UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

Commission File No. 0-29373  

Seychelle Environmental Technologies, Inc.

(Exact Name of registrant as specified in its charter)

Nevada
IRS# 33-6159915
----------------------------
--------------------------
(State or other jurisdiction
(IRS Employer File Number)
Of incorporation)
 
   
33012 Calle Perfecto
 
San Juan Capistrano, California
92675
----------------------------------------
----------
(Address of principal executive offices)
(zip code)
   
 
(949) 234-1999
----------------------------------------------------
(Registrant's telephone number, including area code)

Securities to be Registered Pursuant to Section 12(b) of the Act: None

Securities to be Registered Pursuant to Section 12(g) of the Act:

Common Stock, $0.001 per share par value

References in this document to "us," "we," or "the Company" refer to Seychelle Environmental Technologies, Inc., its predecessor and its subsidiary.

 
 

 

 


TABLE OF CONTENTS

ITEM
PAGE
PART I
 
Item 1. Description of Business
1
(a) Business Development
1
(b) Business of Seychelle
2
Risk Factors Related to Our Business
6
Item 2. Management’s Discussion and Analysis - Plan of Operation
9
Item 3. Description of Property
12
Item 4. Security Ownership of Certain Beneficial Owners and Management
12
Item 5. Directors, Executive Officers, Promoters and Control Persons
13
Item 6. Executive Compensation
14
Item 7. Certain Relationships and Related Transactions
15
Item 8. Description of Securities
16
Part II
 
Item 1. Market Price and Dividends on the Registrant’s Securities
18
Item 2. Legal Proceedings
19
Item 3. Changes in and Disagreements with Accountants
20
Item 4. Recent Sales of Unregistered Securities
20
Item 5. Indemnification of Directors and Officers
21
Part F/S
 
Report of Independent Registered Public Accounting Firm
23
Consolidated Financial Statements for Fiscal Year Ending February 28, 2005
24
Notes to Consolidated Financial Statements for Fiscal Year Ending February 28, 2005
32
Consolidated Financial Statements for Quarter Ending May 31, 2005
67
Notes to Consolidated Financial Statements for Quarter Ending May 31, 2005
72
Part III
 
Item 1. Index to Exhibits
88
Signatures
88



 
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Form 10-SB, including statements under "Item 1. Description of Business," and "Item 2. Management's Discussion and Analysis", constitute "forward looking statements" within the meaning of Section 27A of the Securities Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 (collectively, the "Reform Act"). Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "should", or "anticipates", or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Seychelle Environmental Technologies, Inc. ("Seychelle", "the Company", "we", "us" or "our") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
 
PART I

ITEM 1. Description of the Business.

(a) Business Development  

History of Seychelle

We are a Nevada corporation. Our principal business address is 33012 Calle Perfecto, San Juan Capistrano, California 92675. Our telephone number at this address is 949-234-1999.

We were incorporated under the laws of the State of Nevada on January 23, 1998 as a change of domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.

On January 30, 1998, we entered into an Exchange Agreement with Seychelle Water Technologies, Inc., a Nevada corporation ("SWT"), whereby we exchanged our issued and outstanding capital shares with the shareholders of SWT on a one share for one share basis. We became the parent company and SWT became a wholly owned subsidiary. SWT had been formed in 1997 to market water filtration systems of Aqua Vision International.

On January 31, 1998, we entered into a Purchase Agreement to acquire all of the assets of Aqua Vision International, a private California entity. This Purchase Agreement was amended on February 26, 1999 to provide for the issuance of 8,000 shares of Series "AAA" Cumulative Convertible Preferred Voting Stock in lieu of all consideration that had remained unpaid under the original Purchase Agreement. Aqua Vision International had been in operation since 1995 to develop, manufacture, and market its own proprietary water filtration systems.

In April 2001, we repurchased all of our issued and outstanding Series A 13.5% Non-Voting, Cumulative Preferred Stock, $.01 par value per share. This repurchase was combined with a comprehensive settlement agreement, for the benefit of all parties, with the beneficial owner of the Preferred Stock. We also retired all of these Series A 13.5% Non-Voting, Cumulative Preferred.

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During 2002 through 2003 the company entered into a number of consulting agreements that have all since been terminated with no further obligation to the company. Further the company terminated both stock option agreements it had granted in 2000 and in 2002.

In December 2004 all Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the Tam Irrevocable Trust. In addition, all dividends accrued and unpaid on the AAA Preferred were waived.

As of February 28, 2005, the TAM Irrevocable Trust, one of our principal shareholders and Pacific Financial, have loaned the Company funds from 2001 through 2005 to continue to finance the company operations, with the balance due of $448,150 at 10% simple interest, repayable after March 1, 2006.

As of May 31, 2005, there were 22,541,406 shares of common stock, par value $0.001, issued and outstanding.

Organization

Our Company is presently comprised of Seychelle Environmental Technologies, Inc., a Nevada corporation, with one subsidiary, Seychelle Water Technologies, Inc., also a Nevada corporation. We use the trade name, "Seychelle Water Filtration Products, Inc.," in our commercial operations.

(b) Business of Seychelle  

General

Seychelle designs and manufactures unique, state-of-the-art Ionic Adsorption Micron Filters that remove up to 99.8% of all pollutants and contaminants found in any fresh water source. Using breakthrough technology, Seychelle has also developed proprietary   ozone systems. Patents or trade secrets cover all proprietary products. Since our bodies are 75% water and the quality of water worldwide continues to deteriorate, our mission is twofold: First, to help educate everyone about the problem and second, to provide the solution by making available low-cost, effective filtration products that will meet the growing need for safe water.

Seychelle has sold over 2 million portable water filtration bottles throughout the world to customers such as individuals, dealers, and distributors - and to governments, military, agencies and emergency relief organizations such as the US Marine Corps, the International Red Cross, Eco-Challenge, Kenya Wild Life Service, La Cruz Roja de Mexico and the NY Institute for the Blind. In addition, the company has donated thousands of portable bottles to church groups and missionaries worldwide. Seychelle’s products are approved for sale and distribution in many countries including the US, Mexico, Brazil, Argentina, Venezuela, Japan, China, Korea, India, Pakistan, Australia, UK, New Zealand, Malaysia, Indonesia and South Africa.

The global water market is estimated to be in excess of $420 billion annually, with bottled water revenues at $20 billion growing at 20%. The major bottled water marketers worldwide are PepsiCo with 5% share, Danone - 12%, Coca-Cola - 8%, Nestle - 16% and all others at 59%. While bottled water is growing at a 20% annual rate, water filtration products, which offer greater value, are achieving up to 30% growth. Per capita bottle water consumption in Mexico is 42 gallons a year, compared with the US of about 23 gallons. Behind the US, Mexico is the world’s

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second largest bottled water market with a growth rate of up to 30%. In developing countries, up to 85% of the population boil their water for drinking and cooking to kill bacteria, but this process does not remove the pyrogens, chemicals, toxins, and other elements that remain in the water. In Africa alone, approximately 25,000 people die every day because of water borne diseases.

General Business Plan

Seychelle is the accumulation of over 35 years of improvements and innovations in the field of micron technology. As a result, our products can deliver up to .2-micron filtration, at pennies per gallon, with PSI as low as 24. Further, our point of difference filtration systems remove up to 99.8% of all known pollutants and contaminants most commonalty found in fresh drinking water supplies in the four major areas of concern.

The unique patented Ionic Adsorption Micron Filter removes:

AESTHETICS: Taste, odor, chlorine, sand, sediment and odor problems.
BIOLOGICS: Pathogens such as Cryptosporidium, Giardia and E-Coli bacteria.
CHEMICALS: Pesticides, detergents, toxic chemicals and industrial waste.
DISSOLVED SOLIDS: Heavy metals such as aluminum, asbestos, copper, lead, mercury and radon 222.

Seychelle filters are the most tested in the world, and have been certified by California and Florida approved independent laboratories implementing EPA, ANSI and NSF protocol, procedures, standards and methodology.

No other water filtration system can achieve this level of removal of up to 99.8% of all known pollutants and contaminants most commonalty found in fresh drinking water supplies in the four major areas of concern. The benefit of such a filtration can save lives worldwide as awareness of Seychelle’s product line increases.

The Products
 
Portables Products

Seychelle has a varied line of portable filters for people on the go. They include Flip Top’s, Bottom’s Up’s and varied military style canteens - regular or with silverators (for further bacteria control). Sizes are from 18oz to 30oz, and provide up to 400 gallons of pure drinking water from any fresh water source, running or stagnant (such as rivers, lakes, ponds, streams and puddles).
 
The current portable products include: Flip-Top, Survivor, Canteen, Bottoms UP, In-Line Eliminator, Pure Water Bag, Pump n’ Pure, Facial Mist and replacement filters.

Home Products

Seychelle technology has developed products for above-the-counter, below-the-counter, and to filter the whole house. Installation is easy, and unlike reverse osmosis (RO), only a low PSI input line is needed. No water is wasted in the filtration process. Seychelle also makes a variety of shower filters.

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The current home products include: Deluxe Shower, Handheld Shower, Royal Shower Wall Mount, Royal Shower Handheld, P.O.U. Countertop, P.O.E. Total Home and all replacement filters, and feature technology developed for portable products.

New Products

We are re-engineering the Flop Top bottle to eliminate parts, reduce costs, provide a more streamlined look, and add a disinfectant capability. The Counter Top has been upgraded to provide more enhanced filter media to improve the taste and quality of drinking water. Finally, the In-Line Filter is being changed to provide greater filter media, and meet field conditions that require a longer, narrower design.

We also acquired the rights of Enviro(3) Care Incorporated, as well as all applicable intellectual properties. We will exercise our best efforts to complete the product packaging, marketing, and service in order to maximize sales and distribution of possible new ozonation products. This acquisition includes a patent and other trade secret assets that we plan to use to our advantage in our distribution. This product market includes home, spas, wells, R.V., agricultural, medical and other commercial and industrial applications.

We signed a License Agreement with Aqua Gear USA for a product known as the "Hand Held Pump Technology." We licensed all proprietary rights associated with this technology, including patent #6,136,188. We will pay a 2% royalty on our gross income for the technology during the term of the license. The License Agreement is for an initial term of five years, with five successive five-year renewals. This offers us an additional proprietary product in the portable filtration industry. We believe that this purchase compliments our current product line.

Manufacturing  

Currently, manufacturing is done at our San Juan Capistrano, California headquarters location. Through an exclusive agreement with Heibei R.O. Environmental Technologies, we will be able to produce all of our portable filtration products in China. With two production facilities, we believe that such an agreement will allow the Seychelle brand to be sold at a very competitive price to US, China, Asia and other international markets.

Sales Channels  

Sales channels to be pursued will include: Retail, Military, Government, Multi-Level Marketing, International, OEM and Joint Ventures.

Seychelle is looking toward developing countries in South America, Africa and Asia as its next frontier. Currently, we have signed an agreement to proceed with a marketing partner in South Africa, and talks are in various stages with potential joint venture partners in Pakistan, India and Vietnam.

We have an agreement with the representatives of a company in Japan on a non-exclusive basis to market and sell our entire product line throughout Japan. This company is a current customer who is expanding its marketing operations.

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We will also continue to promote our products and technologies to non-profit organizations, such as the Red Cross, the U.S. and international militaries, missionaries, charitable and fund-raising groups and other philanthropic organizations.

Raw Materials

The use of proprietary medias in the manufacturing of our line of products is a major factor. To date, there is adequate availability of raw materials and proprietary medias for all of our products. We do not expect this situation to change in the near future.

Customers and Competition

There are a number of established companies in the water filtration business, with no one company in a dominant position.

Backlog

As of May 31, 2005, we had backorders of $100,331 in customer orders in portable water filtration units.

Employees

As of May 31, 2005, we had three executive consultants managing the company with two (2) administrative consultants supporting that effort. In production, operations and warehousing we had one (1) full-time employee and four (4) independent contractors working to fill all sales orders.

Proprietary Information and Technology

We own a patent for the Portable Water Filtration System with the filter cap assembly, Patent # 5,914,045. As described in the Abstract, it is "[a] filter assembly for a flexible, portable bottle having a sealing cap including a filter attached to the interior of the cap to filter out substantially all inorganics, organics, radiological chemicals and microbiology. The filter assembly also may include a second filter or Iodinator sealed in the flexible bottle to further remove micro-organisms from water passing there-through. The filter assembly is designed so that the flexible bottle must be pressurized, as by being hand pressed, after it is filled with water to force flow of water through the [sic] either or both of the filters. The filter in the cap includes a check valve to allow the bottle to be re-pressurized after water has been dispensed from the bottle."

We also own a patent, Patent #6,058,971, for a Quick Connect Diverter Valve. As described in the Abstract, it is "A quick-connect diverter valve for use in connecting existing water faucets and water filtration units in and around a kitchen, or other areas where clean water is desired."

