to
Exhibit 10.2 to the Company's current report on Form 8-K, filed
with the Commission on May 23, 2001.
10.2 Promissory note from Enterprises Solutions, Inc. dated October
31, 2001. Incorporated by reference to Exhibit 10.3 to the
Company's annual report on Form 10-KSB, filed with the
Commission on April 16, 2002.
10.3 Promissory Note to Rosanne Solomon dated November 27, 2001.
Incorporated herein by reference to Exhibit 10.1 to Amendment
No. 3 to the Company's registration statement on Form S-4,filed
with the Commission on November 30, 2001.
10.4 License Agreement with Enterprises Solutions, Inc. dated
December 11, 2001. Incorporated by reference to Exhibit 10.5 to
the Company's annual report on Form 10-KSB, filed with the
Commission on April 16, 2002.
10.5 Employment Agreement between Kenneth A. Martin and the Company.
Incorporated by reference to Exhibit 10.6 to the Company's
annual report on Form 10-KSB, filed with the Commission on
April 16, 2002.
10.6 Agreement, dated January 13, 2003, between the Company and
Kenneth A. Martin. Incorporated by reference to Exhibit 10.7 to
the Company's registration statement on Form S-8, filed with
the Commission on February 13, 2003.
|
10.7 Agreement, dated February 3, 2003, between the Company and
Peter F. Russo. Incorporated by reference to Exhibit 10.8 to
the Company's registration statement on Form S-8, filed with
the Commission on February 13, 2003.
10.8 Agreement, dated February 4, 2003, between the Company and J.
Dapray Muir. Incorporated by reference to Exhibit 10.9 to the
Company's registration statement on Form S-8, filed with the
Commission on February 13, 2003.
10.9 Executive Employment Agreement, effective March 11, 2003, by
and between the Company and Peter F. Russo. Incorporated herein
by reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-KSB, filed with the Commission on April 14, 2003.
10.10 Consulting Agreement, effective February 28, 2003, between
M.U.R.G., LLC and Delta Mutual, Inc. Incorporated herein by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-KSB, filed with the Commission on April 14, 2003.
10.11 Agreement, March 31, 2003, between the Company and Burrows
Consulting Inc. Incorporated herein by reference to Exhibit
10.3 to the Company's current report on Form 8-K, filed with
the Commission on April 25, 2003.
10.12 License Agreement with Joseph Friedman and Sons, International,
Inc., dated April 2, 2003. Incorporated herein by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-KSB,
filed with the Commission on April 14, 2003.
10.13 Agreement, dated July 1, 2003, between the Company and Gary T.
Robinson. Incorporated herein by reference to Exhibit 10.10 to
the Company's registration statement on Form S-8, filed with
the Commission on August 20, 2003.
10.14 Agreement, dated August 29, 2003, between the Company and
Burrows Consulting Inc. Incorporated herein reference to
Exhibit 10.10 to the Company's current report on Form 8-K,
filed with the Commission on September 4, 2003.
|
10.15 Strategic Alliance Agreement, dated September 10, 2003, between
Delta-Envirotech, Inc. and ZAFF International Ltd. Incorporated
herein by reference to Exhibit 99.2 to the Company's current
report on Form 8-K, filed with the Commission on January 22,
2004.
10.16 Agreement, dated January 14, 2004, by and between Delta Mutual,
Inc. and Hi Tech Consulting and Construction, Inc. Incorporated
herein by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-KSB, filed with the Commission on April 6,
2004.
10.17 Agreement to Purchase Stock, dated January 14, 2004, between
Delta Mutual, Inc. and Hi Tech Consulting and Construction,
Inc., as sellers, and Ali Razmara, as purchaser. Incorporated
herein by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-KSB, filed with the Commission on April 6,
2004.
10.18 Consulting Agreement, dated as of March 21, 2004, between
Delta Mutual, Inc. and Clark Street Capital. Incorporated
herein by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-QSB, filed May 19, 2004.
10.19 Consulting Services Agreement, dated as of April 16, 2004,
between Delta Mutual, Inc. and Basic Investors, Inc.
Incorporated herein by reference to Exhibit 10.19 to the
Company's Quarterly Report on Form 10-QSB, filed May 19, 2004.
10.20 Memorandum of Understanding, dated as of March 17, 2004, by and
between Delta-Envirotech, Inc., PT Faryan Nusantara and
Crescent Aeronautical Technology. Incorporated herein by
reference to Exhibit 10.20 to the Company's Quarterly Report on
Form 10-QSB, filed May 19, 2004.
10.21 Agreement, dated April 5, 2004, Trans Indies Realty Investment
Corporation and Delta Developers Corp. Incorporated herein by
reference to Exhibit 10.21 to the Company's Quarterly Report on
Form 10-QSB, filed August 12, 2004.
|
10.22 Term Sheet, dated May 12, 2004, among Delta Mutual, Inc., Neil
Berman and Ivano Angelastri. Incorporated herein by reference
to Exhibit 10.22 to the Company's Quarterly Report on Form
10-QSB, filed August 12, 2004.
10.23 Term Sheet, dated July 1, 2004, between Delta Mutual, Inc. and
Neil Berman. Incorporated herein by reference to Exhibit 10.23
to the Company's Quarterly Report on Form 10-QSB, filed August
12, 2004.
10.24 Settlement Agreement and Mutual General Releases, dated
November 26, 2004, between the Company and Joseph Friedman and
Sons International, Inc. Incorporated herein by reference to
Exhibit 10.24 to the Company's Current Report on Form 8-K,
filed with the Commission on December 2, 2004.
10.25 Delta Mutual, Inc. Code of Conduct and Business Ethics, filed
herewith.
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
|
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(1) Aggregate fees for the last two years:
2004 2003
---- ----
$75,116 $52,855
(2) Audit related fees: 2004 2003
---- ----
$72,704 $48,855
(3) Tax fees:
2004 2003
---- ----
$5,000 $4,000
|
(4) All other fees: NA
(5) Audit committee pre-approval processes, percentages of services approved by audit committee, percentage of hours spent on audit engagement by persons other than principal accountant's full time employees: NA
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DELTA MUTUAL, INC.
Dated: April 14, 2005 By:/s/ Peter F. Russo ------------------------------ Peter F. Russo President, Chief Executive Officer and Director By:/s/ Martin G. Chilek ------------------------------ Martin G. Chilek Vice President and Chief Financial Officer Principal Financial Officer |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
----------------- ----------------- ---------------
/s/ Peter F. Russo
---------------------
Peter F. Russo President April 14, 2005
And Director
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DELTA MUTUAL, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
Accountant's Report F-1
Financial Statements:
Consolidated Balance Sheet as of December 31, 2004 F-2
Consolidated Statement of Operations for the years ended
December 31, 2004 and 2003 F-3
Consolidated Statement of Stockholders' Deficiency as of
December 31, 2004 and 2003, Respectively F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 2004 and 2003. F-5
Notes to Consolidated Financial Statements F-6
|
[LETTERHEAD OF WIENER, GOODMAN & COMPANY, P.C.)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Delta Mutual Inc.
We have audited the accompanying consolidated balance sheets of Delta Mutual, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders deficiency and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Delta Mutual, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. Since a change in control, new Company management has embarked upon a new mission and strategic direction intending to establish a series of subsidiaries and joint ventures, primarily for the establishment of business operation focusing upon providing technologies and services in the environmental remediation industry and utilizing certain construction technologies to participate in selected housing development projects. As more fully explained in Note 1, to the financial statements the Company needs to obtain additional financing to fulfill its proposed activities and achieve a level of sales adequate to support its cost structure.
These uncertainties raise substantial doubt about the Company's ability to continue as a going concern. Management's plans are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties should the Company be unable to continue as a going concern.