Trademark registrations have been filed with the USPTO for both Seychelle and Aqua Gear and are in progress.

We have a trade name, "Seychelle Water Filtration Products, Inc.," which we use in our commercial operations.

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Government Regulation

We are not, as a company, subject to any material governmental regulation or approvals. However, our products are subject to inspection and evaluation by regulatory authorities that have jurisdiction over water quality standards. Such authorities are on the federal, state, and local level, both in the United States and overseas, where we market our products. Most of our products have already been inspected and evaluated by all applicable governmental authorities in the areas in which we operate or plan to operate in the near future. With respect to our new proposed focus of operations, we do not know if governmental regulation will have a material impact on us in the future.

Research and Development

We have spent approximately $25,100 and $12,500 in research and development activities for the fiscal years ending, February 29, 2004 and February 28, 2005 respectively. During the three-month period ending May 31, 2004 and 2005, the Company spent approximately $1,300 and $2,800, respectively.

Environmental Compliance

At the present time Seychelle is not subject to any material costs for compliance with any environmental laws. With respect to our new proposed focus of operations, we do not know if environmental compliance will have a material impact on us in the future.

Risk Factors Related to Our Business

THE OWNERSHIP AND INVESTMENT IN OUR SECURITIES INVOLVES SUBSTANTIAL RISKS. OUR COMMON SHARES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS RELATING TO OUR COMPANY.

Lack of History . Our Company was formed on January 23, 1998 and acquired the operations of a company that had been in existence since 1995. Since beginning operations, we initially sold water filtration products to a number of customers then later consolidated the business with one customer, Nikken, to expand sales and cover increased costs. This was done since Nikken is a global multi-level marketing company in the wellness consumer products industry and provided access to an expanded base of potential customers. Further, we have not been profitable except in fiscal year ending February 28, 2002 when the relationship with Nikken ended. However, product lines sales have stabilized since the Nikken business ended, but have not generated enough revenue to support our Company. This has required us to seek both investor capital and financing to buy the time required by new management to reverse the downward trend. Recent sales activity as of May 31, 2005 has expanded suggesting a positive change in direction with the new management. Still, we have limited financial results upon which you may judge our potential. The company is not engaged in enough consistent business activity over a sustained period of time to be said to have a successful operating history. We have experienced in the past and may experience in the future under-capitalization, shortages, setbacks and many of the problems, delays and expenses encountered by any early stage business. These include:

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- operating as a public entity, incurring non-cost of sales expenses such as accounting, auditing, legal activities, and maintaining full compliance of a regulated reporting status including continuing Sarbanes-Oxley requirements.

- unplanned delays and expenses related to research, development and testing of our new products

- production and marketing problems that may be encountered in connection with our existing products and technologies,

- competition from larger and more established companies, and

- under-capitalization to challenge the lack of market acceptance of our new products and technologies.

Limited Profitability. Sales of our products may not continue to generate sufficient revenues to fund our continuing operations. We may not continue to generate a positive cash flow or maintain profitability. To date, we have incurred significant losses. As of February 28, 2005, our revenue was $341,106 versus $468,420 in the prior fiscal year ending February 29, 2004. This decrease was due to primarily to lower sales to a large customer (from $223K to $35K) partially offset by sales to a smaller customer (from $4K to $50K). Net Losses as of February 28, 2005 of $250,423 were greater than in the prior year ending February 29, 2004 of $208,428 due to claim settlements ($31K) higher SG&A expenses ($89K) and partially offset by the reversal of a product return liability of $61K. Going forward the company has a policy of not projecting sales and profits due to:

- significant legal and professional fees associated with regulated business activities and SEC reporting requirements including continuing Sarbanes-Oxley requirements.

- lack of consistent sales to maintain profitability,

Inherently Risky-Competition. Because we are a company with a limited history, our operations will be extremely competitive and subject to numerous risks. The water filtration business is highly competitive with many companies having access to the same market. Substantially all of them have greater financial resources and longer operating histories than we have and can be expected to compete within the business in which we engage and intend to engage. There can be no assurance that we will have the necessary resources to be competitive. We are subject to the risks that are common with under-capitalized companies. Therefore, investors should consider an investment in us to be an extremely risky venture.

Need For Additional Financing. To position the Company for growth over the past 5 past years, we incurred financing charges from the Tam Irrevocable Trust of $340,000 for which the Company issued 1,266,667 shares of restricted common stock at $0.18 per share and 500,000 warrants at $0.225 per share redeemable for an equal number of shares of restricted common stock. Additionally, on March 29, 2005, the Company granted the Tam Irrevocable Trust 1,972,133 restricted shares of the Company’s common stock. For this the Company recorded unearned interest relating to the estimated value of these shares of $493,000. During the three-month period ending, May 31, 2005, the Company issued an aggregate of 2,150,000 common shares to various investors for cash for an approximate total value of $535,000.

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For the foreseeable future, Seychelle is currently in a good cash position with $440,818 in cash as of, May 31, 2005. This included $188,946 in cash receipts from sales. For domestic customers, we require 50% prepayment of the order. For international customers, effective June 1, 2005, we require 100% prepayment either though credit cards, wire transfers or Letters of Credit. We also have $150,000 in credit lines at two of our banks. Consequently we do not foresee the need for additional funding for the balance of the fiscal year ending February 28, 2006.   However, we cannot guarantee the success of this plan.  

Potential Inability to Conduct Successful Operations. The results of our operations will depend, among other things, upon our ability to develop and to market our water filtration products. Further, it is possible that our proposed operations may not be able to generate income sufficient to meet operating expenses or sustain us. Our operations may be affected by many factors, some known by us, some unknown and some that are beyond our control. Any of these problems, or a combination thereof, could have a materially adverse effect on our viability as an entity and might cause the investment of our shareholders to be impaired or lost. Our technologies and products are in various stages of development. The development stage products may not be completed in time to allow production or marketing due to the inherent risks of new product and technology development, limitations on financing, competition, obsolescence, loss of key personnel and other factors. Although we may license or market our development technology at its current stage of development, there can be no assurance that we will be able to do so. Unanticipated technical obstacles can arise at any time and result in lengthy and costly delays or in a determination that further development is not feasible.

While we have a limited product line, the development of some of our technologies has taken longer than anticipated and could be additionally delayed. Therefore, there can be no assurance of timely completion and introduction of improved products on a cost-effective basis, or that such products, if introduced, will achieve market acceptance such that, in combination with existing products, they will sustain us or allow us to maintain profitable operations.

Dependence Upon Technology. We are operating in a business that requires extensive and continuing research, development and testing efforts. There can be no assurance that new products will not render our products obsolete or non-competitive at some time in the future.

Protection of Technology. A successful challenge to the ownership of our technology could materially damage our business prospects. We rely principally on trade secrets as well as trade secret laws, two patents, two trademarks, copyrights, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We currently have two U.S. patents issued and a license on two patents. Any issued patent may be challenged and invalidated. Patents may not issue from any of our future applications. Any claims allowed from existing or future pending patents may not be of sufficient scope or strength to provide significant protection for our products. Patents may not be issued in all countries where our products can be sold so as to provide meaningful protection or any commercial advantage to us. Our competitors may also be able to design around our patents or the patents that we license.

Vigorous protection and pursuit of intellectual property rights or positions characterize our industry, which has resulted in significant and often protracted and expensive litigation. Therefore, our competitors may assert that our technologies or products infringe on their patents

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or proprietary rights. Problems with patents or other rights could increase the cost of our products or delay or preclude new product development and commercialization by us. If infringement claims against us are deemed valid, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our future patent and/or technology license positions or to defend against infringement claims.

Competition. Technological competition from larger and more established companies is significant and expected to increase. Most of the companies with which we compete and expect to compete have far greater capital resources and more significant research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. Our ability to compete effectively may be adversely affected by the ability of these competitors to devote greater resources to the sale and marketing of their products than we can. In addition, one or more of our competitors may succeed or may already have succeeded in developing technologies and products that are more effective than any of those we currently offer or are developing. In addition, there can be no guarantee that we will be able to protect our technology from being copied or infringed upon. Therefore, there are no assurances that we will ever be able to obtain and to maintain a profitable position in the marketplace.

Success Dependent Upon Management . Our success is dependent upon the decision making of our directors and executive officers. These individuals have made a full commitment to the business. The loss of any or all of these individuals could have a materially adverse impact on our operations. On December 1, 2001, we entered into an employment agreement with our President. During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services for the Company.

(c) Reports to Security Holders

Seychelle is not at this time a reporting company required to file reports with the Securities and Exchange Commission (“SEC”) and is not required to deliver an annual report to our security holders. However, upon the effectiveness of this Form 10-SB, Seychelle will become a reporting company and will be required to file periodic reports with the SEC. Those reports will be available to our security holders (i) through the Internet web site maintained by the company, http://www.seychelle.com ; (ii) at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C 20549; and (iii) through an Internet site maintained by the SEC that contains reports, proxy and information statements and other information regarding issuers that file such documents electronically at http://www.sec.gov . Information regarding the operations of the SEC’s Public Reference Room is available by calling the SEC at 1-800-SEC-0330.

ITEM 2. Management's Discussion and Analysis - Plan of Operation .

Since beginning operations, we initially sold water filtration products to a number of customers then later consolidated most of the business with one customer, Nikken, to expand sales and cover increased costs. This was done since Nikken is a global multi-level marketing company in the wellness consumer products industry and provided access to an expanded base of potential customers. However, we have not been profitable except in the fiscal year ending February 28, 2002 when the relationship ended with our principal customer Nikken.

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After the Nikken business ended in 2002, when sales were $1,971,744, the company retrenched by cutting costs, de-registering with the SEC, returning to the Pink Sheets and by seeking out a new base of customers as the Nikken business had been providing most of the revenues. Sales for the past two years have stabilized at a lower level of $341,106 (fiscal year ending February 28, 2005) and 468,420 (fiscal year ending February 29, 2004). Earnings in the fiscal year ending February 28, 2005 were a negative $250,423 due to higher costs on lower sales versus a negative $208,428 in the fiscal year ending February 29, 2004.
 
In the three-month period ending May 31, 2005, sales were $237,987 compared to the same period in the prior year with sales of $128,547 and our backlog was $ 100,000 as of May 31, 2005. This would have almost equaled sales in the fiscal year ending February 28, 2005 in just the three-month period ending May 31, 2005.
 
Both the Plan of Operation and the Results of Operation are as follows:
 
a. Plan of Operation

i.  
Liquidity

Seychelle is currently in a good cash position with $440,818 in cash as of May 31, 2005. This included $188,946 in cash receipts from sales that are on the upswing. For domestic customers, we require 50% prepayment of the order. For international customers, effective June 1, 2005, sales are to be 100% prepaid either though credit cards, wire transfers or Letters of Credit. Consequently, we do not foresee the need for additional funding for the year ending February 28, 2006. Seychelle also has $150,000 in credit lines at two of our banks.

ii.  
Research and development.

The flip top container is being reengineered in design for greater ease of use and now includes disinfectant capabilities. The countertop is also been upgraded with more advanced filtration media for removal of contaminants and pollutants. The in-line filter is also being redesigned as well to make it more applicable to field conditions.

iii   Capital expenditures.

We do not expect any significant capital expenditures except for additional molds or tooling to supplement our existing capital equipment, which can be funded out of current cash flow.


iv Employees.

We anticipate no additional executive hiring even with an increase in the business that can be handled through the addition of variable and independent plant contractors and outside consultants.

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b. Results of Operations  

i.   Three-month periods ending May 31, 2005 compared to the corresponding period in 2004.
 
In the three-month period ending May 31, 2005, sales were $237,987 compared to the same period in the prior year with sales of $128,547 and our backlog was $100,000 as of May 31, 2005. This would have almost equaled sales in the fiscal year ending February 28, 2005 in just the three-month period ending May 31, 2005.

ii   Liquidity and capital resources .

For domestic customers, we require 50% prepayment of the order. For international customers, effective June 1, 2005, we require orders to be 100% prepaid either though credit cards, wire transfers or Letters of Credit. Consequently, we do not foresee the need for additional funding for the year ending February 28, 2006.

iii   Capital expenditures .

We do not expect any significant capital expenditures except for additional molds or tooling to supplement our existing capital equipment, which can be funded out of current cash flow.

iv.   Trends that have or will likely impact revenues from continuing operations.
 
In the three-month period ending May 31, 2005, sales were $237,987 compared to the same period in the prior year with sales of $128,547 and our backlog was $ 100,000 as of May 31, 2005. This would have almost equaled sales in the fiscal year ending February 28, 2005 in just the three-month period ending May 31, 2005. Consequently, the business is improving with both new and current (international and domestic) customers purchasing product. Gross Profit Margins also improved from 66.2% to 67.7% with greater sales of higher margin products. Gross Margins for all of fiscal year ending February 28, 2005 were 54.5% that shows greater emphasize on higher margin products.

v.   Significant elements of income or loss not from continuing operations

Even though profits for the three-month period ending May 31, 2005 were negative by $83K, $85K in accounting and legal fees to assist in the audit and preparation of the Form 10 were the primary explanation for the result. In addition, there was $78K in financing costs and amortization of officer stock compensation.

vi.   Causes for any material changes from period to period .

Fluctuations in the ordering pattern from a small customer base.

vii.   Any seasonal aspects .

Except for heavier consumption of water in the summer months, water is something everyone drinks year round and should not be considered seasonal.

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c. Off-Balance Sheet Arrangements : none


ITEM 3. Description of Properties.  

As of May 31, 2005, our business office was located at 33012 Calle Perfecto, San Juan Capistrano, CA 92675. Our telephone number at this address is 949-234-1999. We pay a total of $7,000 in rent per month for approximately 12,000 square feet of office, operations and warehousing. We have a three-year lease with an unaffiliated third party.

We own two patents and numerous trade secrets, see Proprietary Information above, and other proprietary information related to our business operations. We recently filed for two trademarks: Seychelle that has been used in commerce since 1997 and Aqua Gear, which had been abandoned previously by Aqua Gear USA to capitalize on the patent agreement we secured from them.

ITEM 4. Security Ownership of Certain Beneficial Owners and Management .

The following sets forth the number of shares of our $0.001 par value Common Stock beneficially owned by (i) each person who, as of May 31, 2005, was known by us to own beneficially more than five percent (5%) of our Common Stock; (ii) our individual directors and (iii) our officers and directors as a group. As of May 31, 2005 there were a total of 22,541,406 shares of Common Stock issued and outstanding.

NAME AND ADDRESS
AMOUNT AND NATURE OF
PERCENT OF
OF BENEFICIAL OWNER
BENEFICIAL OWNERSHIP(1)(2)
CLASS
     
The TAM Irrevocable Trust
10,108,388 (3)
44.8%
4012 S. Rainbow #K111
   
Las Vegas, NV 80103-2012
   
     
Shawn Lampman
2,000,000
8.9%
2345 Calico Creek
   
Las Vegas, NV 89135
   
     
FTS Worldwide Corp.
1,320,009
5.9%
24 Route De Malagnou
   
1208 Geneva Switzerland
   
     
Carl Palmer
-0-
-0-
251 Jeanell Dr., Ste 3
   
Carson City, NV 89703
   
     
Richard Parsons
614,673
2.7%
251 Jeanell Dr., Ste 3
   
Carson City, NV 89703
   

12
 
 

 
James Place
300,000
1.3%
251 Jeanell Dr., Ste 3
   
Carson City, NV 89703
   
     
All officers and directors
914,673
3.7%
As a Group (three persons)
   

(1) All ownership is beneficial and of record, unless indicated otherwise.

(2) Beneficial owners listed above have sole voting and investment power with respect to the shares shown, unless otherwise indicated.

(3) The TAM Irrevocable Trust is an irrevocable trust for the benefit of certain family members of Mr. Carl Palmer. Mr. Palmer disclaims any beneficial ownership or interest in this Trust.


ITEM 5. Directors, Executive Officers, Promoters, and Control Persons; Compliance with Section 16(a) of the Exchange Act.  

Our Directors and Executive Officers, their ages and positions held in the Company as of May 31, 2005 are as follows:

NAME
AGE
POSITION HELD
----
---
-------------
     
Carl Palmer
71
President, Chief Executive Officer and Director
Richard Parsons
70
Executive Vice President, Secretary and Director
     
James Place
66
Chief Operating Officer, Treasurer and Director

Our directors have served and will serve in such capacity until the next annual meeting of our shareholders and until their successors have been elected and qualified. The officers serve at the discretion of our directors.

Carl Palmer . Mr. Palmer has been the President, CEO and a director of the Company since January 1998. He is the founder of our company, innovator of the complete line of Seychelle water filtration products and primary spokesperson worldwide. He is an internationally recognized expert in the field for over 35 years and pioneered the development of the reverse osmosis (RO) home and office pure water business in the US in the late 1970’s. That company, Aq-Ro-Matic, was later sold to Coca-Cola. Carl developed CTA membrane, a breakthrough technological development in the industry and subsequently, created and sold pure water companies to Coca Cola Los Angeles, AMF, Cuno and Shaklee. In the late 1980’s Carl developed the Best Water RO business for Shaklee and sold over $53 million in above-the-counter systems. Carl’s 30 years of direct sales experience has led to many significant business relationships, many of which continue today. He is the inventor of thirteen patented products related to water purification. Mr. Palmer received a Bachelors Degree from Whittier College.

13

 
 

 

Richard Parsons . Mr. Parsons has been Secretary, Executive Vice President and a director of the Company since November 2004. He has over 30 years experience in bottled water, RO and water filtration with Fortune 100 companies such as Coca-Cola, Arrowhead, Shaklee, and Canadian Glacier. In addition, Mr. Parsons ran his own successful consulting business in water and related beverages with clients such as General Foods, Coke-USA, The Beverage Group, Coke-Japan and Mitsubishi Industries. He also has over 20 years experience in direct sales and multilevel marketing with companies such as Avon, Holiday Magic, Arrowhead and National Education. Mr. Parsons has a Bachelors Degree from Principia College.

James Place . Mr. Place has been Treasurer, COO and a director of our Company since November 2004. He has over 30 years experience in food, beverages and bottled water. While at Arrowhead, he took the liter still and sparkling business from $10 to $75 million in 5 years. Mr. Place also had extensive marketing, new product development and operating experience with Fortune 100 companies such as Carnation, Kerr Glass and Hunt-Wesson. Mr. Place also has substantial experience in business development, M & A and with the investment community. Mr. Place has an MBA from Michigan State University and a Bachelors degree from Albion College.

ITEM 6. Executive Compensation.  

The following table sets forth the Summary Compensation Table for the Chief Executive Officer and the compensated executive officers with salaries in excess of $100,000 per annum who were serving as executive officers at the end of the last three completed fiscal years. Compensation does not include minor business-related and other expenses paid by us. Such amounts in the aggregate do not exceed $10,000.

Summary Compensation Table

Annual Compensation
Long Term Compensation
----------------------------------
---------------------------------------
Awards
Payouts
----------------------------------
---------------------------------------
         
Restricted
All
Name and
 
Salary
Annual
Other Stock
LTIP
Other
Principal/
Positions
Fiscal Year
Ending
Compensation($)
Bonus ($)
Compensation ($)(1)(3)
Award(s)
Securities
Carl Palmer
2005
   
$10,000
   
President & CEO
2004
   
$10,000
   
Director
2003
   
$10,000
   
             
Richard Parsons
2005
   
$9,400(2)
 
$11,908(3)
Executive VP*
2004
   
--
   
Director (1)
2003
         
             
James Place
2005
   
$9,400(2)
 
$4,584(3)
COO*
2004
   
--
   
Director (1)
2003
   
--
   
[Footnotes on following page]  
14

 
 

 


(1)  
Elected to Board of Directors during November 2004
(2) Messrs. Parsons and Place were granted 240,000 shares of restricted common stock valued at $.03 per share and are distributed over three years beginning December 1, 2004, 2005 and 2006
(3) Messrs. Parsons and Place were granted warrants to purchase 500,000 shares of restricted common stock at $0.225 per share and are distributed over the same three years and are exercisable from December 1, 2004 until December 1, 2008

The Board of Directors as a whole acts as a compensation committee. We have no retirement, pension, sharing, stock option, insurance or other similar programs.

We do not pay members of our Board of Directors any fees for attendance or similar remuneration, but reimburse them for any out-of- pocket expenses incurred by them in connection with their activities.


ITEM 7. Certain Relationships and Related Transactions  

Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the Company. The agreement shall be automatically renew for successive one-year terms unless the Company or employee provides written notice of non-renewal.

During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services for the Company. As consideration for services to be rendered, the consultants received 480,000 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The fair market value of the restricted shares earned during the period ending November 30, 2004 was estimated at $225,600 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded amortization of approximately $18,800 and $18,800 for the fiscal year ending February 28, 2005 and three-month period ending May 31, 2005, respectively.

During December 2004, all Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the Tam Irrevocable Trust. In addition, all dividends accrued and unpaid on the AAA Preferred were waived.

As the February 28, 2005 and February 29, 2004, the Company had received advances of $448,200 and $504,800 from companies related to an officer and Board member. These advances bear interest at 10 percent. As of February 28, 2005, $100,000 of these advances is due before February 28, 2006 with the balance of the advances not repayable until after March 1, 2006.

As of February 28, 2005 and February 29, 2004, accrued interest on these advances was approximately $134,500 and $86,000, respectively, and is included in accrued interest due to related parties in the accompanying consolidated balance sheet.

15

 
 

 

During December 2004, the Company granted the Tam Irrevocable Trust restricted common stock of 1,266,667 shares, valued at $76,000 per year, effective March 1, 2002, for additional interest and continued financial support.

As of February 28, 2005 and February 29, 2004, accrued charges on these advances was approximately $228,000 and $152,000, respectively, and are included in accrued interest due to related parties in the accompanying consolidated balance sheet.

On March 29, 2005, the Company expanded the consulting agreement with one officer to provide management consulting services for the Company. As consideration for services to be rendered, the consultant received 316,312 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $79,100 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded amortization of approximately $8,800 and $6,600 for the fiscal year ending February 28, 2005 and three-month period ending May 31, 2005, respectively.

On March 29, 2005, the Company expanded the consulting agreements with two officers to provide management consulting services for the Company. As further consideration for services to be rendered, the consultants were granted 1,000,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 and are exercisable through December 1, 2008. The fair market value of the warrants earned during the period ending November 30, 2004 was estimated at $55,300 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded amortization of approximately $6,100 and $4,600 for the fiscal year ending February 28, 2005 and three-month period ending May 31, 2005, respectively.

On March 29, 2005, the Company granted the Tam Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. As the warrants provide for the purchase of common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded amortization of approximately $3,000 and $3,100 for the fiscal year ending February 28, 2005 and the three-month period ending May 31, 2005, respectively.


ITEM 8. Description of Securities

Common Stock

The holders of Common Stock have one vote per share on all matters (including election of Directors) without provisions for cumulative voting. The Common Stock is not redeemable and has no conversion or preemptive rights.

16

 
 

 

In the event of liquidation of the Company, the holders of Common Stock will share equally any balance of the Company’s assets available for distribution to them after satisfaction of creditors and the holders of the Company’s senior securities. The Company may pay dividends, in cash or in securities or other property, when and as declared by the Board of Directors from assets legally available. To date, the Company has not declared or paid dividends on its Common Stock.


Preferred Stock

The Board of Directors has the authority to issue Preferred Stock and to fix and determine its series, relative rights and preferences to the fullest extent permitted by the laws of the State of Nevada and its articles of incorporation. As of February 28, 2005, three classes of Preferred Stock were authorized and none was outstanding.

Series “A” 13.5% Non Voting, Convertible Preferred Stock $0.01 par value

Series “A” Preferred Stock has rights which are superior to all other securities of the Company, including upon liquidation and as to payment of dividends, if any, carries a cumulative dividend of 13.5% per annum, is non-voting, and is redeemable by the Company at any time at face value and is convertible into common shares of the Company at the lesser of $10 per share or 85% of the last five closing bid prices.

During April 2001, the Company repurchased for $350,000 all issued and outstanding Series A Preferred Stock, and settled all liability for dividends. This repurchase was done in conjunction with a comprehensive settlement agreement with the beneficial owner of the preferred stock.

The stock repurchase was funded by a loan made by one of the Company’s principal stockholders.

Series “AA” 10% Non Voting, Convertible Preferred Stock

Series “AA” Preferred Stock has rights superior to all other securities of the Company except to Series “A” Preferred Stock, including upon liquidation and as to payment of dividends, if any, carries a 10% cumulative dividend, is non-voting, redeemable by the Company at any time at face value and is convertible into common shares of the Company at 85% of the last five closing bid prices. On June 14, 1999, all of the Series “AA” Preferred Stock was converted into 1,337,509 shares of Common Stock at the original conversion terms.

Series “AAA” 12 % Voting Convertible Preferred Stock

Series “AAA” Preferred Stock has rights which are superior to all other securities of the Company except Series “A” and the Series “AA” Preferred Stock, including upon liquidation and as to payment of dividends, if any carries a 12% per annum dividend payable in stock or cash, is voting, with each share equal to 100 shares of Common Stock, and is redeemable, at the Company’s option, according to the following procedure: upon written notice of conversion from the holders, the Company shall have 45 days from receipt of such notice to repurchase for cash shares of the Series “AAA” Preferred Stock at $1,000 per share.