/s/ WIENER, GOODMAN & COMPANY, P.C. ----------------------------------- WIENER, GOODMAN & COMPANY, P.C. Eatontown, New Jersey March 30, 2005 |
DELTA MUTUAL INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
---------------------------
2004 2003
------------ ------------
Current Assets:
Cash $ 113,780 $ 14,057
Prepaid expenses 40 3,962
Refundable deposits 144,700 25,200
------------ ------------
Total Current Assets 258,520 43,219
Property & Equipment - net 8,689 7,033
Investment in joint ventures 1 33,800
Capitalized construction costs 170,000 --
Other assets 4,234 650
------------ ------------
Total Assets $ 441,444 $ 84,702
============ ============
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 202,929 $ 186,592
Accrued expenses 426,137 265,286
Loan due former officer/stockholder -- 56,364
Loan to related parties -- 122,000
Due to related parties -- 11,200
------------ ------------
Total Current Liabilities 629,066 641,442
Long term convertible debt 891,400 --
------------ ------------
Total Liabilities 1,520,466 641,442
------------ ------------
Minority interest in consolidated subsidiaries 183,160 150
Stockholders' Deficiency:
Common stock $0.0001 par value -
Authorized 100,000,000 shares;
19,133,571 and 9,361,688 shares issued
and outstanding, respectively 1,913 936
Additional paid-in-capital 4,446,004 1,231,574
Deficit accumulated during the
development stage (5,710,099) (1,789,400)
------------ ------------
Total Stockholders' Deficiency (1,262,182) (556,890)
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ 441,444 $ 84,702
============ ============
|
See notes to consolidated financial statements
DELTA MUTUAL, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
2004 2003
--------------- ---------------
Revenue $ -- $ --
--------------- ---------------
Costs and Expenses
General and administrative
expenses 1,848,078 1,209,853
--------------- ---------------
Loss from operations (1,848,078) (1,209,853)
--------------- ---------------
Minority interest share of loss
of consolidated subsidiaries 101,644 --
Write down of joint venture (33,799) --
Interest element of warrant issue (2,112,500) --
Interest expense (27,966) (39,656)
--------------- ---------------
Loss before benefit
from income taxes (3,920,699) (1,249,509)
Benefit from income taxes -- --
--------------- ---------------
Net loss $ (3,920,699) $ (1,249,509)
=============== ===============
Loss per common share -
basic and diluted $ 0.28 $ 0.19
=============== ===============
Weighted average number of
common shares outstanding -
basic and diluted 14,250,963 6,734,384
=============== ===============
|
See notes to consolidated financial statements
DELTA MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Number of Common Paid in Total
Common Stock Capital
Shares Deficit
Accumulated
------------- ------------- ------------- ------------- -------------
Balance, January 1, 2003 857,000 $ 56 $ 304,329 $ (539,891) $ (235,476)
Issuance of common stock for interest 100,000 10 28,740 -- 28,750
expense (valued at $0.275-$0.30 per
share)
Issuance of common stock for services 950,000 95 244,499 -- 244,594
(valued at $0.035 - $0.50)
Issuance of common stock in lieu of 280,000 28 93,597 -- 93,625
payment of officer loan (valued at
$0.334375 per share)
Sale of common stock (at $0.125 - $0.50) 450,000 45 112,455 112,500
Issuance of common stock for investment 50,000 5 7,495 -- 7,500
in joint venture (valued at $0.15 per
share)
Issuance of common stock for repayment 520,000 52 127,074 -- 127,126
of debt (valued at $0.10 - $0.69336)
Stock split February 24, 2003 (five for 4,708,050 471 (471) -- --
one)
Issuance of common stock for license 288,638 28 39,972 -- 40,000
agreement (valued at $0.138582 per share)
Issuance of common stock for promissory 800,000 80 249,920 -- 250,000
note repayment (valued at $0.3125 per
share)
Issuance of common stock awards from the 358,000 36 23,964 -- 24,000
Company's stock option plan (valued at
$0.067039 per share)
Net loss -- -- -- (1,249,509) (1,249,509)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2003 9,361,688 936 1,231,574 (1,789,400) (556,890)
|
See notes to consolidate financial statements
DELTA MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY (Continued)
Number of Common Paid in Total
Common Shares Stock Capital
Deficit
Accumulated
-------------- -------------- -------------- -------------- --------------
Issuance of common stock for 2,636,328 264 246,178 -- 246,442
repayment and conversion for
debt and interest expense (valued
at $0.05 - $0.137 per share)
Issuance of common stock for 3,840,000 384 457,791 -- 458,175
services (valued at $0.05 - $0.30
per share)
Sale of common stock (valued at 2,544,055 254 275,996 -- 276,250
$0.05 - $0.18 per share)
Issuance of common stock for 412,000 41 69,999 -- 70,040
settlement Agreement (valued at
$0.17 per share)
Issuance of common stock awards 339,500 34 51,966 -- 52,000
from the Company's 2001 stock
option plan (valued at $0.078 -
$0.18 per share)
Issuance of common stock purchase -- -- 2,112,500 -- 2,112,500
warrants in connection with the
proceeds from borrowings (valued
at $0.10 per share)
Net loss -- -- -- (3,920,699) (3,920,699)
-------------- -------------- -------------- -------------- --------------
Balance, December 31, 2004 19,133,571 $ 1,913 $ 4,446,004 $ (5,710,099) $ (1,262,182)
============== ============== ============== ============== ==============
|
See notes to consolidated financial statements
DELTA MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
--------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net loss $ (3,920,699) $ (1,249,509)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 2,137 1,759
on-cash compensation, including
settlement and common stock awards 528,215 337,344
Issuance of common stock awards 52,000
Minority interest share of losses
of consolidated subsidiaries (101,644) --
Non-cash fair value of warrants 2,112,500 --
Bad debt 47,521 --
Write-down of joint venture 33,799 --
Changes in operating assets
and liabilities (106,253) 429,666
-------------- --------------
Net cash used in operating activities (1,352,424) (480,740)
-------------- --------------
Cash flows from investing activities:
Purchase of fixed assets (3,793) (33,992)
Advances to joint ventures -- (115,100)
Advances to ESI --
-------------- --------------
Net cash used in
Investing activities (3,793) (149,092)
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock 276,250 112,500
Proceeds from loans -- --
Repayment of loans -- --
Proceeds from minority interest 284,654 150
Proceeds from former officer
and stockholder -- 515,383
Repayment to former officer
and stockholder (56,364) (109,015)
Proceeds from related parties -- 187,000
Repayment to related parties (10,000) (65,000)
Proceeds from convertible debt 961,400 --
-------------- --------------
Net cash provided by
financing activities 1,455,940 641,018
-------------- --------------
Net increase in cash 99,723 11,186
Cash - Beginning of year 14,057 2,871
-------------- --------------
Cash - End of year $ 113,780 $ 14,057
============== ==============
|
See notes to consolidated financial statements
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended December 31,
-----------------------------------
2004 2003
--------------- ---------------
Supplementary information:
Cash paid during year for:
Interest $ 12,328 $
=============== ===============
Income taxes $ -- $ --
=============== ===============
Changes in operating assets and
liabilities consists of:
(Increase) in loan receivable $ (51,221) $ --
(Increase) decrease in prepaid expenses 3,922 (3,962)
(Increase) decrease in deposits (119,500) --
Increase in other assets (173,584) (650)
Increase in accounts payable
and accrued expenses 234,130 434,278
--------------- ---------------
$ (106,253) $ 429,666
=============== ===============
Non-cash financing activities:
Issuance of common stock for
promissory note $ -- $ 250,000
=============== ===============
Offset of note receivable and convertible
debt in connection with termination
Agreement $ -- $ --
=============== ===============
Forgiveness of debt to former
Shareholders $ -- $ --
=============== ===============
Offset of note receivable to
liquidate loan to officer $ -- $ 350,000
=============== ===============
Issuance of common stock for debt $ 46,442 $ 127,126
=============== ===============
Issuance of common stock for investment
in unconsolidated subsidiary $ -- 7,500
=============== ===============
Issuance of common stock in lieu of
payment of accrued expenses $ -- $ 93,625
=============== ===============
|
See notes to consolidate financial statements
DELTA MUTUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's financial statements for the year ended December 31, 2004 have been prepared on a going concern basis which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. Management recognizes that the Company's continued existence is dependent upon its ability to obtain needed working capital through additional equity and/or debt financing and the commencement of its planned principal operations. As of December 31, 2004 operations had commenced and, accordingly, the Company is no longer considered a development stage enterprise.
The Company's business is subject to most of the risks inherent in the establishment of a new business enterprise. The likelihood of success of the Company must be considered in light of the expenses, difficulties, delays and unanticipated challenges encountered in connection with the formation of a new business, raising operating and development capital, and the marketing of a new product. There is no assurance the Company will achieve a profitable level of operations.
The Company presently does not have sufficient liquid assets to finance its anticipated funding needs and obligations. The Company's continued existence is dependent upon its ability to obtain needed working capital through additional equity and/or debt financing to achieve a level of sales adequate to support its cost structure. Management is actively seeking additional capital to ensure the continuation of its development activities and complete the proposed joint ventures. However, there is no assurance that additional capital will be obtained and the joint ventures will be profitable. These uncertainties raise substantial doubt about the ability of the Company to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of uncertainties should the Company be unable to continue as a going concern.
Business Plan
Since the change in control, new Company management has embarked upon a new mission and strategic direction, through the establishment of joint ventures and a limited partnership. This structure is primarily for the establishment of business operations focused on providing construction and environmental technologies and services to specific geographic areas in Puerto Rico, the Middle East and the Far East. The Company, simultaneously, made a strategic decision to minimize its activities in Eastern Europe and to maintain a small passive investment in the area that can be expanded in the future should circumstances change.
The Company has entered into strategic alliance agreements with several United States-based entities with technologies in the environmental technology field to support the Company's world wide activities.
On March 18, 2003 the Company entered into a Letter of Intent with Hi Tech Consulting and Construction, Inc. to form a joint venture to provide environmental technology services for certain business sectors located in the Middle East and Africa. The joint venture agreement was finalized January 14, 2004, and the joint venture company, Delta-Envirotech, Inc., is based in the Commonwealth of Virginia and incorporated in the State of Delaware.
Middle East
On January 22, 2004, the Company announced a strategic alliance agreement between Delta-Envirotech, Inc. and ZAFF International, Ltd., a technology company located in Saudi Arabia. The strategic alliance states that the two companies will jointly pursue projects related to soil and water reclamation requirements in the Middle East. On December 1, 2004, the Company announced that ZAFF International, Ltd., Delta's strategic partner, received its operating license from the Saudi Arabia environmental authorities to employ all soil, refinery waste and waste water technologies held by Delta for environmental recovery projects. ZAFF International, Ltd. is one of the first companies to be granted a multi-technology environmental license in Saudi Arabia.
Far East In April 2004, Delta-Envirotech executed an agreement with the Indonesian government's technology authority, LIPI. The agreement outlines a joint |
cooperation between Delta-Envirotech, Inc. and a local Indonesian technology company to commence energy recovery and waste processing operations in Indonesia. A local joint venture is being established to conduct the actual recovery and processing activities.
Puerto Rico
On January 20, 2004, the Company announced the formation of a joint venture project to develop government sponsored, Section 124 low income housing in the Commonwealth of Puerto Rico. The development, Brisas Del Atlantico, has been approved for development under Section 124 of the Housing Department, which provides for government subsidized low-income housing. The Company is the General Partner and majority owner of a limited partnership that is the majority shareholder of Delta Developers Corp., a Puerto Rico corporation, formed to manage the construction and related activities required to build approximately 270 low income homes under Section 124. The necessary building permits have been submitted for approval and a real estate agency has been hired to sell the homes planned for construction. Due to events related to the ballot recount in the Puerto Rico gubernatorial election held November 2, 2004, the election of a new governor was not certified until late December 2004. These events
have delayed the Company's permit approval process. Currently, the Company expects the building permits to be approved and presale of the homes to begin in the third quarter of 2005.
On December 9, 2004, the Company announced the formation of a second joint venture project to develop government sponsored Section 124 low income housing in the Commonwealth of Puerto Rico using the same construction as the first project. The Company is the majority owner of Delta Developers Guayanilla Corp., a Puerto Rico corporation. The Company plans to build approximately 300 low income houses under Section 124.
The Company is currently dependent on equity investments and/or loans from private investors to pay its operating expenses. There are no assurances that such investors will continue to advance funds or invest in the Company's securities. In the event the Company is unable to obtain additional capital or funding it may be unable to pursue its business plans. Due to the fact that the company has limited operations at this time, it is anticipated that its cash requirements will be limited, and that all necessary capital, to the extent required, will be provided by investors. The Company anticipates that it will be required to raise capital in the amount of $3,000,000 in the next 12 months in order to continue to fund its limited operations and to finance its planned business operations. However there is no assurance that additional capital will be obtained and the joint ventures will be profitable.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its majority - owned subsidiaries and joint ventures. The consolidated statements include 100 percent of the assets and liabilities of these subsidiaries and joint ventures and the ownership interests of minority participants are recorded as "Minority interests in consolidated subsidiaries". All intercompany transactions and balances have been eliminated.
INVESTMENTS
Long-term investments between 20% and 50% in associated companies are accounted for under the equity method and are included in Investment in Joint Ventures on the Company's balance sheet at December 31, 2004. Investments in associated companies where the Company has a controlling interest and exercises significant influence are consolidated with the Company's operations unless otherwise disclosed.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those efforts.
LOSS PER SHARE
Basic and diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the year. Potential common shares are excluded from the loss per share calculation, because the effect would be antidilutive. Potential common shares relate to the convertible debt and common stock purchase warrants. As of December 31, 2004, there were 13,953,200 potential common shares related to convertible debt issued by the Company and 8,080,000 potential common shares related to common stock purchase warrants issued by the Company. As of December 31, 2003, there were no potential common shares.
REVENUE RECOGNITION ON CONSTRUCTION CONTRACTS
The Company will recognize revenue in accordance with the guidance contained in SEC Staff Accounting Bulletin No. 104 "Revenue Recognition Finance Statements" (SAB No. 104).
Revenue and profits in construction contracts will be recorded under the percentage of completion method. Progress toward completion is measured using the cost to cost method. Under the cost to cost method, revenues and profits are recognized based on the ratio that costs incurred bear to total estimated costs. This method is subject to physical verification of actual progress towards completion. To date the Company has recognized no revenue as defined.
EVALUATION OF LONG-LIVED ASSETS
The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable in accordance with guidance in SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". If the carrying value of the long-lived asset exceeds the present value of the related estimated future cash flows, the asset would be adjusted to its fair market value and an impairment loss would be charged to operations in the period identified.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is provided for by the straight-line method over the estimated useful lives of the related assets.
STOCK OPTION PLAN
The Company accounts for equity-based compensation issued to employees in accordance with Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees". APB No. 25 requires the use of intrinsic value method, which measures compensation cost as the excess, if any, of the quoted price of the stock at the measurement date over the amount the employee must pay to acquire the stock. The Company makes disclosures of pro forma net earnings and earnings per share as if the fair-market-value based method of accounting had been applied as required by SFAS No. 123 "Accounting for Stock-Based Compensation".
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. It also requires disclosure in both
annual and interim financial statements about the method of accounting for
stock based employee compensation and the effect of the method used on
reported results. The Company adopted the disclosure provisions of SFAS
No. 148 beginning with the year ended December 31, 2002. The Company
grants stock options with exercise prices at fair market value at the date
of grant. The Company will continue to account for stock-based employee
compensation under recognition and measurement principle of APB Opinion
No. 25 and related interpretations through December 15, 2005. Thereafter,
the Company will account for stock-based compensation under SFAS No.
123(R). The Company is currently evaluating its position and will make a
determination to account for the compensation costs either prospectively
or retroactively at the time of adoption.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Had compensation cost for the Company's stock option plan been determined based on the fair market value at the grant date of awards in 2004 consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would have been reduced to the pro forma amounts included below:
For the year ended
December 31,
--------------------------------
2004 2003
-------------- --------------
Net loss-as reported $ (3,920,699) $ (1,249,509)
Deduct: Total stock-based
employee compensation expense
determined under fair value based
method for all awards,
net of taxes 406,250 --
-------------- --------------
Net loss- pro forma $ (4,326,949) $ (1,249,509)
============== ==============
Loss per common share
basic and diluted- as reported $ (0.28) $ (0.19)
Loss per common share
basic and diluted - pro forma $ (0.30) $ (0.19)
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average-average assumptions used for grants in 2004: dividends yield of 0%, expected volatility of 116% and expected life of 10 years. 6,500,000 options were granted during the year ended December 31, 2004, and there were no option grants in 2003.
The Company is also authorized to issue shares of stock to its employees from its 2001 Employee Stock Option Plan. The Company expenses the issuance of stock awards in accordance with SFAS No. 123. Shares issued from the Plan are expensed at the time of issuance, as the common stock issued has no restrictions to the employees. The Company issued stock awards to five employees totaling 339,500 shares from the 2001 Plan during 2004 and 358,000 shares issued to four employees during 2003. The shares issued were at fair market value as compensation to employees. The Company recorded compensation expense of $52,000 and $24,000 and is included in the Company's statement of operations for the year ended December 31, 2004 and 2003, respectively.
STOCK-BASED COMPENSATION
The Company issues shares of its common stock to employees and non-employees as stock-based compensation. The Company accounts for the services using the fair market value of the services rendered. For the years ended December 31, 2004 and 2003 the Company issued 3,840,000 and 1,230,000 common shares respectively, and recorded compensation expense of $458,175, and $244,594 respectively, in connection with the issuance of these shares. In 2004, the Company issued 412,000 common shares and recorded $70,040 in settlement expenses in connection with the termination of a license agreement.
The Company also granted 8,880,000 warrants to the various lenders to acquire the Company's common stock during the year ended December 31, 2004. The warrants are exercisable at a price per share of $0.10, which was below the fair market value at the time of the grant. The warrants may be exercised any time after issuance and expire March 31, 2006. During the year ended December 31, 2004, 800,000 warrants were exercised. There were no warrants issued during the year ended December 31, 2003.
The fair value of the 8,880,000 warrants amount to $2,112,500 and was charged to operations and is included in interest element of warrant issuance in accompanying statement of operations for the year ended December 31, 2004.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach under which deferred taxes are recognized by applying enacted tax rates applicable to future years to the differences between financial statement carrying amounts and the tax basis of reported assets and liabilities. The principal item giving rise to deferred taxes are future tax benefits of certain net operating loss carryforwards.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments including cash, accounts payable, accrued expenses, and convertible debt, it was assumed that the carrying amount approximated fair value because of the short maturities of such instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to conform to current year presentation.
NEW FINANCIAL ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standard Board ("FASB") issued Statement on Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment" (revised), that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the reward. The statement also amends SFAS No. 95, "Statement of Cash Flows", to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. SFAS No. 123(R) is effective as
to the Company as of the beginning of the first interim period that begins after June 15, 2005. The Company is currently evaluating its position and will make its determination to account for the compensation costs either prospectively or retroactively at the time of adoption. The adoption of SFAS 123(R) is expected to have a material effect on the Company's results of operations.
In December 2004, the FASB staff issued FASB Staff Position ("FSP") FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" to provide guidance on the application of Statement 109 to the provision within the American Jobs Creations Act of 2004 (the "Act") that provides tax relief to U.S. domestic manufacturers. The FSP states that the manufacturers, deduction provided for under the Act should be accounted for as a special deduction in accordance with Statement 109 and not as a tax rate reduction. The FSP is effective upon issuance. The adoption of FAS 109-1 could have a material effect on the Company's results of operations or financial position.
In December 2004, the FASB staff issued FSP No. FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the American Jobs Creation Act of 2004" to provide accounting and disclosure guidance for the repatriation provisions included in the Act. The Act introduced a special limited-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer as more fully described in Note 8 of Notes to Consolidated Financial Statements. The FSP is effective upon issuance. The adoption of FAS 109-2 could have a material effect on the Company's results of operations and financial position.
In December 2004, the FASB issued SFAS No. 153 an amendment of APB Opinion No. 29 "Exchanges of Nonmonetary Assets". SFAS No. 153 amends APB Opinion No. 29 by eliminating the exception under APB No. 29 for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for periods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material effect on the Company's financial position or results of operations.
In November, 2004 the FASB issued SFAS No. 151, an amendment to ARB No. 43 chapter 4 "Inventory Costs". SFAS No. 151 requires that abnormal costs of idle facility expenses, freight, handling costs and wasted material (spoilage) be recognized as current-period charges. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. Adoption of SFAS No. 151 is not expected to have a material impact on the Company's results of operations or financial position.
In December 2003, the FASB issued SFAS No. 132(R), "Employer's Disclosure about Pensions and Other Postretirement Benefits" (revised). SFAS No. 132(R) retains disclosure requirements of the original SFAS No. 132(R) and requires additional disclosures relating to assets, obligations, cash flows, and net periodic benefit cost. SFAS No. 132(R) is effective for fiscal years ending after December 15, 2003, except that certain disclosures are effective for fiscal years ending after June 15, 2004. Interim period disclosures are effective for interim periods beginning after December 15, 2003. The adoption of SFAS No. 132(R) did not have a material effect on the Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of the provisions of SFAS No. 150 did not have a material effect on the Company's financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after September 30, 2003, and for hedging relationships designated after September 30, 2003. Adoption of this statement did not have a material impact on the Company's results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities." In December 2003, the FASB issued FIN No. 46(R) (revised) to address certain FIN No. 46 implementation issues. This interpretation requires that the assets, liabilities, and results of activities of a Variable Interest Entity ("VIE") be consolidated into the financial statements of the enterprise that has a controlling interest in the VIE. FIN No. 46(R) also requires additional disclosures by primary beneficiaries and other significant variable interest holders. For entities acquired or created before February 1, 2003, this interpretation is effective no later than the end of the first interim or reporting period ending after March 15, 2004, except for those VIE's that are considered to be special purpose entities, for which the effective date is no later than the end of the first interim or annual reporting period ending after December 15, 2003. For all entities that were acquired subsequent to January 31, 2003, this interpretation is effective as of the first interim or annual period ending after December 31, 2003. The adoption of FIN No. 46 did not have a material impact on the Company's results of operations or financial position.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others", and interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN No. 45 clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. This interpretation clarifies that a guarantor is required to recognize, at the inception of certain types of guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted FIN No. 45 on January 1, 2003. The adoption of FIN No. 45 did not have a material impact on the Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan. The Company adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on the Company's result of operations or financial position.