17

 
 

 

As a result of the settlement of the litigation involving the Company and its former Chairman, in which the Company was seeking to rescind the issuance of all common shares previously issued to the former Chairman, the number of common shares issuable to the holders pursuant to the conversion provisions of the Series “AAA Preferred Stock was reduced from 8,000,000 shares to 4,500,000 shares

In December 2004 all Series “AAA” Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the Tam Irrevocable Trust. In addition, all dividends accrued and unpaid on the “AAA” Preferred Stock were waived.


PART II

ITEM 1. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters.  

(a) Principal Market or Markets  

Our Common Stock began trading in 1997. Since the consummation of the Exchange Agreement between our Company and SWT, market makers and other dealers have provided bid and ask quotations of our Common Stock under the symbol "SYEV." Trading was conducted in the over-the-counter market on the NASD's "Electronic Bulletin Board" until April 20, 2000. We traded on the "Pink Sheets" until December, 2000, when we were re-listed on the NASD's "Electronic Bulletin Board." After we filed a Form 15 in 2002 we began trading on the “Pink Sheets” where we currently trade. The table below represents the range of high and low bid quotations of our Common Stock as reported during the reporting period herein. The following bid price market quotations represent prices between dealers and do not include retail markup, markdown, or commissions; hence, they may not represent actual transactions. For the first quarter ending May 30, 2005, the common stock was at a High of $.37 and a Low of $.28.


Fiscal Year 2005
High Bid
Low Bid
     
Month Ending:
   
First Quarter May 2004
$.28
$.11
Common Shares
   
     
Second Quarter Aug 2004
$.16
$.09
Common Shares
   
     
Third Quarter Nov 2004
$.13
$.04
Common Shares
   
     
Fourth Quarter Feb 2005
$.65
$.05
Common Shares
   


18

 
 

 


Fiscal Year 2004
High Bid
Low Bid
     
Month Ending:
   
First Quarter May 2003
$.11
$.03
Common Shares
   
     
Second Quarter Aug 2003
$.07
$.03
Common Shares
   
     
Third Quarter Nov 2003
$.07
$.04
Common Shares
   
     
Fourth Quarter Feb 2004
$.28
$.06
Common Shares
   
 
Source: Commodity Systems, Inc. through Yahoo Finance

(b) Approximate Number of Holders of Common Stock  

As of May 31, 2005, there were approximately 337 shareholders of record of our common stock.

(c) Dividends

Holders of Common Stock are entitled to receive such dividends as may be declared by our Board of Directors. Seychelle paid no dividends on the Common Stock during the periods reported herein nor do we anticipate paying such dividends in the foreseeable future


ITEM 2. Legal Proceedings.  

During May 2001, Seychelle Water Technologies, Inc. was named and served with a lawsuit filed by SafeWater Anywhere, Inc. This lawsuit was filed in State Superior Court in Orange County, California. Mr. Carl Palmer was also named as a defendant. The complaint alleges breach of fiduciary duty, constructive fraud, promissory fraud, rescission, constructive trust, unfair trade practices, and conversion. The complaint sought unspecified damages and injunctive relief. We continue to believe that this matter is without any merit and intend to vigorously defend our rights.

In February 2002, Mr. Douglas Copp filed a lawsuit on behalf of himself and American Rescue Team International, Inc. against Seychelle, Nikken, and Carl Palmer in the U.S. District Court for the District of New Mexico. The Complaint, which is essentially a claim for royalty payments, alleges breach of contract, unfair trade practices, misappropriation of publicity, unjust enrichment, violation of the Lanham Act, and conspiracy. A trial was held in 2004 and all claims against Seychelle were dismissed.

19

 
 

 

On or about January 21, 2004 a lawsuit was filed on behalf of Ms. Letty Garcia against Mr. Carl Palmer and/or Seychelle claiming injuries she suffered from riding an electric scooter allegedly imported by Mr. Palmer and/or Seychelle. This lawsuit was filed in the Superior Court of San Diego, California. A trial was held in May 2005 and all claims against Seychelle were dismissed.

Otherwise, as of May 31, 2005, we know of no legal proceedings pending or threatened or judgments entered against any of our directors or officers in his or her capacity as such.

ITEM 3. Changes in and Disagreements with Accountants.  

Effective August 1, 2002, the firm of Rushall Reital & Randall (former accountants) resigned as independent auditors for the Company, and their resignation was accepted by the Board of Directors. At no time were there any disagreements between the Company and Rushall Reital & Randall on any matter of accounting principles or practices, financial statement disclosures or auditing scopes or procedures. Rushall Reital & Randall performed the audit of the Company’s financial statements for the fiscal years-ending February 28, 2001 and 2002. The audit report of Rushall Reital & Randall did not contain either an adverse opinion or disclaimer of opinion, and was not modified as to uncertainty, audit scope or accounting principles. The former accountants’ report on the financial statements of the Company as of and for the fiscal years ending February 28, 2001 and 2002, contained separate paragraphs, which indicated that the Company has experienced recurring losses, had an accumulated deficit, negative working capital and had not yet commenced profitable operations. These factors, among others, raised substantial doubt as to its ability to obtain long-term debt or equity financing in order to have the necessary resources to market the Company’s new and existing products.

On February 21, 2005, the Board of Directors approved the engagement of Armando C. Ibarra (A Professional Corporation) as independent auditors for the Company.

ITEM 4. Recent Sales of Unregistered Securities.

During the fiscal year ending February 28, 2000, the Company issued 32,000 shares valued at $0.184 per share, or $5,900 for tooling.

During May 2002, the Company completed an agreement to acquire rights to Enviro Care Inc., as well as, all applicable intellectual properties, whereby the Company can sell various ozonation products. In connection with the agreement, the Company granted 500,000 shares of common stock valued at $0.208 per share, or $104,000.

On June 6, 2002, the Company entered into a License Agreement for a product known as the “Hand Pump Technology.” The Company licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear TM. In connection with the license agreement, the Company granted the licensor 50,000 shares of common stock valued at $0.16 per share, or $8,000. The shares were issued during March 2002.

During the fiscal year ending February 29, 2004, the Company issued 120,000 shares for compensation; and 250,000 shares for services provided.

During the fiscal year ending February 29, 2004, the Company settled approximately $13,500 of its accrued expenses as of February 28, 2003 through the issuance of 15,000 shares of common stock.
20

 
 

 

During February 2004, the Company received $20,000 in proceeds for the issuance of 200,000 shares of common stock. The stock was delivered to the investor during March 2004. As of February 29, 2004, the Company recorded the proceeds as an un-issued stock liability in the accompanying consolidated financial statements.

During the fiscal year ending February 28, 2005, the Company issued 125,000 shares for compensation; and 70,000 shares for services provided.

During the fiscal year ending February 28, 2005, the Company issued an aggregate of 541,166 shares to various investors for cash for an approximate total value of $91,100.

During the fiscal year ending February 28, 2005, the Company issued an aggregate of 55,000 shares to various debt holders with an approximate total value of $42,400.

During the fiscal year ending February 28, 2005, the Company issued 84,000 shares to settle a claim with an approximate total value of $29,400.

During March 2005, the Company settled approximately $6,000 of its accrued expenses as of February 28, 2005 through the issuance of 17,500 shares of common stock.

During March 2005, a consultant surrendered to the Company 250,000 of common stock, valued at $32,500, due to failure to perform certain contractual obligations.

During April 2005, the Company settled approximately $228,000 of its accrued interest due to related parties as of February 28, 2005, through the issuance of 1,266,667 shares of common stock.

During the three-month period ending May 31, 2005, the Company issued an aggregate of 2,150,000 common shares to various investors for cash for an approximate total value of $535,000.

During the first five months ending July 31 2005, the Company repurchased approximately 100,000 common shares, at prices ranging from $0.15 to $0.17, for an approximate total value of $22,800.

Also during July 2005, the Company issued 2,000,000 common shares to an investor for cash for a total value of $450,000.

During the three-month period ending May 31, 2005, the Company issued 154,700 in restricted shares, estimated value $47,400, for services provided in connection with Form 10 filing.

ITEM 5. Indemnification of Directors and Officers.
 
Seychelle's Bylaws provide that it will indemnify its officers and directors to the full extent permitted by Nevada state law. Seychelle's bylaws likewise provide that Seychelle will indemnify and hold harmless its officers and directors for any liability including reasonable costs of defense arising out of any act or omission taken on behalf of Seychelle, to the full extent allowed by Nevada law, if the officer or director acted in good faith and in a manner the officer or director reasonably believed to be in, or not opposed to, the best interests of the corporation.
 
 
21
 

 
 

 

 
In so far as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
 




22

 
 

 

PART F/S  

ARMANDO C. IBARRA
Certified Public Accountants
A Professional Corporation

Armando C. Ibarra, C.P.A.
Members of the California Society of Certified Public Accountants
Armando Ibarra, Jr., C.P.A., JD
Members of the American Institute of Certified Public Accountants
 
Registered with the Public Company Oversight Accounting Board

To the Board of Directors
Seychelle Environmental Technologies, Inc.

Report of Independent Registered Public Accounting Firm

We have audited the accompanying consolidated balance sheets of Seychelle Environmental Technologies, Inc. and subsidiaries as of February 28, 2005, and February 29, 2004 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Seychelle Environmental Technologies, Inc., and subsidiaries as of February, 28, 2005, and February 29, 2004 and the results of their operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
 


_ /s/ Armando C. Ibarra _________________________________
ARMANDO C. IBARRA, CPA

August 16, 2005
Chula Vista, Ca. 91910

371 “E” Street, Chula Vista, CA 91910
Tel: (619) 422-1348
Fax: (619) 422-1465


23
 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET

 
February 28,
February 29,
 
2005
2004
ASSETS
   
     
CURRENT ASSETS
   
Cash
$ 23,782
$ 68,768
Trade receivables, net of allowance for doubtful accounts of $2,047 and $10,674
   
as of February 28, 2005 and February 29, 2004, respectively
20,047
36,689
Inventories, net
313,754
195,421
 
 
 
Total current assets
357,583
300,878
 
 
 
PROPERTY AND EQUIPMENT, NET
99,826
104,350
     
INTANGIBLE ASSETS, NET
121,567
122,911
     
OTHER ASSETS
14,670
14,420
 
 
 
Total non-current assets
236,063
241,681
 
 
 
TOTAL ASSETS
$ 593,646
$ 542,559

See accompanying notes to consolidated financial statements.

24

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET (CONTINUED)

 
February 28,
February 29,
LIABILITIES AND STOCKHOLDERS' DEFICIT
2005
2004
     
CURRENT LIABILITIES
   
Accounts payable
$ 25,179
$ 37,283
Accrued expenses
188,900
287,112
Accrued interest due to related parties
362,518
237,959
Current portion of notes payable to related parties
100,000
-
Customer deposits
25,911
-
Income taxes payable
8,397
6,797
 
 
 
Total current liabilities
610,905
569,151
     
NOTES PAYABLE TO RELATED PARTIES, less current portion
348,150
504,833
   
 
COMMITMENTS AND CONTINGENCIES
   
     
STOCKHOLDERS' DEFICIT
   
Preferred stock, $.01 par value
   
Series "AAA", preferred stock, 8,000 shares
-
80
authorized, issued and outstanding as of February 29, 2004
   
Common stock $.001 par value - 50,000,000 shares
16,665
10,513
authorized; 16,665,646 and 10,513,480 shares issued and
   
outstanding as of February 28, 2005 and February 29, 2004, respectively
   
Additional paid-in capital
4,340,086
3,213,469
Unissued stock liability
-
20,000
Accumulated deficit
(4,025,910)
(3,775,487)
Unearned interest
(462,443)
-
Unearned compensation
(333,807)
-
 
 
 
Total stockholders' deficit
(465,409)
(531,425)
 
 
 
TOTAL LIABILITIES AND
   
STOCKHOLDERS' DEFICIT
$ 593,646
$ 542,559

See accompanying notes to consolidated financial statements.