2. REFUNDABLE DEPOSITS
December 31,
-------------------------------
2004 2003
-------------- --------------
Deposits on land $ 60,700 $ 25,200
Other joint venture deposits 84,000 --
-------------- --------------
$ 144,700 $ 25,200
============== ==============
3. PROPERTY AND EQUIPMENT
December 31,
-------------------------------
2004 2003
-------------- --------------
Equipment $ 4,778 $ 985
Leasehold improvements 7,807 7,807
-------------- --------------
$ 12,585 $ 8,792
Less accumulated
Depreciation (3,896) (1,759)
-------------- --------------
$ 8,689 $ 7,033
============== ==============
|
Depreciation expense for the years ended December 31, 2004 and 2003 amounted to $2,137 and $1,759, respectively.
4. DUE FROM CEVA INTERNATIONAL, INC.
On June 17, 2003 the Company and Dr. Louis Rose entered into an agreement whereby Dr. Rose assigned all of his rights, title and interest in a promissory note from CEVA International, Inc. ("CEVA") in the amount of $250,000 to the Company in exchange for an aggregate of 800,000 shares of the Company's common stock. The note was guaranteed by Gary Robinson, formerly the Company's largest shareholder. CEVA did not pay the note and the Company exercised its right against the guarantor by reducing the amount owed on the revolving line of credit with Gary Robinson in the amount of $250,000. See Note 9 below.
5. INVESTMENT IN JOINT VENTURES
a) In December 2003, the Company formed a joint venture to develop government sponsored, Section 124, low income housing in the commonwealth of Puerto Rico. The Company became the general partner and majority owner of a limited partnership, Delta Development Partners, LP, that holds the majority share of Delta Developers Corp, a Puerto Rico corporation, formed to manage the construction and related activities required to build approximately 270 low income homes under Section 124. The operations of the joint venture have been consolidated with the Company for the year ended December 31, 2004.
During the year ended December 31, 2004, Neil Berman, an investor, purchased a 25% interest in Delta Development Partners, LP for $148,000.
On October 6, 2004 the Company entered into a second joint venture
agreement to develop government sponsored, Section 124 low income housing
in the Commonwealth of Puerto Rico. The Company became the general partner
and majority owner of a limited partnership, Delta Development Partners
II, LP, that holds the majority share of Delta Developers Guayanilla Corp,
a Puerto Rico corporation formed to manage the construction and related
activities required to build approximately 300 low income houses under
Section 124. The operations of the joint venture have been consolidated
with the Company for the year ended December 31, 2004.
During the period October 6, 2004 through December 31, 2004, Ebony Finance, Ltd. and T & T Asset Management, investors, purchased a 4% interest from the existing partners in Delta Development Partners II, LP for $40,000.
b) On March 18, 2003, the Company entered into a letter of intent with Hi-Tech Consulting and Construction, Inc. ("Hi-Tech") to form a joint venture to provide environmental technology services primarily to markets in the Middle East and Africa. The joint venture company, named Delta-Envirotech, Inc., is based in Virginia and focuses on participating in foreign government sponsored pollution remediation projects. The joint venture agreement was concluded January 14, 2004 and Delta-Envirotech, Inc., a Delaware corporation, was formed.
On January 14, 2004, Delta and Hi-Tech agreed to each sell 75 shares of the joint venture to Ali Razmara ("Razmara"), representing a ten (10%) percent interest, for $2. The transaction became effective July 14, 2004.
On January 22, 2004, the Company announced the conclusion of a strategic alliance agreement between Delta-Envirotech, Inc. and ZAFF International, Ltd., an advanced technology company located in Saudi Arabia. The strategic alliance states that the two companies will jointly pursue projects related to soil and water reclamation requirements in the Middle East.
The operations of the joint venture have been consolidated with the Company for the year ending December 31, 2004 as the Company maintains effective control over the operations.
c) On May 1, 2003, the Company entered into a joint venture in Romania, forming a new Company, Delta TP Mediu, SRL. The joint venture, of which the Company owns 10%, was organized to primarily pursue the sourcing, treatment and processing of hydrocarbon based and other industrial residuals and, where possible, to create alternative fuels and raw materials for industrial use primarily in Romania. The Company invested $33,800 in the joint venture, consisting of $15,100 in cash, the issuance of 100,000 shares of common stock valued at $15,000 and a cash obligation of $11,200 to the joint venture which is included in the Due to Related Party amount on the Company's balance sheet at December 31, 2003. The Company made a strategic decision to minimize its activities in Eastern Europe and the investment has been written down to $1 and a charge was taken against operations in 2004.
d) On April 25, 2003, the Company entered into a letter of intent with Ms. Jamie Burrows and Burrows Consulting, Inc., a Texas based corporation (collectively referred to as "Burrows") to form a joint venture company to be known as Delta Specialty Services based in Houston, Texas and was to engage in providing waste remediation technologies and services on a project basis to the United States Government, foreign governments and their respective departments, agencies, political sub-divisions as well as to private entities around the world. The funding commitments were not accomplished on the established timetable and the joint venture has not commenced operations and activities have ceased in this area. The Company expensed $75,000 that had been advanced to the joint venture and is included in the Company's statement of operations for the year ended December 31, 2003. No charges were incurred during 2004.
6. CONVERTIBLE DEBT
a) On May 12, 2004, the Company issued two convertible notes in the principal amounts of $193,740 and $129,160, respectively, to a related party and the spouse of a related party. Each note is due May 12, 2006. Both notes bear interest of 4% per annum and are convertible into common stock at an initial conversion price of $0.125 per share. Interest expense for the year ended December 31, 2004 amounted to $6,617 and was included in accrued expenses on the Company's balance sheet at December 31, 2004.
b) On July 1, 2004, the Company issued a convertible note to a related party for $157,000 due December 31, 2006. The note bears interest of 4% per annum and are convertible into common stock at an initial conversion price of $0.05 per share. On January 7, 2005, the Company issued 500,000 shares of common stock as partial repayment of $25,000 of the principal amount of the note. Interest expense for the year ended December 31, 2004 amounted to $3,165 and was included in accrued expenses on the Company's balance sheet at December 31, 2004.
c) On July 16, 2004, the Company issued a convertible note to a related party for $37,500 due January 16, 2007. The note bears interest of 4% per annum and is convertible into common stock at an initial conversion price of $0.05 per share. Interest expense for the year ended December 31, 2004 amounted to $682 and was included in accrued expenses on the Company's balance sheet at December 31, 2004.
d) On September 20, 2004, the Company issued a series of convertible notes to various lenders in the aggregate amount of $301,500 with a maturity date
of September 16, 2006. Of the aggregate principal amount $71,500 was issued to three related parties. The notes bear interest of 6% per annum and are convertible into common stock at an initial conversion price of $0.05 per share. On November 19, 2004, the Company issued 400,000 shares of common stock to one of the lenders as repayment of the principal amount of a $20,000 convertible note issued by the Company on September 20, 2004. The Company paid the interest on the note of $198 by issuing the lender an additional 3,951 shares of common stock. Interest expense for the year ended December 31, 2004 amounted to $4,918 and $4,220 was included in the accrued expenses on the Company's balance sheet at December 31, 2004.
e) On September 23 and September 27, 2004, the Company issued two convertible notes in the principal amounts of $10,000 and $20,000, respectively, to two related parties.. The notes are due September 22, 2006 and September 26, 2006, respectively. Each note bears interest of 6% per annum and is convertible into common stock at an initial conversion price of $0.05 per share. Interest expense for the year ended December 31, 2004 amounted to $475 and was included in accrued expenses on the Company's balance sheet at December 31, 2004.
f) On October 19, 2004, the Company issued a convertible note to a related party for $25,000 due October 18, 2006. The note bears interest of 6% per annum and is convertible into common stock at an initial conversion price of $0.05 per share. On November 23, 2004, the Company repaid the principal amount of this note by issuing 500,000 shares of common stock. The Company paid the interest on the note of $144 by issuing the lender an additional 2,877 shares of common stock.
g) On November 2 and November 5, 2004, the Company issued two convertible notes in the principal amounts of $12,500 and $25,000, respectively, to two lenders, one of whom was a related party. The notes are due November 1, 2006 and November 4, 2006 respectively. Each note bears interest of 6% per annum and is convertible into common stock at an initial conversion price of $0.05 per share. On November 8, 2004, the Company repaid the $25,000 note by issuing 500,000 shares of common stock with interest paid in cash. On January 3, 2005, the Company repaid the $12,500 note by issuing 250,000 shares of common stock. The Company paid the interest of $127 by issuing the lender an additional 2,542 shares of common stock.
h) On November 26, 2004, the Company entered into a settlement agreement and mutual release with a stockholder. As part of the settlement amount the Company issued a convertible note for $50,000 due on November 24, 2006. The note bears interest of 6% per annum and is convertible into common stock at an initial conversion price of $0.05 per share.
i) At December 31, 2004, the Company's outstanding convertible notes were convertible into 13,953,200 shares of common stock.
The following table shows the maturities by year of the total long-term convertible debt obligations at December 31:
2005 $ --
2006 853,900
2007 37,500
------------
$ 891,400
============
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7. ACCRUED EXPENSES
Accrued expenses consist of the following:
Years Ended
December 31,
---------------------------
2004 2003
------------ ------------
Professional fees $ 50,000 $ 20,000
Consulting fees -- 61,500
Interest expense 16,077 10,598
Payroll expense 125,110 --
Payroll expense officers 214,149 158,224
Payroll tax expense 20,801 14,964
------------ ------------
$ 426,137 $ 265,286
============ ============
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8. LOAN RECEIVABLE - FORMER OFFICER/SHAREHOLDER
During 2003, the Company entered into a revolving credit agreement with Gary Robinson ("Robinson"), the former Chairman and Chief Executive Officer of the Company, in the amount of $300,000. The credit agreement bears interest at 4.2%. Robinson advanced the Company $515,383 and the Company repaid Robinson $109,515 through December 31, 2004.
In March 2003, the Company entered into a consulting agreement with M.U.R.G. and advanced M.U.R.G. $100,000 against future compensation in the form of a promissory note. The project did not go forward and on June 16, 2003, Robinson agreed to assume the promissory note from M.U.R.G. and reduce the amount due him.
On March 4, 2004, the Company paid $121,508 to David Green ("Green"), which constituted full and complete repayment of a $100,000 loan made by Green to Robinson. The loan was secured by a pledge of the Company's common stock. The Company offset the payment to Green against the amount due Robinson.
The Company recorded interest expense of $425 and $7,986 on the revolving line of credit for the years ended December 31, 2004 and 2003, respectively.
After adjustments for expense reimbursements and interest due Robinson and offsets as noted above, Robinson owed the Company $51,221 as of December 31, 2004. The full amount of the receivable has been reserved as a potential bad debt.
9. LOANS FROM RELATED PARTIES
a) On January 7, 2003, the Company borrowed $15,000 from Michael Pisani ("Pisani") a stockholder of the Company. Pisani received 50,000 shares of common stock (valued at fair market value) which represented the payment of interest accruing on the unpaid principle balance through January 27, 2003, the maturity date. The Company recorded interest expense of $ 15,000 in 2003 for the issuance of the shares.
The Company did not pay the outstanding balance on the maturity date and was required to pay monthly interest of one (1%) percent to Pisani. On April 7, 2003, the Company repaid Pisani $5,000 against the outstanding balance. The balance due Pisani at December 31, 2003 was $10,000. In May 2003, the note was amended. Subsequently, a dispute arose between the parties about the validity of the amendment.
In March, 2004 the Company repaid the principal and interest due under the terms of the amended note. Pisani, through counsel, has informed the Company that, by accepting repayment, he does not prejudice his position regarding the validity of the original note. The Company is attempting to resolve this dispute. If the matter can not be resolved and Pisani prevails in a legal action against the Company, Pisani may be entitled to, in addition to the principal amount and interest that he has received from the Company, shares of common stock as additional interest.
The Company recorded interest expense of $1,599 and $16,600 for the years ended December 31, 2004 and 2003, respectively, and $1,600 was included in the accrued expense on the Company's balance sheet at December 31, 2003.
b) On May 15, 2003 the Company borrowed $12,000 from Michael Fasci, ("Fasci") a stockholder of the Company. Fasci received 50,000 common shares of common stock which represented the payment of interest through May 26, 2003, the maturity date. The Company recorded interest expense in the amount of $13,750 and $6,705 for the years ended December 31, 2004 and 2003, respectively. On February 27, 2004 the Company issued 140,000 shares of common stock (valued at fair market value) in repayment of the loan, interest, penalty and expenses amounting to $19,100. $840 was included in the accrued expense on the Company's balance sheet at December 31, 2003.
c) On October 17, 2003 the company borrowed $60,000 from Mitchell Rosenthal, a shareholder of the Company, with interest at the rate of six percent (6%) per annum. The note was repaid in December 2003 through conversion of security that was posted against the loan by Gary T. Robinson on behalf of the Company. The Company recorded interest expense of $156 for the year ended December 31, 2003.
d) On December 30, 2003 the Company borrowed $50,000 from Edward Tuccio, a shareholder of the Company. The note was due December 29, 2004 with interest at six percent (6%) per annum. The note was converted on February 11, 2004 into 500,000 shares of common stock (valued at fair market value). The Company recorded accrued interest expense of $168 for the year ended December 31, 2004 The Company did not expense any interest for the year ended December 31, 2003.
e) On December 11, 2003 the Company borrowed $50,000 from Neil Jones, a shareholder of the Company. The note was due December 16, 2004 with interest at six percent (6%) per annum. The Company recorded interest expense of $112 and $63 for the year ended December 31, 2004 and 2003, respectively. Accrued interest is in the amount of $132 is included in the Company balance sheet at December 31, 2003. The note was converted into 500,000 shares of common stock on January 24, 2004.
10. MINORITY INTERESTS
Minority interests primarily consist of ownership interest in Delta-Envirotech, Inc., Delta Development Partners, L.P., Delta Development Partners II, L.P., Delta Developers Corp. and Delta Developers Guayanilla, Corp. The income and losses from operations of these entities and their respective minority interests have been reflected in the Company's statement of operations for the twelve months ended December 31, 2004. There are losses for the minority interests in excess of the $101,644 attributed to the minority interests due to basis limitations. In future periods, the profits attributable to the minority interests will be first absorbed against any unused losses until the losses are fully absorbed. The amount on the Company's balance sheet represents the minority interests as of December 31, 2004.
The following represents a schedule of minority interests as of December
31,
2004 2003
------------ ------------
Delta Development Partners L.P. $ 143,010 $ --
Delta Development Partners II, L.P 40,000 --
Delta Developers Guayanilla, Corp. 150 --
Delta Developers Corp. -- 150
Delta-Envirotech, Inc. -- --
------------ ------------
$ 183,160 $ 150
============ ============
11. STOCKHOLDER'S DEFICIENCY
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a. On January 12, 2003, the Company entered into an agreement with Kenneth Martin, the Company's former controlling shareholder, to compensate him for past services rendered to the Company in the amount of $12,454, of which was accrued at December 31, 2002. The Company issued 30,000 shares of common stock registered pursuant to a Form S-8 registration statement in full payment of the Company's debt.
b. On February 4, 2003, the Company and J. Dapray Muir, Esq. ( the Company's previous attorney) entered into an agreement to compensate him for past services rendered to the Company in the amount of $34,669, all of which was accrued at December 31, 2002. The Company issued 50,000 shares of common stock, registered pursuant to a Form S-8 registration statement in full payment of the Company's debt.
c. On February 24, 2003 the Board of Directors effected a forward stock split of five to one. All references to common stock after that date reflect the forward stock split.
d. On February 3, 2003, the Company and Peter Russo, an executive of the Company, entered into an agreement to compensate him for past services rendered to the Company in the amount $20,000, all of which was accrued at December 31, 2002. The Company issued 40,000 shares of common stock registered pursuant to a Form S-8 registration statement in full payment of the Company's debt
e. On February 10, 2003, the Company and Jerome Kindrachuk, an executive of the Company, entered into an agreement to compensate him for past services rendered to the Company in the amount of $20,000, all of which was accrued at December 31, 2002. The Company issued 200,000 shares of common stock in full payment of the Company's debt in February 2003.
f. On April 29, 2003, the Company and Peter Russo, the CEO of the Company, entered into an agreement to compensate him in recognition of his commitment for services in the amount of $22,500. The Company issued 100,000 shares of common stock in full payment of this debt.
g. On April 29, 2003, the Company and Jerry Kindrachuk, an executive of the Company, entered into an agreement to compensate him in recognition of his commitment for services in the amount of $22,500. The Company issued 100,000 shares of common stock in full payment of this debt.
h. On April 29, 2003 the Company and Steven L. Gray, entered into an agreement to compensate him for past services rendered to the Company in the amount of $50,000. The Company issued 100,000 shares of common stock in full payment of this debt.
i. On April 29, 2003, the Company and Kevin Forcier, entered into an agreement to compensate him for past services rendered to the Company in the amount of $10,000. The Company issued 20,000 shares of common stock in full payment of this debt.
j. On April 29, 2003, the Company and T&T Asset Management of Zurich, Switzerland, entered into an agreement to compensate them for past services rendered in the amount of $50,000. The Company issued 240,000 shares of common stock in full payment of this debt.
k. On June 30, and July 23, 2003, the Company and Michael Kahn, entered into an agreements to compensate him for past services rendered to the Company in the amount of $16,500 and $16,500 respectively. The Company issued 80,000 shares of common stock in full payment of this debt.
l. On July 1, 2003, the Company entered into an agreement with Gary Robinson, a stockholder, former CEO and former chairman, to compensate him for past services rendered to the Company in the amount of $93,625, the fair value of the services. The Company issued 280,000 shares of common stock registered pursuant to a Form S-8 registration statement in full payment of the Company's debt.
m. On August 8, 2003 the Company and Joseph Tomasek entered into an agreement to compensate him for past services rendered in the amount of $40,000. The Company issued 200,000 shares of common stock in full payment of this debt.
n. On August 8, 2003, the Company and a private investor entered into an agreement for the purchase by the investor of 100,000 shares of common stock for $50,000.
o. On August 11, 2003, the Company and Joy Miller entered into an agreement for compensation of services to the Company in the amount of $43,750. The Company issued 100,000 shares of common stock in full payment of this debt.
p. On August 22, 2003, the Company and a private investor entered into an agreement for the purchase by the investor of 250,000 shares of common stock for $50,000.
q. On October 21, 2003, the Company entered into agreements for compensation for services with Nela Pavaliou and Business Centres International, Inc. in the amount of $1,750 for each. The Company issued 50,000 shares of common stock in full payment of this debt.
r. On November 15, 2003, the Company and Neil Berman entered into an agreement for the purchase by Mr. Berman of 100,000 shares of common stock for $12,500.