25

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For Fiscal Years Ending February 28, 2005 and February 29, 2004

 
2005
2004
SALES
$ 341,106
$ 468,420
     
COST OF SALES
155,113
307,175
 
 
 
Gross profit
185,993
161,245
 
 
 
OPERATING EXPENSES
   
Selling
27,425
6,904
General and administrative
308,054
239,897
 
 
 
Total expenses
335,479
246,801
 
 
 
LOSS FROM OPERATIONS
(149,486)
(85,556)
     
OTHER INCOME (EXPENSES)
   
Interest expense
(124,629)
(117,584)
Claim settlement
(31,360)
-
Write-Off of accrual for product return liability
61,630
-
Gain (loss) on sale of vehicle / equipment
5,100
(5,000)
Miscellaneous income (expense)
(10,078)
1,312
 
 
 
Total other income (expense)
(99,337)
(121,272)
 
 
 
LOSS BEFORE PROVISION
   
FOR INCOME TAXES
(248,823)
(206,828)
     
PROVISION FOR INCOME TAXES
1,600
1,600
 
 
 
Net loss
$ (250,423)
$ (208,428)
 
 
 
BASIC AND DILUTED (LOSS) PER SHARE
$ (0.02)
$ 0.02)
     
WEIGHTED AVERAGE NUMBER OF
   
SHARES: BASIC AND DILUTED
11,936,767
10,148,521
See accompanying notes to consolidated financial statements.

26
 
 

 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For Fiscal Years Ending February 28, 2005 and February 29, 2004

 
Preferred
Preferred
Common
Common
Additional
Unissued
 
 
 
Total
 
Stock
Stock
Stock
Stock
Paid-in
stock
Accumulated
Unearned
Unearned
Stockholders
 
Shares
Amount
Shares
Amount
Capital
liability
Deficit
Interest
Compensation
Deficit
 
 
 
 
 
 
 
 
 
 
 
Balance, February 28, 2003
8,000
$ 80
10,128,480
$ 10,128
$ 3,142,249
$ -
$ (3,567,059)
$ -
$ -
$ (414,602)
 
 
 
 
 
 
 
 
 
 
 
Contributed executive services
-
-
-
-
10,000
-
-
-
-
10,000
                     
Issuance of common stock for
                   
compensation and services
-
-
250,000
250
32,250
-
-
-
-
32,500
     
 
             
Issuance of common stock to
                   
employees
-
-
120,000
120
15,480
-
-
-
-
15,600
 
                   
Issuance of common stock in
                   
exchange for debt
-
-
15,000
15
13,490
-
-
-
-
13,505
 
                   
Issuance of common stock for
                   
cash (delivered March 2004)
-
-
-
-
-
20,000
-
-
-
20,000
 
                   
Net loss from fiscal year ending
                   
February 29, 2004
-
-
-
-
-
-
(208,428)
-
-
(208,428)

See accompanying notes to consolidated financial statements

27
.
 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For Fiscal Years Ending February 28, 2005 and February 29, 2004

 
Preferred
Preferred
Common
Common
Additional
Unissued
 
 
 
Total
 
Stock
Stock
Stock
Stock
Paid-in
stock
Accumulated
Unearned
Unearned
Stockholders
 
Shares
Amount
Shares
Amount
Capital
liability
Deficit
Interest
Compensation
Deficit
Balance, February 29, 2004
8,000
80
10,513,480
10,513
3,213,469
20,000
(3,775,487)
-
-
(531,425)
 
                   
Issuance of common stock
-
-
200,000
200
19,800
(20,000)
-
-
-
-
 
                   
Contributed executive services
-
-
-
-
10,000
-
-
-
-
10,000
 
                   
Issuance of common stock for
                   
compensation and services
-
-
125,000
125
9,500
-
-
-
-
9,625
 
                   
Issuance of common stock
                   
to employees
-
-
70,000
70
21,280
-
-
-
-
21,350
 
                   
Issuance of common stock for
                   
cash
-
-
541,166
541
90,561
-
-
-
-
91,102
 
                   
Issuance of common stock in
                   
exchange for debt
-
-
55,000
55
42,307
-
-
42,362
 
                   
Issuance of common stock
                   
for technology
-
-
32,000
32
5,868
-
-
-
-
5,900
 
                   
Issuance of common stock
                   
for claim settlement
-
-
84,000
84
29,316
-
-
-
-
29,400
 
                   
Conversion of preferred to
                   
common stock
(8,000)
(80)
4,500,000
4,500
(4,420)
-
-
-
-
-
See accompanying notes to consolidated financial statements.
28
 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For Fiscal Years Ending February 28, 2005 and February 29, 2004
 
Preferred
Preferred
Common
Common
Additional
Unissued
 
 
 
Total
 
Stock
Stock
Stock
Stock
Paid-in
stock
Accumulated
Unearned
Unearned
Stockholders
 
Shares
Amount
Shares
Amount
Capital
liability
Deficit
Interest
Compensation
Deficit
Discount factor on common
                   
stock issued to consultants
                   
at below fair value
-
-
65,000
65
22,685
-
-
-
-
15,167
 
                   
Discount factor on common
 
 
 
 
 
 
 
 
 
 
stock issued to officers
                   
at below fair value
-
-
480,000
480
225,120
-
-
-
(206,800)
18,800
                     
Beneficial conversion feature
                   
on warrants issued to
                   
officers at below fair value
-
-
-
-
55,275
-
-
-
(49,133)
6,142
                     
Beneficial conversion feature
                   
on warrants issued to note
                   
holder at below fair value
-
-
-
-
27,225
-
-
(24,200)
-
3,025
                     
Discount factor on common
                   
stock issued to officers
                   
at below fair value
-
-
-
-
79,100
-
-
-
(70,291)
8,809
 
                   
Discount factor on common
                   
stock issued to note
                   
holder at below fair value
-
-
-
-
493,000
-
-
(438,243)
-
54,757
 
                   
Net loss from fiscal year ending February 28, 2005
-
-
-
-
-
-
(250,423)
 
-
(250,423)
Balance, February 28, 2005
0
$ 0
16,665,646
$ 16,665
$ 4,340,086
-
$ (4,025,910)
$ (462,443)
$ (333,807)
$ (465,409)
See accompanying notes to consolidated financial statements.
29
 
 

 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ending February 28, 2005 and February 29, 2004

 
2005
2004
CASH FLOWS FROM OPERATING ACTIVITIES
   
Net loss
$ (250,423)
$ (208,428)
Adjustments to reconcile net loss to net cash used by operating activities:
   
Depreciation and amortization
33,868
38,215
Amortization of beneficial conversion feature
9,167
-
Compensation and interest expense on stock and warrants
97,533
-
Contributed executive services
10,000
10,000
Stock issued for services
30,975
48,100
Stock issued for claim settlement
29,400
-
Allowance for doubtful accounts
9,018
2,335
Provision for slow moving inventory
162,700
2,480
Write Off of product return liability
(61,630)
-
(Gain) loss on disposal of vehicle
(5,100)
5,000
Changes in operating assets and liabilities:
   
Trade receivables
7,624
6,123
Inventories
(281,033)
32,832
Prepaid expenses
-
6,912
Accounts payable
(8,171)
(27,473)
Accrued expenses
(349)
(71,924)
Accrued interest due to related parties
124,559
117,585
Income tax payable
1,600
1,600
Customer deposits
26,000
-
     
Net cash used by operating activities
(64,262)
(36,643)
     
CASH FLOWS FROM INVESTING ACTIVITIES
   
Proceeds from sale of vehicle
5,800
-
Purchase of equipment
(18,234)
(15,956)
     
Net cash used by investing activities
(12,434)
(15,956)

See accompanying notes to consolidated financial statements.

30

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Fiscal Years Ending February 28, 2005 and February 29, 2004

 
2005
2004
CASH FLOWS FROM FINANCING ACTIVITIES
   
Proceeds from sale of common stock
$ 91,102
$ 20,000
Proceeds from related party advances
1,000
115,226
Repayments on related party advances
(60,392)
(19,556)
     
Net cash provided by financing activities
31,710
115,670
     
NET (DECREASE) INCREASE IN CASH
(44,987)
63,072
     
Cash, beginning of year
68,768
5,696
     
Cash, end of year
$ 23,782
$ 68,768
     
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   
     
Cash paid during the year for:
   
     
Interest
$ -
$ -
     
Income taxes
$ -
$ -
     
NON-CASH INVESTING AND FINANCING ACTIVITIES
   
     
Stock issued for services
$ 30,975
$ 48,100
     
Stock issued for settlement of debt
$ -
$ 13,505
     
Stock issued for settlement of claim
$ 29,400
$ -
     
Stock issued for purchase of technology
$ 5,900
$ -

See accompanying notes to consolidated financial statements.

31

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS

Organization

Seychelle Environmental Technologies, Inc. (“SET”), was incorporated under the laws of the State of Nevada on January 23, 1998 as a change in domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.

Seychelle Water Technologies (“SWT”) was formed as a corporation in February 1997 under the laws of the state of Nevada for the purpose of marketing the products of Aqua Vision International (“Aqua Vision”), a private California entity operating since 1996. Prior to January 1998, SWT operations were limited primarily to fundraising and marketing activities.

On January 30, 1998, SET entered into a stock exchange agreement with SWT, whereby SWT shareholders emerged as the majority stockholder of SET. This reverse acquisition resulted in SWT becoming a wholly owned subsidiary of SET. SWT had no material operations for each of the seven fiscal years ending February 28, 2005.

On January 31, 1998, SET attempted a purchase of the assets of Aqua Vision for $9.5 million. Only $1.2 million was paid to the Aqua Vision owners and the transaction was not consummated. Effective February 28, 1999, the Company revised its Purchase Agreement and issued 8,000 shares of its Series “AAA” Preferred Stock Cumulative Preferred Voting Stock (described in Note 7) to Aqua Vision’s owners. As a result, Aqua Vision’s owners became the ultimate controlling stockholder of SET. Because the assets were acquired from existing shareholders, the $1.2 million payment was treated as a distribution and the Series “AAA” stock issuance was treated as a recapitalization.

32

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS, continued

Description of Business

The Company designs, manufactures and supplies water filtration systems to the general public. These systems range from portable water bottles that can be filled from nearly any available source to units, which provide entire water facilities at the point of entry for a facility. There are a number of established companies in the water filtration business, with no one company dominating the business.

During the later part of the fiscal year ending February 28, 2002, the Company began discussions with companies researching new technologies in the field of water filtration including:

1   Ozonation; and,
2   Waste water recovery

During May 2002, the Company completed an agreement to acquire rights to Enviro Care Inc., as well as, all applicable intellectual properties, whereby the Company can sell various ozonation products. The Company believes this agreement will open product markets including home, spas, agriculture, medical and other commercial and industrial applications.

During June 2002, the Company entered into an exclusive agreement with Heibei R.O. Environmental Technologies, whereby the Company can sell reverse osmosis-based products, which is currently being developed in China. The agreement shall be for a period of three years with a performance understanding agreed upon at the end of the second year. The Company will be able to purchase Heibei products for cost plus fifteen percent. The Company believes this agreement will allow the Seychelle brand to be sold at a very competitive price to US China, Asia and other international markets.

33

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS, continued

Also, during June 2002, the Company entered into a License Agreement for a product known as the “Hand Pump Technology.” The Company licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear TM. The Company will pay a two percent royalty and a one- percent license of trademark fee on any sales using this technology during the term of the license. The License Agreement is for an initial term of five years, with five successive five years renewals. The Company intends to market this technology in the United States and internationally.

During 2004, the Company commenced contractual agreements with the   representatives of a Japanese company on an exclusive basis to market and   sell the Company’s entire product line throughout Japan.

The Company sells its products throughout the United States and abroad including Asia. Geographic information for the fiscal years ending February 28, 2005 and February 29, 2004 is as follows:

 
2005
2004
Water filtration products sold to
   
external customers (1) (2) in:
   
     
The United States
$173,213
$462,298
Asia and Abroad
167,893
6,122
     
Total
$341,106
$468,420

(1)     Sales to external customers are attributed based on the country of residence of the customer.

(2)   Long lived assets outside the United States included $50,000 in tooling costs located in Asia at February 28, 2005 and February 29, 2004, respectively.

34

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of SET and its wholly owned subsidiary, SWT, (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectibility is reasonably assured. These criteria are typically met when product is shipped. Revenue is not recognized at the time of shipment if these criteria are not met.

The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Trade receivables generally are due in 30 days. Credit losses have consistently been within management’s expectations. An allowance for doubtful accounts is recorded when it is probable that all or a portion of trade receivables balance will not be collected.  

The Company provides a liability for returned products generally for a period of twelve months. Management periodically reviews its estimate for potential returnable products. Although management believes its recorded liability is adequate, it is at least reasonably possible that such estimate may change in the near term

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the average cost method. Finished goods inventory includes material, labor and manufacturing overhead costs.

35

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Management reviews and estimates realization of inventory on a regular basis with respect to obsolete and slow moving inventory. Although management believes its evaluations are sound, it is at least reasonably possible that such estimates may change in the near term. During the fiscal year ending February 28, 2005, the Company scrapped its previously identified slow moving and obsolete inventory of approximately $162,000.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets. The estimated useful lives used in determining depreciation are three to five years for tooling and five years for computers, furniture and equipment and vehicles. Management evaluates useful lives regularly in order to determine recoverability taking into consideration current technological conditions. Maintenance and repairs are charged to expense as incurred; additions and betterments are capitalized. Upon retirement or sale, the cost and related accumulated depreciation of the disposed assets are removed, and any resulting gain or loss is credited or charged to operations. Fully depreciated assets are not removed from the accounts until physical disposition.