On November 15 and December 15, 2003 the Company and Neil Berman entered into consulting agreements with compensation for consulting of $8,500 and $850 respectively. The Company issued 100,000 and 10,000 shares of common stock respectively in full payment of this debt.
s. On January 14, 2004, the Company and David Razmara, entered into an agreement to compensate him for past services rendered to the Company in the amount of $4,125, all of which was accrued at December 31, 2003. The Company issued 50,000 shares of common stock in full payment of this debt.
t. In February 2004, the Company sold to a private investor 300,000 shares of restricted common stock for $37,500, valued at $.125 per share, fair market value at the time of issuance.
u. The Company and Citrus Land and Development Company entered into an agreement for services rendered to the Company in the amount of $25,000. In February 2004, the Company issued 355,000 shares of common stock in connection with this agreement.
v. On March 31, 2004 the Company and MicroCap, Inc. entered into an agreement for services rendered to the Company in the amount of $9,000. The Company issued 30,000 shares of common stock in connection with this agreement.
w. The Company and Kenneth Martin entered into an agreement to compensate him for past services in the amount of $50,000, all of which was accrued at December 31, 2003. In March 2004, the Company issued 200,000 shares of common stock in full payment of this debt.
x. On March 31, 2004, pursuant to a joint venture agreement dated January 14, 2004, the Company issued 50,000 shares of common stock to David Razmara in consideration of services rendered to the joint venture in the amount of $4,125.
y. On April 16, 2004, the Company and Burton Lasalle Capital Corporation, entered into an agreement for services rendered to the Company in the amount of $36,000. In April 2004 the Company issued 200,000 shares of common stock in connection with this agreement.
z. On April 16, 2004, the Company and Basic Investors, Inc. entered into an agreement for services rendered to the Company in the amount of $72,000. In April 2004, the Company issued 400,000 shares of common stock in connection with this agreement.
aa. On March 4, 2004, the Company and Charter Capital Resources, Inc. entered into an agreement for services rendered to the Company in the amount of $12,500. In May 2004, the Company issued 100,000 shares of common stock in connection with this agreement.
bb. On March 21, 2004 the Company and Clark Street Capital, entered into an agreement for services rendered to the Company in the amount of $72,000. In June 2004, the Company issued 400,000 shares of common stock in connection with this agreement.
cc. On April 5, 2004, the Company and Inna Turney, through her assignee Business Centres International, entered into an agreement for services rendered to the Company in the amount of $7,500. In April 2004, the Company issued 50,000 shares of common stock in full settlement of this debt.
dd. On May 5, 2004, the Company issued to three employees an aggregate of 185,000 shares of common stock valued at $25,900 in consideration for their respective commitments as employees of the Company.
ee. During the second quarter of 2004 the Company sold 840,000 shares of restricted common stock for $105,000 valued at $.125 per share, fair market value at the time of issuance.
ff. In August 2004, pursuant to a placement agent agreement dated May 3, 2004, the Company issued 250,000 shares of common stock to T&T Asset Management of Zurich, Switzerland in consideration of past services rendered to the Company in the amount of $31,250, all of which was expensed at September 30, 2004.
gg. On September 16, 2004, pursuant to a placement agent agreement dated September 1, 2004, the Company issued 125,000 shares of common stock to T&T Asset Management of Zurich, Switzerland in consideration of services rendered to the Company in the amount of $6,250.
hh. On September 17, 2004, pursuant to an amended and restated consulting services agreement dated September 7, 2004, the Company issued 100,000 shares of common stock to Basic Investors, Inc. for past services rendered to the Company in the amount of $12,000 as full payment of the Company's debt, all of which was expensed at September 30, 2004. In return, Basic Investors returned to the Company 400,000 shares of common stock that was issued to Basic in April 2004 in consideration of services rendered to the Company in the amount of $72,000.
ii. On September 10, 2004, the Company and B C N Investments, L.L.C. entered into an agreement for services rendered to the Company in the amount of $36,000 all of which was expensed at September 30, 2004. The Company issued 300,000 shares of common stock in connection with this agreement.
jj. On September 20, 2004, the Company and Commonwealth Holdings, Inc. entered into an agreement for services rendered to the Company in the amount of $12,000 all of which was expensed at September 30, 2004. The Company issued 100,000 shares of common stock in connection with this agreement.
kk. During the third quarter of 2004, the Company sold 350,000 shares of restricted common stock for $43,750 valued at $.125 per share, fair market value at the time of issuance.
ll. On October 4, 2004, pursuant to an agreement dated May 3, 2004, the Company issued 750,000 shares of common stock to Ebony Finance Ltd. of Zurich, Switzerland in consideration of past services rendered to the Company in the amount of $37,500, all of which was expensed during the year ended December 31, 2004.
mm. On October 22, 2004, the Company and VarGrowth Corp., Inc. entered into an agreement for services rendered to the Company in the amount of $35,375, all of which was expensed during the year ended December 31, 2004. The Company issued 250,000 shares of common stock in connection with this agreement.
nn. On November 1, 2004, the Company and Consulting Medical Management entered into an agreement for services rendered to the Company in the amount of $31,250, all of which was expensed during the year ended December 31, 2004. The Company issued 250,000 shares of common stock in connection with this agreement.
oo. On November 9, 2004, the Company and Michael Schantz entered into an agreement for services rendered to the Company in the amount of $25,000, all of which was expensed during the year ended December 31, 2004. The Company issued 250,000 shares of common stock in connection with this agreement.
pp. On November 15, 2004, pursuant to a monthly retainer agreement dated August 15, 2004, the Company issued 45,000 shares of common stock to Focus Partners LLC in consideration of past services rendered to the Company in the amount of $5,400, all of which was expensed during the year ended December 31, 2004.
qq. On November 16, 2004, pursuant to an advisory agreement dated June 7, 2004, the Company issued 250,000 shares of common stock to Constellation Capital Corp. in consideration of past services rendered to the Company in the amount of $37,500, all of which was expensed during the year ended December 31, 2004.
rr. On November 26, 2004, pursuant to a settlement agreement and mutual general release, the Company issued 412,000 shares of common stock to Joseph Friedman and Sons International, Inc. ("Friedman"), a stockholder of the Company, in respect of the complete release provided by Friedman to the Company as contained in the settlement agreement. The consideration for the release was in the amount of $70,040, all of which was expensed during the year ended December 31, 2004.
ss. In December 2004, the Company issued 800,000 shares of its common stock through the exercise of the Company's common stock warrants, held by four warrant holders, at an exercise price of $0.10 per share.
tt. During the fourth quarter of 2004, the Company sold 54,055 shares of its restricted common stock for $10,000, valued at $0.185 per share, fair market value at the time of issuance.
12. INCOME TAXES
The liability method, prescribed by SFAS No. 109, "Accounting for Income Taxes", is used by the Company in accounting for income taxes. Under this method, deferred tax assets and liabilities are based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.
During the year ended December 31, 2004, the Company recorded a deferred tax asset associated with its net operating loss ("NOL") carryforwards of approximately $5,120,000 that was fully offset by a valuation allowance due to the determination that it was more likely than not that the Company would be unable to utilize these benefits in the foreseeable future. The Company's NOL carryforward expires beginning in 2010 through 2017.
There is no provision for income taxes for the years ended December 31, 2004 and 2003 as there was no taxable income in either year.
The types of temporary differences between tax basis of assets and liabilities and their financial reporting amounts that give rise to the deferred tax liability and deferred tax asset and their approximate tax effects are as follows:
December 31, 2004 December 31, 2003
--------------------------------- ---------------------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
-------------- -------------- -------------- --------------
Gross deferred tax asset $ 5,120,000 $ 1,74000 $ 608,000 $ 207,000
resulting from net operating
loss carryforward
Valuation allowance (5,120,000) (1,740,000) (608,000) (207,000)
-------------- -------------- -------------- --------------
Net deferred income tax asset $ -- $ -- $ -- $ --
============== ============== ============== ==============
|
The reconciliation of the effective income tax rate to the federal statutory rate is as follows:
For the Year Ended
December 31,
---------------------
2004 2003
-------- --------
Federal income tax rate 34% 34%
Valuation allowance on net
operating loss carryforward (34)% (34)%
Effective income tax rate 0% 0%
======== ========
13. STOCK OPTION PLANS
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In December 2001, the Company's stockholders approved a stock option plan entitled the 2001 Employee Stock Option Plan (the "2001 Plan"), pursuant to which 2,000,000 shares of common stock were reserved for issuance. In August 2004, the Company's stockholders approved the 2004 Stock Option Plan (the "2004 Plan"), pursuant to which 10,000,000 shares of common stock were reserved for issuance. As of December 31, 2004, 613,000 shares of common stock remained available for issuance of options under the 2001 Plan and 3,500,000 shares of common stock remained available for issuance of options under the 2004 Plan. As of March 28, 2005, all shares under the 2001 Plan had been issued.
A summary of the status of the Company's options and stock awards under the Plans as of December 31, 2004, and changes during the year then ended, is presented below:
2004 2003
---------------- ----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- ---------------- ---------------- ----------------
Options out-
standing, begin-
ning of year -- $ -- -- $ --
Options granted 6,500,000 $ 0.25 -- $ --
Options exercised -- $ -- -- $ --
Stock awards granted 429,000 $ 0.1375 358,000 $ 0.067
Stock awards issued (429,000) $ 0.1375 (358,000) $ 0.067
Options cancelled/expired -- $ -- -- $ --
---------------- ---------------- ---------------- ----------------
Options out-
standing, end
of year 6,500,000 $ 0.25 -- $ --
================ ================
Options price
range at end
of year $ 0.25
Options price
range for
exercised
shares --
Options available
for grant at end
of year 4,113,000 1,642,000
Weighted-
average fair
value of options
granted during the
year $ 0.25 $ --
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The following table summarizes information about fixed price stock options outstanding December 31, 2004.
Weighted-
Number Out- Average Weighted- Number Weighted-
Range of standing at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2004 Life Price 2004 Price
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
$0.25 6,500,000 9 $0.25 1,600,000 $0.25
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A summary of the status of the Company's Stock Purchase Warrants as of December 31, 2004, and changes during the year is then presented below:
2004 2003
------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- -------------- -------------- --------------
Warrants out-
Standing, beginning of
Year -- $ -- -- $ --
Warrants granted 8,880,000 $ 0.10 -- $ --
Warrants exercised (800,000) $ 0.10 -- $ --
Warrants cancelled/expired -- $ -- -- $ --
-------------- -------------- -------------- --------------
Warrants outstanding, end of year 8,080,000 $ 0.10 -- $ --
============== ============== ============== ==============
Warrant price range at
end of year $ 0.10 $ --
Warrant price range for
exercised shares $ 0.10 $ --
Weighted-average fair value of
warrants granted below market value
during the year $ 0.24 $ --
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The following table summarizes information about fixed price warrants outstanding at December 31, 2004.
Weighted-
Number Out- Average Weighted- Number Weighted-
Range of standing at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2004 Life Price 2004 Price
---------------- -------------- ------------- ---------- -------------- ----------
$0.10 8,080,000 2 $0.10 8,080,000 $0.10
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14. COMMITMENTS AND CONTINGENCIES
a. Executive Employment Agreements
Effective March 11, 2003, the Company entered into an employment agreement with Peter Russo for three years with a renewal option upon mutual agreement. The agreement compensates Mr. Russo $10,800 per month. Additionally, Mr. Russo will receive an incentive of 1.5% of adjusted net profits beginning with the year 2003 and each fiscal year thereafter during the term of this agreement, payable in stock. For the year ended December 31, 2004 and 2003 no incentive payments were made or accrued as the Company recorded a loss each year. This agreement and Mr. Russo's employment may be terminated by the Company at its discretion at any time after the initial term, provided that the Mr. Russo be paid six months of his base compensation then in effect. Effective June 11, 2003, Mr. Russo was appointed president and chief executive officer of the Company and in recognition of his new responsibilities agreed to compensation of $15,000 per month effective July 1, 2003. On September 20, 2004, Mr. Russo's employment agreement was amended by mutual agreement, and his monthly salary was reduced to $6,500 effective January 1, 2004. In addition, he will be eligible for any incentive compensation program for senior executives that is established by the board of directors. During the years ending December 31, 2004 and 2003, Mr. Russo earned $78,000 and $120,000, respectively. At December 31, 2004 and 2003, the Company owed Mr. Russo $121,887 and $98,224, respectively, in accrued salary and the amounts are included in accrued expenses on the Company's balance sheet.
Effective July 1, 2003 and prior to his appointment as a Company officer, the Company entered into an employment agreement with Jerome Kindrachuk, for three years with a renewal option upon mutual agreement. The agreement
compensates Mr. Kindrachuk $10,000 per month. The agreement and Mr. Kindrachuk's employment may be terminated by the Company at its discretion at any time after the initial term, provided that Mr. Kindrachuk be paid six months of his base compensation then in effect. On September 22, 2004, Mr. Kindrachuk's employment agreement was amended by mutual agreement, and his monthly salary was reduced to $6,000 effective January 1, 2004. In addition, he will be eligible for any incentive compensation program for senior executives that is established by the board of directors. During the years ending December 31, 2004 and 2003, Mr. Kindrachuk earned compensation of $72,000 and $60,000, respectively. At December 31, 2004 and 2003, the Company owed Mr. Kindrachuk $92,262 and $60,000, respectively, in accrued salary and the amounts are included in accrued expenses on the Company's balance sheet.
b. License Agreements
In April 2003, the Company entered into a License Agreement (the "License Agreement") with Joseph Friedman and Sons International, Inc. ("Friedman") where the Company licensed certain environmental technologies to Friedman in the territory of the Former Soviet Union. The License Agreement was predicated upon technologies that were assigned to the Company under a separate agreement with the technology owner. Due to actions taken against the technology owner by his creditors during the latter part of 2003, the technology owner lost his ability to assign the technologies to the Company. Accordingly, the Company was unable to convey these rights to Friedman.
The Company and Friedman executed an Addendum to the License Agreement (the "Addendum") in April 2003. The Addendum contemplated the formation of joint ventures between the Company and Friedman to provide environmental services in the license territory under contracts obtained by Friedman, with the Company owning not less than 60% of any joint venture established. In consideration of the potential benefit to the Company (as majority owner of the joint ventures), it issued Friedman 288,368 shares of common stock valued at $40,000, with certain anti-dilution provisions. The Company also granted Friedman the right to nominate a member to its board of directors. In November 2003, Friedman made a claim for additional shares of common stock, citing the anti-dilution language of the Addendum. Friedman also requested that its nominee be appointed to the Company's board of directors.
In light of the events that effected the License Agreement, the Company notified Friedman on March 30, 2004, as provided in the License Agreement, terminating the License Agreement and the Addendum. The Company took the position that the termination of the Addendum eliminated Friedman's right to a board seat.
Effective November 26, 2004, the Company entered into a settlement
agreement and mutual general release with Friedman (reference note number
5) and as part of the settlement agreement the Company issued to Friedman
a $50,000 principal amount 6% Convertible Promissory Note, due November
24, 2006, initially convertible into 1,000,000 shares of Common Stock
together with Warrants to purchase an additional 1,000,000 shares of
Common Stock and issued 412,000 shares of Common Stock (Reference "Recent
Sales of Unregistered Securities") in settlement of any and all claims
made for additional shares attributable to the anti-dilution language and
to forego the requirement of appointing a nominee to the Board.
During the year ended December 31, 2004, the Company expensed warrants of $349,400 and stock valued at $70,040, in connection with the terminated license agreement.
c. Financing Agreement
On July 8, 2003, the Company entered into an agreement with Rolan Jansen and Ivano Angelastri ("J&A") to introduce and arrange equity, debt or other financing agreements with strategic partners, for the Company, or its affiliates for a finders fee of 6.0% to Rolan Jansen and 2.0% to Ivano Angelastri of the gross proceeds of the equity financing. For the year ended December 31, 2003, no financing was introduced to the Company in connection with this agreement.
d. Investor Relations Agreements
On August 15, 2004 the Company entered into an agreement with Focus Partners LLC ("Focus") for a month-to-month retainer, as its investor relations and strategic communications consultant. Focus received a fee of $19,060 for 2004 and restricted Common Stock in the amount of 45,000 shares (valued at $5,400) for the year 2004.
e. Leases
The Company entered in to a lease March 1, 2003 for a business office space. The lease will require the Company to pay certain executory costs (such as insurance and maintenance).
Future minimum lease payments for the operating lease is as follows:
Year Ending
December 31,
-------------------
2005 $ 7,800
2006 1,300
2007 --
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$ 9,100
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Rent expense was $7,800 and $6,662 for the years ended December 31, 2004 and 2003, respectively.
In addition, the Company has a month-to-month lease on a business office in McLean, Virginia at a cost of $1,100 per month that began in November 2004. For the year 2004 the Company incurred expense of $2,200.
15. SUBSEQUENT EVENTS
a. On March 22, 2005, the Company issued to a related party a 6% Promissory Note in the principal amount of $71,731.29, with the principal and interest due in three equal installments with the final installment due at maturity, on December 20, 2005.
b. On April 5, 2005, the Company issued 8% Promissory Notes to private investors in the amount of $210,655.04, with the principal and interest due at maturity, on October 2, 2005.
Exhibit 10.25
DELTA MUTUAL, INC.
CODE OF BUSINESS CONDUCT AND ETHICS
Adopted by the board of directors on April 12, 2005
1. Overview
This Code of Business Conduct and Ethics ("Code") covers a wide range of business practices and procedures and outlines the broad principles of ethical business conduct adopted by Delta Mutual, Inc. (the "Company"). The collection of policies and guidelines embodied in the Code apply to all of the Company's employees, officers, directors and consultants. Since no written policy can set forth the appropriate action for all business situations, this Code describes a general standard of ethical conduct that must permeate all of the Company's business dealings and relationships.
If a law conflicts with a policy in this Code, you must comply with the law. If you have any questions about these conflicts, you should ask your supervisor or the Company's General Counsel how to handle the situation.
Those who violate the standards in this Code will be subject to disciplinary action, up to and including termination of employment. If you are in a situation which you believe may violate or lead to a violation of this Code, follow the guidelines described in Section 12 of this Code.
2. Compliance With Applicable Laws, Rules, and Regulations
Obeying the law, both in letter and in spirit, is the foundation on which this Company's ethical standards are built. As an international United States-based company, the Company is subject to laws, rules, and regulations both in the United States-and abroad. All employees, officers, directors and consultants must respect and obey the laws of the cities, states and countries in which the Company operates. Although not all employees are expected to know the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel, inasmuch as all employees, officers, directors and consultants are expected to comply fully with all laws, rules, and regulations applicable to the Company's businesses and with all applicable company policies.
3. Books and Records
The Company requires honest and accurate recording and reporting of information in order to make responsible business decisions. All employees, officers and directors must ensure that all of the Company's books, records, accounts and financial statements meet the highest standards of accuracy and completeness, appropriately reflect the Company's transactions and conform both to applicable legal requirements and to the Company's system of internal controls. Unrecorded or off the books funds or assets should not be maintained unless permitted by applicable law or regulation.
Records should always be retained or destroyed according to the Company's record retention policies. In accordance with those policies, in the event of litigation or governmental investigation please consult the Company's General Counsel. Falsification of any record is prohibited and mistakes should never be covered up. All mistakes should be immediately and fully disclosed and corrected. If you detect or suspect improper record keeping, you should immediately contact the General Counsel.
4. Public Disclosure and Reporting
The Company requires full, fair, accurate, timely, and understandable disclosure in reports and documents filed with, or submitted to, the Securities and Exchange Commission and other regulators, and in other public communications made by the Company. Depending on an individual's responsibilities at the Company, some employees, officers and/or directors may be required to provide information to insure that the Company's public records meet this standard. The Company expects all individuals to take this responsibility seriously and to provide prompt and accurate answers to inquiries related to the Company's public disclosure requirements.