Intangible Assets

Intangible assets include patents, product rights and technology costs. All patent, product rights and technology costs are capitalized and amortized over ten years using the straight-line method. The Company assesses whether there has been a permanent impairment of the value of intangible assets by considering factors such as expected future product revenues, anticipated product demand and prospects and other economic factors.

36

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Accounting For Long-Lived Assets

Long-lived and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In that case, if the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between the carrying amount of the asset and the fair value of the asset.

Customer Deposits

Customer deposits represent advance payments received for products and is recognized as revenue when products are shipped.

Research and Development Expenses

Research and development costs are expensed as incurred and amounted to approximately $12,500 and $25,100 for the fiscal years ending February 28, 2005 and February 29, 2004, respectively, and are included in cost of sales in the accompanying consolidated statements of operations.

Advertising Expenses

Advertising expenses are expensed as incurred. Total advertising expenses amounted to approximately $1,000 and $600 for the fiscal years ending February 28, 2005 and 2004, respectively, and are included in selling expenses in the accompanying consolidated statements of operations.

37

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Concentration of Credit Risk

For the fiscal years ending February 28, 2005 and February 29, 2004, SET had several customers, which individually accounted for at least 10% of total sales. The following table summarizes total sales and accounts receivable for the fiscal years then ended for these customers:

 
2005
2005
2004
2004
 
Sales
Accounts
Sales
Accounts
 
Percentage
Receivable
Percentage
Receivable
         
Customer 1
16%
$2,041
0%
$ 4,123
Customer 2
14%
0
4%
1,998
Customer 3
10%
100
48%
930

Management believes that these revenues can be replaced through the sale of filters and related products to other direct marketing companies. However, there can no assurance that such this will occur which could result in an adverse effect on the Company’s financial condition or results of operations in the future.

For the fiscal years ending February 28, 2005 and February 29, 2004, SET had several vendors, which individually supplied at least 10% of total purchases. The following table summarizes total raw material purchases and accounts payable for the fiscal years then ended.

 
2005
2005
2004
2004
 
Purchase
Accounts
Purchase
Accounts
 
Percentage
Payable
Percentage
Payable
         
Vendor 1
18%
$ 0
13%
$ 0
Vendor 2
11%
0
3 %
0
Vendor 3
10%
1,102
0%
1,005

38

 
 

 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Management believes that these raw materials can be purchased through other comparable suppliers.

Income Taxes

The Company utilizes Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Issuance of Stock for Services

 
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for employee stock-based compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, as permitted by SFAS No. 123; accordingly, compensation expense for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.
 
 
39
 

 
 

 

 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 
For stock options or other securities issued to non-employees, the issuance of such securities is accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Compensation expense is recognized in the financial statements for securities granted to non-employees in the period in which the consideration is obtained from the non-employee.
 

Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of outstanding common shares during the periods presented. Basic loss per share and diluted loss per share are the same amount because the impact of additional common shares that might have been issued under the Company’s stock option plan, warrants and convertible debt would be anti-dilutive.

 
Fair Value of Financial Instruments
 
Statement of Financial Accounting Standards (“SFAS”) No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amounts of the Company’s financial instruments as of February 28, 2005 and February 29, 2004 approximate their respective fair values because of the nature of these instruments. Such instruments consist of cash, accounts receivable and payable, inventory and certain accrued expenses. The fair value of the related party accrued liabilities and notes payable are not determinable.

40

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Management’s Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts, sales returns, inventory reserves, deferred income tax valuation allowances and litigation. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.

Product Return Reserve

The Company provides a reserve for returned products. Such costs are included in cost of sales. Total costs for returned products for the fiscal years ending February 28, 2005 and February 29, 2004 was $nil.

Management reviews and estimates reserve for returned products on a regular basis. Although management believes its evaluations are sound, it is at least reasonably possible that such estimates may change in the near term. During the fiscal year ending February 28, 2005, the Company adjusted its reserve for returned products, which was recorded during fiscal year ending February 28, 2001, as no products had been returned to the Company during the three fiscal years ending February 28, 2005.

41

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Segment Disclosures

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” requires public enterprises to report financial and descriptive information about reportable operating segments and establishes standards for related disclosures about product and services, geographic areas, and major customers. At this time, the Company has only one operating segment.

 
Recent Accounting Pronouncements
 

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling of interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001, and for purchase business combinations completed on or after July 1, 2001. Upon adoption of SFAS No. 142, it also requires that the Company reclassify, if necessary, the carrying amounts of intangible assets and goodwill, based on the criteria in SFAS No. 141.

SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment, at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. Adoption of this statement is not expected to be material.

42

 
 

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , in that it removes goodwill from its impairment scope and allows for different approaches in cash flow estimation. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of. SFAS No. 144 also supersedes the business segment concept in Accounting Principles Board Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions , in that it permits presentation of a component of an entity, whether classified as held for sale or disposed of, as a discontinued operation. However, SFAS No. 144 retains the requirement of Accounting Principals Board Opinion No. 30 to report discontinued operations separately from continuing operations. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001 with earlier application encouraged. Implementation of SFAS No. 144 did not have a material effect on the Company’s results of operations or financial position.

In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation-Transition and Disclosure: An amendment of FASB Statement 123. This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures 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 reporting results. The disclosure provisions of SFAS 148 are applicable for fiscal periods ending after December 15, 2002. The Company has adopted SFAS 148, which has no material effect on the consolidated financial statements.

43

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities , which amends SFAS No. 133 for certain decisions made by the FASB Derivatives Implementation Group.  In particular, SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying instrument to conform it to language used in FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others , and (4) amends certain other existing pronouncements.  This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. In addition, most provisions of SFAS No. 149 are to be applied prospectively.  The adoption of SFAS No. 149 did not have a material impact on the Company’s financial position, cash flows or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”). SFAS 150 changes the accounting for certain financial instruments that under previous guidance issuers could account for as equity. It requires that those instruments are classified as liabilities in balance sheets. The guidance in SFAS 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective on July 1, 2003. The adoption of SFAS 150 did not have a material impact on the Company’s financial position, cash flows or results of operations.

44

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

In December 2004, the FASB published SFAS 123R, “Share Based Payments” (“SFAS 123R). SFAS 123R required that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee share purchase plans. The provisions of SFAS 123R are effective as of the first interim period that begins after June 15, 2005. Accordingly, the Company will implement the revised standard in the third quarter ending November 30, 2005. Currently, the Company accounts for its share-based payment transactions under the provisions of APB 25, which does not necessarily require the recognition of compensation cost in the financial statements. Management is assessing the implications of this revised standard, which may materially impact the Company’s results of operations in the third quarter ending November 30, 2005 and thereafter.


NOTE 3:   PROPERTY AND EQUIPMENT

The following is a summary of property and equipment at February 28, 2005 and February 29, 2004:

 
2005
2004
     
Tooling
$231,266
$216,216
Equipment
21,392
21,392
Vehicles
31,433
33,433
Furniture and fixtures
15,465
15,465
Computer equipment
15,726
15,726
Leasehold equipment
1,000
1,000
 
316,262
369,817
     
Less: Accumulated depreciation
288,941
265,467
Book Value
27,341
37,765
Tooling not in service
72,485
66,575
 
$ 99,826
$104,350


45

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 3:   PROPERTY AND EQUIPMENT, continued

During the fiscal years ending February 28, 2005 and February 29, 2004, the Company sold a vehicle and tooling with an approximate cost and net book value of $700 and $nil, respectively. The gain or loss on disposition of the vehicle and equipment is included in other expenses in the accompanying consolidated statement of operations.

As of February 28, 2005 and February 29, 2004, the Company had purchased tooling to be used in connection with the new reverse osmosis-based products to be manufactured in China. The Company intends on depreciating such tooling with the commencement of production and sale to customers. Depreciation will be computed using the straight-line method over a period of 5 years.

The carrying amount of all property and equipment is evaluated periodically to determine if adjustment to the useful life or to the un-depreciated balance is warranted. As of February 28, 2005, no event has been identified that would indicate an impairment of the value of property and equipment recorded in the accompanying consolidated financial statements.

Total depreciation expense for the fiscal years ending February 28, 2005 and February 29, 2004 was approximately $24,800 and $36,900, respectively.

NOTE 4:   INTANGIBLE ASSETS

The following is a summary of intangible assets at February 28, 2005 and February 29, 2004:
 
2005
2004
Enviro Care technologies
$ 104,000
$ 104,000
Hand pump
8,000
8,000
Patents
16,182
16,182
 
128,182
128,182
     
Less: Accumulated amortization
6,615
5,271
     
 
$ 121,567
$ 122,911
46

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 4:   INTANGIBLE ASSETS, continued

During May 2002, the Company completed an agreement to acquire rights to Enviro Care Inc., as well as, all applicable intellectual properties, whereby the Company can sell various ozonation products. The Company believes this agreement will open product markets including home, spas, agriculture, medical and other commercial and industrial applications. In connection with the agreement, the Company granted 500,000 shares of common stock valued at $0.208 per share, or $104,000. The Company anticipates that it will be utilizing the technology during the fall of 2005. Once fully operational the Company anticipates amortizing the technology using the straight-line method over a period of 5 years.

Also, during June 2002, the Company entered into a License Agreement for a product known as the “Hand Pump Technology.” The Company licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear TM. The Company will pay a two percent royalty and a one- percent license of trademark fee on any sales using this technology during the term of the license. The Company intends to market this technology in the United States and internationally. In connection with the license agreement, the Company granted the licensor 50,000 shares of common stock valued at $0.16 per share, or $8,000. The shares were issued during March 2002. The License Agreement is for an initial term of five years, with five successive five years renewals.


47

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 5:   ACCRUED EXPENSES

Accrued expenses consist of the following at February 28, 2005 and February 29, 2004:

 
2005
2004
     
Accrued legal expenses
$114,985
$115,372
Reserve for returned products
-
61,630
Accrued accounting expenses
6,076
41,046
Accrued rent
14,889
28,477
Accrued claim settlement
12,750
12,750
Accrued credit card purchases
19,134
10,779
Accrued wages and benefits
1,932
1,800
Other accrued expenses
19,134
15,258
     
 
$188,900
$287,112



The accrued legal expenses represent the attorney fees the Company incurred in connection with the SWT stock exchange agreement and purchase of Aqua Vision (NOTE 1), of which approximately $113,500 will be paid in stock.

The accrued settlement represents an estimate of the settlement of an employment-related claim, of which $12,750 will be paid in stock.

NOTE 6: NOTES PAYABLE TO RELATED PARTIES

As the February 28, 2005 and February 29, 2004, the Company received advances of $448,200 and $504,800 from the Company’s primary investor, Tam Irrevocable Trust (“Tam Trust”). These advances bear interest at 10 percent. As of February 28, 2005, $100,000 of these advances is due before February 28, 2006 with the balance of the advances not repayable until after March 1, 2006.

48

 
 

 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 6: NOTES PAYABLE TO RELATED PARTIES, continued

As of February 28, 2005 and February 29, 2004, accrued interest on these advances was approximately $134,500 and $86,000, respectively, which is included in accrued interest due to related parties.

During December 2004, the Company granted the Tam Trust additional common stock of 1,266,667 shares, valued at $76,000 per year, effective March 1, 2002, for additional interest and continued financial support.

As of February 28, 2005 and February 29, 2004, the estimated value of accrued interest on these additional common shares was approximately $228,000 and $152,000, respectively, which is included in accrued interest due to related parties.

On March 29, 2005, the Company granted the Tam Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006 and are exercisable through December 1, 2008. As the warrants provide for the purchase of common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded amortization of approximately $3,000 for the fiscal year ending February 28, 2005.

Additionally, on March 29, 2005, the Company granted the Tam Trust 1,972,133 restricted shares of the Company’s common stock. These shares were granted at a price of $0.03 per share and vest over a three-year period, beginning November 1, 2004. As the Tam Trust was granted the common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these shares of $493,000. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $54,800 for the fiscal year ending February 28, 2005.

49

 
 

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 7:   CAPITAL STRUCTURE

Common Stock

The holders of Common Stock have one vote per share on all matters (including election of Directors) without provisions for cumulative voting. The Common Stock is not redeemable and has no conversion or preemptive rights.

In the event of liquidation of the Company, the holders of Common Stock will share equally in any balance of the Company’s assets available for distribution to them after satisfaction of creditors and the holders of the Company’s senior securities. The Company may pay dividends, in cash or in securities or other property, when and as declared by the Board of Directors from assets legally available. To date, the Company has not declared or paid dividends on its Common Stock.