5. Insider Trading
Persons who have access to confidential information are not permitted to use or share that information for stock trading purposes or for any other purpose except the conduct of the Company's business. All non-public information about the Company should be considered confidential information. To use non-public information for personal financial benefit or to tip others who might make an investment decision on the basis of this information is not only unethical but also illegal. In order to assist with compliance with laws against insider trading, the Company has adopted a specific policy governing trading in the Company's securities by employees, officers and directors. If you have any questions, please consult the Company's General Counsel.
6. Discrimination and Harassment
The diversity of the Company's employees is a tremendous asset. The Company is firmly committed to providing equal opportunity in all aspects of employment and will not tolerate any illegal discrimination or harassment of any kind. Examples include derogatory comments based on racial or ethnic characteristics and unwelcome sexual advances.
7. Health and Safety
The Company strives to provide each employee with a safe and healthy work environment. Each employee has responsibility for following safety and health rules and practices and reporting accidents, injuries and unsafe equipment, practices or conditions.
Violence and threatening behavior are not permitted. Employees should report to work in condition to perform their duties, free from the influence of illegal drugs or alcohol. The use of illegal drugs in the workplace will not be tolerated.
8. Conflicts of Interest
It is imperative that all employees, officers and directors base their business decisions and actions in the course of their employment with or service to the Company on the best interest of the Company as a whole, and not based on personal relationships or benefits. A conflict of interest exists whenever an individual's private interests interfere or conflict in any way with the Company's interests or makes it difficult to perform his or her Company work objectively and effectively.
Conflicts of interest are prohibited as a matter of Company policy, except under guidelines approved by the Board of Directors and consented to in writing by the Company's General Counsel.
Conflicts of interest may not always be clear-cut, so if you have a question, you should consult with higher levels of management or the General Counsel. Any employee, officer or director who becomes aware of a conflict or potential conflict should bring it to the attention of a supervisor, manager or other appropriate personnel or consult the procedures described in Section 12 of this Code.
Any business opportunities, investments, relationships, or activities that would or could cause a conflict of interest should be avoided. Guidelines for some of the most common conflict of interest situations are listed below.
Outside Affiliations and Interests
It is almost always a conflict of interest for a Company employee or director to work simultaneously for a competitor, customer, provider or supplier. Unless specifically approved in writing by the Company, you are not allowed to work for a competitor as an employee, officer, director or consultant, nor may you acquire a significant ownership interest in such an entity. The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on our behalf.
Personal Benefits
Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position in the Company. Loans to, or guarantees of obligations of, employees, officers and directors and their family members may create conflicts of interest. Personal loans to directors or executive officers, with certain exceptions, are prohibited under the Sarbanes-Oxley Act of 2002.
Gifts and Gratuities
It is a conflict of interest to accept or give gifts that may influence business decisions. Whenever possible, gifts should be refused and they should never be accepted where prohibited by law. However, it is usually permissible to accept non-cash gifts of nominal value. Employees, officers and directors should use their best judgment in determining if a gift is appropriate and should contact the Company's General Counsel if in doubt.
Corporate Opportunities
Employees, officers and directors are prohibited from taking for themselves personally opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors. No employee may use corporate property, information, or position for improper personal gain, and no employee may compete with the Company directly or indirectly. Employees, officers and directors owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises.
9. Competition and Fair Dealing
The Company seeks to outperform its competition fairly and honestly. Stealing proprietary information, possessing trade secret information that was obtained without the owner's consent or inducing such disclosures by past or present employees of other companies is prohibited. Each employee should endeavor to respect the rights of and deal fairly with the Company's customers, suppliers and competitors. No employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice.
The purpose of business entertainment and gifts in a commercial setting is to create good will and sound working relationships, not to gain unfair advantage with customers. No gift or entertainment should ever be offered, given, provided or accepted by any Company employee, family member of an employee or agent unless it: (1) is not a cash gift, (2) is consistent with customary business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff and (5) does not violate any laws or regulations. Employees should discuss with their supervisor any gifts or proposed gifts which they are not certain are appropriate.
10. Protection of Company Assets
All employees, officers, and directors have a responsibility to protect the Company's assets from theft, loss, or misuse and to ensure their efficient use.
Theft, carelessness and waste have a direct impact on the Company's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Company equipment should not be used for non-Company business, though incidental personal use may be permitted.
All available electronic, technical, physical, procedural, and legal means should be used to protect the Company's assets at all times.
Confidential Information
It is a violation of this Code to disclose confidential information entrusted to employees, officers and directors by the Company or its customers, vendors, or partners, except when disclosure is authorized by the Company's General Counsel or required by laws or regulations. Confidential information includes all non-public information that might be of use to competitors, or harmful to the Company or its customers, if disclosed.
All employees, officers, and directors must take reasonable steps to prevent confidential information from being vulnerable to unauthorized access. The obligation to preserve confidential information continues even after employment ends.
Proprietary Information
The obligation of employees to protect the Company's assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks, and copyrights, as well as business, marketing and service plans, software that the Company has developed, databases, records, salary information and any unpublished financial data and reports. Unauthorized use or distribution of this information violates Company policy. It could also be illegal and result in civil or even criminal penalties.
11. Reporting any Illegal or Unethical Behavior
Employees, officers and directors who suspect or know of violations of this Code or unethical business or workplace conduct have a responsibility to contact the Company's General Counsel. In addition, if you believes that you have violated this Code or any applicable law, rule, or regulation, you must report the violation so that the Company can take appropriate action. The fact that you have reported the violation may reduce the adverse consequences for all parties involved. Violations of this Code, including failures to report potential violations by others, will be viewed as a severe disciplinary matter that may result in personal action, including termination of employment.
Any employee may submit a good faith concern regarding questionable accounting or auditing matters without fear of dismissal or retaliation of any kind.
To the extent feasible, all such communications will be kept confidential. It is the Company's policy not to allow retaliation for reports of misconduct by others made in good faith by employees.
Employees are expected to cooperate in internal investigations of misconduct.
12. Compliance Procedures
We must all work to ensure prompt and consistent action against violations of this Code. However, in some situations it is difficult to know if a violation has occurred. Since the Company cannot anticipate every situation that will arise, it is important to have a way to approach a new question or problem. These are the steps to keep in mind:
o Make sure you have all the facts. In order to reach the right solutions, the Company must be as fully informed as possible.
o Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This will enable you to focus on the specific question you are faced with, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is.
o Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem.
o Discuss the problem with your supervisor. This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question, and will appreciate being brought into the decision-making process. Remember that it is your supervisor's responsibility to help solve problems.
o You may report ethical violations in confidence and without fear of retaliation. If your situation requires that your identity be kept secret, your anonymity will be protected. The Company does not permit retaliation of any kind against employees for good faith reports of ethical violations.
o Always ask first, act later. If you are unsure of what to do in any situation, seek guidance before you act.
13. Waivers of the Code of Business Conduct and Ethics
Any waiver of this Code for executive officers or directors may be made only by the Board or a Board committee and will be promptly disclosed as required by law or stock exchange regulation.
ADDITIONAL POLICIES APPLICABLE
to the
CHIEF EXECUTIVE AND CHIEF OPERATING OFFICERS AND SENIOR FINANCIAL OFFICERS
The Company's Chief Executive Officer and senior financial officers are subject to the following additional specific policies:
1. The Company's Chief Executive Officer and all senior financial officers are responsible for full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company with the Securities and Exchange Commission. Accordingly, it is your responsibility promptly to bring to the attention of the Company's General Counsel any material information of which you may become aware that affects the disclosures made by the Company in its public filings or otherwise assist the General Counsel in fulfilling his or her responsibilities.
2. The CEO and each senior financial officer shall promptly bring to the attention of the Audit Committee or the Company's independent auditors any information you may have concerning (a) significant deficiencies or material weaknesses in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and report financial information, or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls.
3. The CEO and each senior financial officer shall promptly bring to the attention of the General Counsel and the Audit Committee or the Company's independent auditors any information you may have concerning any amendment of the Code or waiver of any provision hereof. Any violation of the Code, including any actual or apparent conflicts of interest between personal and professional relationships involving any management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls shall also be brought to the attention of the General Counsel and the Audit Committee or the Company's independent auditors.
4. The CEO and each senior financial officer shall promptly bring to the attention of the General Counsel or the Audit Committee or the Company's independent auditors any information you may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof, or of violation of the Code or of these additional procedures.
5. The Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of the Code or of these additional procedures by the CEO and the Company's senior financial officers. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to the Code, including, without limitation, these additional procedures, and shall include written notices to the individual involved that the Board has determined that there has been a violation, censure by the Board, demotion or re-assignment of the individual involved, suspension with or without pay or benefits (as determined by the Board) and termination of the individual's employment. In determining what action is appropriate in a particular case, the Board of Directors or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past.
Exhibit 31.1
CERTIFICATION
I, Peter F. Russo, President and Chief Executive Officer of Delta Mutual, Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-KSB of Delta Mutual, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Company's intternal control over financial reporting that occurred during the Company's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and
5. The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability trecord, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
Date: April 14, 2005 /s/ Peter Russo
--------------------------------
Peter F. Russo
President and
Chief Executive Officer
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Exhibit 31.2
CERTIFICATION
I, Martin G. Chilek, Chief Financial Officer of Delta Mutual, Inc. (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-KSB of Delta Mutual, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the Company's disclosure controlseffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (the Company's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and
5. The Company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.
Date: April 14, 2005 /s/ Martin Chilek
--------------------------------
Martin G. Chilek
Chief Financial Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Delta Mutual, Inc. (the "Company") on Form 10-KSB for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter F. Russo, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Peter Russo
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Peter F. Russo
President and
Chief Executive Officer
April 14, 2005
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