During May 2002, the Company completed an agreement to acquire rights to Enviro Care Inc., as well as, all applicable intellectual properties, whereby the Company can sell various ozonation products. In connection with the agreement, the Company granted 500,000 shares of common stock valued at $0.208 per share, or $104,000.

On June 6, 2002, the Company entered into a License Agreement for a product known as the “Hand Pump Technology.” In connection with the license agreement, the Company granted the licensor 50,000 shares of common stock valued at $0.16 per share, or $8,000. The shares were issued during March 2002.

During the fiscal year ending February 29, 2004, the Company issued 120,000 shares for compensation; and 250,000 shares for services provided.

During the fiscal year ending February 29, 2004, the Company settled approximately $13,500 of its accrued expenses as of February 28, 2003 through the issuance of 15,000 shares of common stock.

50

 
 

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 7: CAPITAL STRUCTURE, continued

During February 2004, the Company received $20,000 in proceeds for the issuance of 200,000 shares of common stock. The stock was delivered to the investor during March 2004. As of February 29, 2004, the Company recorded the proceeds as an un-issued stock liability in the accompanying consolidated financial statements.

During December 2004, the Company granted the Tam Trust additional common stock of 1,266,667 shares, valued at $76,000 per year, effective March 1, 2002, for additional interest and continued financial support.

During the fiscal year ending February 28, 2005, the Company issued 125,000 shares for compensation; and 70,000 shares for services provided.

During the fiscal year ending February 28, 2005, the Company issued an aggregate of 541,166 common shares to various investors for cash for an approximate total value of $91,100.

During the fiscal year ending February 28, 2005, the Company issued an aggregate of 55,000 shares to various debt holders with an approximate total value of $42,400.

During the fiscal year ending February 28, 2005, the Company issued 32,000 shares to purchase tooling with an approximate value of $5,900.

During the fiscal year ending February 28, 2005, the Company issued 84,000 shares to settle a claim with an approximate total value of $29,400.

During November 2004, the Company entered into a six-month consulting agreement with an individual to provide accounting services for the Company. As consideration for services to be rendered, the consultant received 65,000 restricted shares of the Company’s common stock. The common shares were distributed on November 1, 2004. The Company recorded unearned compensation relating to the estimated value of the shares of $22,750. The Company is amortizing the estimated fair market value of the unearned compensation over a six-month term. The Company has recorded amortization of approximately $15,100 for the fiscal year ending February 28, 2005.
51

 
 

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 7:   CAPITAL STRUCTURE, continued


During December 2004, all Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the Tam Irrevocable Trust.

Additionally, on March 29, 2005, the Company granted the Tam Trust 1,972,133 restricted shares of the Company’s common stock. These shares were granted at a price of $0.03 per share and vest over a three-year period, beginning November 1, 2004. As the Tam Trust was granted the common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these shares of $493,000. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $54,800 for the fiscal year ending February 28, 2005.

Preferred Stock

The Board of Directors has the authority to issue Preferred Stock and to fix and determine its series, relative rights and preferences to the fullest extent permitted by the laws of the State of Nevada and its articles of incorporation. As of February 28, 2005, three classes of Preferred Stock were authorized and none was outstanding.

Series “A” 13.5% Non Voting, Cumulative, Convertible Preferred Stock

Series “A” Preferred Stock has rights which are superior to all other securities of the Company, including upon liquidation and as to payment of dividends, if any, carries a cumulative dividend of 13.5% per annum, is non-voting, and is redeemable by the Company at any time at face value and is convertible into common shares of the Company at the lesser of $10 per share or 85% of the last five closing bid prices.

52

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 7:   CAPITAL STRUCTURE, continued

During April 2001, the Company repurchased for $350,000 all issued and outstanding Series A 13.5 percent non-voting, cumulative preferred stock, $0.01 par value per share and settled all liability for dividends. This repurchase was done in conjunction with a comprehensive settlement agreement with the beneficial owner of the preferred stock. The stock repurchase was funded by a loan made by one of the Company’s principal stockholders.

Series “AA” Non Voting, Cumulative, Convertible Preferred Stock

Series “AA” Preferred Stock had rights superior to all other securities of the Company except to Series “A” Preferred Stock, including upon liquidation and as to payment of dividends, if any, carried a 10% cumulative dividend, was non-voting, redeemable by the Company at any time at face value and was convertible into common shares of the Company at 85% of the last five closing bid prices. On June 14, 1999, all of the Series “AA” Non Voting, Cumulative Convertible Preferred Stock was converted into 1,337,509 shares of Common Stock at the original conversion terms.

Series “AAA” 12 % Cumulative, Convertible Preferred Shares

Series “AAA” Preferred Stock has rights, which are superior to all other securities of the Company except Series “A”, and the Series “AA” Preferred Stock, including upon liquidation and as to payment of dividends, if any. Series “AAA” Cumulative, Convertible Preferred Voting Stock carries a 12% per annum dividend payable in stock or cash, is voting, with each share equal to 100 shares of Common Stock, and is redeemable, at the Company’s option, according to the following procedure: upon written notice of conversion from the holders, the Company shall have 45 days from receipt of such notice to repurchase for cash up to 2,000 shares of the Series “AAA” 12 % Cumulative, Convertible Preferred Shares at $1,000 per share.

53

 
 

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 7:   CAPITAL STRUCTURE, continued

As a result of the settlement of the litigation involving the Company and its former Chairman, in which the Company was seeking to rescind the issuance of all common shares in the Company previously issued to the former Chairman, the number of common shares issuable to the holders pursuant to the conversion provisions of the Series “AAA” Cumulative, Convertible Preferred Shares were reduced from 8,000,000 shares to 4,500,000 shares (but after pro rata adjustments, if any, for stock dividends, stock splits, reverse stock splits, and any other similar capital stock adjustments of a general nature). There are 8,000 shares issued and outstanding at February 29, 2004. The cumulative dividend shall be computed based on the Preferred Stock $80 par value.

In December 2004, all Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the Tam Irrevocable Trust. In addition, all dividends accrued and unpaid on the AAA Preferred were waived.

Cumulative Dividends

Aggregate preferred redemption value and cumulative dividends in arrears at February 29, 2004 is as follows:

Series “AAA”
 
Aggregate redemption value
$ 4,500,000
Per share cum. preferred dividend in arrears
.33
Per share cumulative preferred dividend
.00

As previously noted, during December 2004, the Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock.

54

 
 

 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 7: CAPITAL STRUCTURE, continued

Consulting Agreements

During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services for the Company. As consideration for services to be rendered, the consultants received 480,000 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The first third vested on the effective date of the agreement as an enticement to enter into the agreement.

The fair market value for these options was estimated at the date of grant using a Black-Scholes security pricing model with the following assumptions for the fiscal year 2004: risk-free interest rate of 6.5%; expected life of the option of 3 years; zero dividend yield; and a volatility factor of the expected market price of SET common stock of 250%. The estimated fair market value of the stock as of November 30, 2004 was $225,600 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreements. The Company has recorded compensation expense of approximately $18,800 for the fiscal year ending February 28, 2005.

On March 29, 2005, the Company expanded the consulting agreement with one officer to provide management consulting services for the Company. As consideration for services to be rendered, the consultant received 316,312 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing   on December 1, 2004, 2005 and 2006.

55

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 7:   CAPITAL STRUCTURE, continued

The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $79,100 and recorded to unearned compensation.   The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded compensation expense of approximately $8,800 for the fiscal year ending February 28, 2005.

Warrants

On March 29, 2005, the Company expanded the consulting agreements with two officers to provide management consulting services for the Company. As further consideration for services to be rendered, the consultants were granted 1,000,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. The fair market value of the warrants earned during the period ending November 30, 2004 was estimated at $55,300 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreements. The Company has recorded compensation expense of approximately $6,100 for the fiscal year ending February 28, 2005.

On March 29, 2005, the Company granted the Tam Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. As the warrants provide for the purchase of common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded compensation expense of approximately $3,000 for the fiscal year ending February 28, 2005.

56

 
 

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 7:   CAPITAL STRUCTURE, continued

The fair market value for these warrants was estimated at the date of grant using a Black-Scholes security pricing model with the following assumptions for the fiscal year 2004: risk-free interest rate of 6.5%; expected life of the option of 3 years; zero dividend yield; and a volatility factor of the expected market price of SET common stock of 250%.

A summary of warrant activity is as follows:

Outstanding warrants
Warrants Outstanding
Exercise Price
     
Balance, February 29 ,2004
0
0
Granted
1,500,000
$ 0.225
Exercised
0
0
Canceled
0
0
Balance, February 28, 2005
1,500,000
$ 0.225
     


Stock Compensation Plan

During July 2000, the Company adopted a stock compensation plan to be administered by the Board of Directors, or a Compensation Committee to be appointed by the Board. Consultants, advisors, and employees of the Company are eligible to participate in the Plan. The Plan provides for the issuance of 300,000 shares of common stock to be issued as stock grants, or under stock option agreements. During October 2000, the Company settled approximately $109,200 of its accrued expenses through the issuance of 109,139 shares of common stock.

During the fiscal year ending February 28, 2005, the Company terminated this stock compensation plan.

57

 
 

 

  SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 7:   CAPITAL STRUCTURE, continued

During February 2002, the Company adopted an additional stock compensation plan to be administered by the Board of Directors or a Compensation Committee to be appointed by the Board. The Plan provides for the issuance of 300,000 shares of common stock to be issued as stock grants, or under stock option agreements. During February 2002, the Company issued 10,000 shares for compensation and 232,000 shares for services provided. During the fiscal year ending February 28, 2005, the Company terminated this stock compensation plan.

A summary of stock option activity is as follows:

 
Outstanding options
Stock Options Outstanding
Exercise Price
     
Balance, February 29 ,2004
248,861
Market
Granted
0
 
Exercised
0
 
Canceled
248,861
 
Balance, February 28, 2005
0
 

Contributed Executive Services
 
Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the Company as reported in the Company's Form 10-KSB. The agreement shall be automatically renewed for successive one-year terms unless the Company or employee provides written notice of non-renewal.  

As the President of the Company has decided not to accept his salary until the Company has become profitable, the Company recorded additional paid in capital in the accompanying consolidated statements of changes in stockholders’ deficit.

58

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 8:   INCOME TAXES

The components of the provision for income taxes for the fiscal years ending February 28, 2005 and February 29, 2004 are as follows:

 
2005
2004
Current:
   
State
$1,600
$1,600
Federal
-
-
     
Deferred:
   
State
(16,797)
(6,390)
Federal
(70,591)
(37,096)
     
Valuation allowance
87,388
43,486
     
Provision for income taxes
$1,600
$1,600
     


The reconciliation of the effective tax rates and U.S. statutory tax rates for the fiscal years ending February 28, 2005 and February 29, 2004 are as follows:

 
2005
2004
     
Tax (benefit) of statutory rate
(34%)
(34%)
     
Deferred tax effect of goodwill
   
relating to Aqua Vision Acquisition
(12%)
(12%)
Contributed executive services
3%
3%
Effect of state tax benefit
(3%)
(3%)
Other
4%
4%
Change in valuation allowance
42%
42%
     
Effective tax Rate
0%
0%

59

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 8:   INCOME TAXES, continued

At February 28, 2005, the Company has net operating loss carry forwards, for income tax reporting purposes, of approximately $ 2,872,000 and $1,752,000 available to offset future federal and California taxable income, respectively. The federal carry forwards begin to expire in 2019 and the California carry forwards expire in 2010.

At February 28, 2005, the Company had available tax credit carry forwards comprised of federal and state research and experimentation credits of approximately $8,700 and $5,100, respectively. The research and experimentation credit carry forwards expire through 2023 for federal purposes and do not expire for California purposes.

The components of the net deferred tax asset and (liability) for the fiscal years ending February 28, 2005 and February 29, 2004 are as follows:

 
2005
2004
     
Net operating loss carry forward
$ 922,372
$ 852,372
Accrued interest
63,840
42,560
Inventory & bad debt reserves
14,275
43,372
Other
3,741
2,693
     
Less: Valuation allowance
(1,004,228)
(940,997)
     
Net deferred tax asset (liability)
$ 0
$ 0


NOTE 9:   COMMITMENTS AND CONTINGENCIES

The Company leases an office and production facility under an operating lease that expires in February 2008. As of February 28, 2005, the Company paid $5,544 per month in base rent. The Company must also pay approximately $1,300 per month to cover taxes, maintenance, insurance and certain other operating expenses applicable to the premises.

60

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 9:   COMMITMENTS AND CONTINGENCIES, continued

Total rent expense amounted to approximately $82,900 and $96,400 for the fiscal years ending February 28, 2005 and February 29, 2004, respectively.

Future minimum base lease payments are as follows:

Fiscal Year Ending February 28
2006
$ 69,120
2007
71,712
2008
74,304
   
 
$215,136

Legal Proceedings

During May 2001, Safewater Anywhere LLC filed a lawsuit against Seychelle Water Technologies, Inc., an officer of the Company and others in the Orange County Superior Court. The complaint alleges breach of fiduciary duty, constructive fraud, promissory fraud, rescission, constructive trust, unfair trade practices and conversion. The complaint sought unspecified damages and injunctive relief. During the fiscal year ending February 28, 2002, the Company filed a motion to have the matter set for arbitration / mediation. The court approved the Company’s motion and arbitration / mediation is currently pending. The Company believes that the claims are without merit and intends to aggressively defend the case. Accordingly, no accrual has been made for potential damages.

In February 2002, Mr. Douglas Copp filed a lawsuit on behalf of himself and American Rescue Team International, Inc. against Seychelle Environmental Technologies, an officer of the Company and Nikken, in the U.S. District Court for the District of New Mexico. The Complaint, which is essentially a claim for royalty payments, alleges breach of contract, unfair trade practices, misappropriation of publicity, unjust enrichment, violation of the Lanham Act, and conspiracy. While believes that the claims are without merit and will aggressively defend our rights,

61

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 9:   COMMITMENTS AND CONTINGENCIES, continued

the Company plans to seek an early dismissal because the case was filed in the wrong court. We have not yet responded in this matter. Accordingly, no accrual has been made for potential damages.

On or about January 21, 2004 a lawsuit was filed on behalf of Ms. Letty Garcia against Mr. Carl Palmer and/or Seychelle claiming injuries she suffered from riding an electric scooter allegedly imported by Mr. Palmer and/or Seychelle. This lawsuit was filed in the Superior Court of San Diego, California. A trial was held in May 2005 and all claims against Seychelle were dismissed.

Otherwise, no legal proceedings to which we are a party are pending as of February 28, 2005, and we know of no legal proceedings pending or threatened or judgments entered against any of our directors or officers in his or her capacity as such.

NOTE 10:   RELATED PARTY TRANSACTIONS

Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the Company. The agreement shall be automatically renew for successive one-year terms unless the Company or employee provides written notice of non-renewal.

During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services for the Company. As consideration for services to be rendered, the consultants received 480,000 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $225,600 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the

62

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 10:   RELATED PARTY TRANSACTIONS, continued

consulting agreements. The Company has recorded compensation expense of approximately $18,800 for the fiscal year ending February 28, 2005.

During December 2004, all Series AAA at 12% Cumulative Convert ible
Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the Tam Irrevocable Trust. In addition, all dividends accrued and unpaid on the AAA Preferred were waived.

During December 2004, the Company granted the Tam Trust additional common stock of 1,266,667 shares, valued at $76,000 per year, effective March 1, 2002, for additional interest and continued financial support.

On March 29, 2005, the Company expanded the consulting agreement with one officer to provide management consulting services for the Company. As consideration for services to be rendered, the consultant received 316,312 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing   on December 1, 2004, 2005 and 2006. The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $79,100 and recorded to unearned compensation.   The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded compensation expense of approximately $8,800 for the fiscal year ending February 28, 2005.

Additionally, on March 29, 2005, the Company granted the Tam Trust 1,972,133 restricted shares of the Company’s common stock. These shares were granted at a price of $0.03 per share and vest over a three-year period, beginning November 1, 2004. As the Tam Trust was granted the common stock at below the Company’s market price on the date of grant,

63

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 10:   RELATED PARTY TRANSACTIONS, continued

the Company recorded unearned interest relating to the estimated value of these shares of $493,000. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $54,800 for the fiscal year ending February 28, 2005.

On March 29, 2005, the Company expanded the consulting agreements with two officers to provide management consulting services for the Company. As further consideration for services to be rendered, the consultants were granted 1,000,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. The fair market value of the warrants earned during the period ending November 30, 2004 was estimated at $55,300 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreements. The Company has recorded compensation expense of approximately $6,100 for the fiscal year ending February 28, 2005.

On March 29, 2005, the Company granted the Tam Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. As the warrants provide for the purchase of common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $3,000 for the fiscal year ending February 28, 2005.

64

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 11:   LOSS PER SHARE

 
February 28, 2005
February 29, 2004
Numerator:
   
     
Net loss
$ (250,423)
$ (208,428)
Preferred stock dividends
-
33
     
Loss available to common stockholders
$ (250,423)
$ (208,461)
     
Denominator:
   
     
Weighted average shares outstanding
11,936,767
10,148,521
     
Basic and diluted profit (loss) per share
$ (0.02)
$ (0.02)

Warrants to purchase common stock were outstanding during the 2005 fiscal year (see Note 7) but were excluded in the computation of the diluted loss per share because their inclusion would have an anti-dilutive effect.

Also excluded from the computation of diluted loss per share because of their anti-dilutive effect was preferred stock convertible to approximately  
5,587,000 shares of common stock at February 29, 2004.

NOTE 12:   SUBSEQUENT EVENTS

During March 2005, the Company entered into two lines of credit agreement, totaling $150,000. The lines of credit bear interest at the institutions index rate plus two percent (7.5% at February 28, 2005) and are not repayable until March 31, 2006. The proceeds from the $50,000 line of credit were used to pay down the Note Payable to Related Parties (see Note 6). During May 2005, the Company paid down an additional $25,000 on the Note Payable to Related Parties.

During March 2005, the Company settled approximately $6,000 of its accrued expenses as of February 28, 2005 through the issuance of 17,500 shares of common stock.

65

 
 

 
 
SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of February 28, 2005

NOTE 12: SUBSEQUENT EVENTS, continued

During March 2005, a consultant surrendered to the Company 250,000 of common stock, valued at $32,500, due to failure to perform certain contractual obligations.

During April 2005, the Company settled approximately $228,000 of its accrued interest due to related parties as of February 28, 2005, through the issuance of 1,266,667 shares of common stock to the Company’s primary investor, Tam Trust.

During the three-month period ending May 31, 2005, the Company issued an aggregate of 2,150,000 common shares to various investors for cash for an approximate total value of $535,000.

During the three month period ending May 31, 2005, the Company issued 154,700 in restricted shares, estimated value $47,400, for services provided in connection with Form 10 filing.

During the first five months of fiscal year ending February 28, 2006, a shareholder presented an opportunity to the Company to repurchase approximately 100,000 common shares, at prices under the market ranging from $0.15 to $0.17 that the Company accepted for an approximate total value of $22,800.

Also during July 2005, the Company issued 2,000,000 common shares to an investor for cash for a total value of $450,000.


66

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

As of May 31, 2005

 
May 31,
 
2005
ASSETS
 
CURRENT ASSETS
 
Cash
$ 440,818
Trade receivables, net of allowance for doubtful accounts
78,349
of $-0- as of May 31, 2005
 
Inventories, net
332,414
Prepaid expenses
57,020
 
 
Total current assets
908,601
 
 
PROPERTY AND EQUIPMENT, NET
118,591
   
INTANGIBLE ASSETS
121,232
   
OTHER ASSETS
9,742
   
Total non-current assets
249,565
 
 
TOTAL ASSETS
$ 1,158,166

See accompanying notes to consolidated financial statements.

67

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEET (CONTINUED) (UNAUDITED)

As of May 31, 2005

 
May 31,
 
2005
LIABILITIES AND STOCKHOLDERS' DEFICIT
 
   
CURRENT LIABILITIES
 
Accounts payable
$ 28,731
Accrued expenses
208,065
Line of credit/
50,000
Current portion of Notes Payable to Related Parties
25,000
Accrued interest due to related parties
144,464
Customer deposits
51,485
Income taxes payable
6,400
 
 
Total current liabilities
514,145
   
NOTES PAYABLE TO RELATED PARTIES
348,150
 
 
COMMITMENTS AND CONTINGENCIES
 
   
STOCKHOLDERS' DEFICIT
 
Common stock $.001 par value
19,082
Additional paid-in capital
5,125,688
Accumulated deficit
(4,106,357)
Unearned compensation and interest
(742,542)
 
 
Total stockholders' deficit
295,871
 
 
TOTAL LIABILITIES AND
 
STOCKHOLDERS' DEFICIT
$ 1,158,166
   

See accompanying notes to consolidated financial statements.

68

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For Three-Month Periods Ending May 31, 2005 and 2004
 
2005
2004
     
SALES
$ 237,987
$ 128,547
     
COST OF SALES
76,975
43,374
 
 
 
Gross profit
161,012
85,173
 
 
 
OPERATING EXPENSES
   
Selling
23,475
820
General and administrative
194,795
50,295
 
 
 
Total expenses
218,270
51,115
 
 
 
(LOSS) INCOME FROM OPERATIONS
(57,258)
34,058
     
OTHER INCOME (EXPENSES)
   
Interest expense
(53,753)
(30,542)
Miscellaneous income (expense)
28,846
(2,001)
 
 
 
Total other income (expense)
(24,907)
(32,543)
 
 
 
LOSS BEFORE PROVISION
   
FOR INCOME TAXES
(82,165)
1,515
     
PROVISION FOR INCOME TAXES
1,600
1,600
 
 
 
Net loss
$ (83,765)
$ (85)
 
 
 
BASIC AND DILUTED (LOSS)
   
PER SHARE
$ (0.01)
$ 0.00
     
WEIGHTED AVERAGE NUMBER OF
   
SHARES: BASIC AND DILUTED
14,053,760
10,303,884

See accompanying notes to consolidated financial statements
69

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For Three-Month Periods Ending May 31, 2005 and 2004

 
2005
2004
CASH FLOWS FROM OPERATING ACTIVITIES
   
Net loss
$ (83,765)
$ (85)
Adjustments to reconcile net loss to net
   
cash used by operating activities:
   
Depreciation and amortization
7,026
1,011
Compensation and interest expense on stock and warrants
80,933
-
Contributed executive services
2,500
2,500
Provision for doubtful accounts
-
(3,268)
Reversal of product return liability
-
(61,630)
Changes in operating assets and liabilities:
   
Trade receivables
(58,302)
(5,128)
Inventory
(18,660)
30,047
Prepaid inventory
(49,842)
-
Other current assets
(7,178)
7,061
Accounts payable
3,551
(2,848)
Accrued expenses
18,719
(11,535)
Accrued interest due to related parties
9,945
30,543
Income tax payable
1,600
1,600
Customer deposits
25,574
-
 
 
 
Net cash used by operating activities
(67,899)
(11,732)
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
   
Purchase of equipment
(25,800)
(6,925)
 
 
 
Net cash used by investing activities
(25,800)
(6,925)

See accompanying notes to consolidated financial statements.

70

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(CONTINUED)

For Three-Month Periods Ending May 31, 2005 and 2004

 
2005
2004
CASH FLOWS FROM FINANCING ACTIVITIES
   
Proceeds from sale of common stock
$ 535,735
$ 11,000
Proceeds from line of credit
50,000
-
Repayments on related party advances
(75,000)
(12,230)
 
 
 
Net cash provided (used) by financing activities
510,735
(1,230)
 
 
 
NET INCREASE (DECREASE) IN CASH
417,036
(19,887)
     
Cash, beginning of period
23,782
68,768
 
 
 
Cash, end of period
$ 440,818
$ 48,881
 
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   
     
Cash paid during the year for:
   
     
Interest
$ -
$ -
 
 
 
Income taxes
$ -
$ -
 
 
 
NON-CASH INVESTING AND FINANCING ACTIVITIES
   
     
Stock issued for settlement of debt
$ 53,400
$ 1,867
     
Stock issued for accrued interest
$ 228,000
$ -

See accompanying notes to consolidated financial statements.

71

 
 

 


SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS

Organization

Seychelle Environmental Technologies, Inc. (“SET”), was incorporated under the laws of the State of Nevada on January 23, 1998 as a change in domicile to Royal Net, Inc., a Utah corporation that was originally incorporated on January 24, 1986. Royal Net, Inc. changed its state of domicile to Nevada and its name to Seychelle Environmental Technologies, Inc. effective in January 1998.

Seychelle Water Technologies (“SWT”) was formed as a corporation in February 1997 under the laws of the state of Nevada for the purpose of marketing the products of Aqua Vision International (“Aqua Vision”), a private California entity operating since 1996. Prior to January 1998, SWT operations were limited primarily to fundraising and marketing activities.

On January 30, 1998, SET entered into a stock exchange agreement with SWT, whereby SWT shareholders emerged as the majority stockholder of SET. This reverse acquisition resulted in SWT becoming a wholly owned subsidiary of SET. SWT had no material operations for each of the seven fiscal years ending February 28, 2005.

On January 31, 1998, SET purchased the assets of Aqua Vision for $9.5 million. Only $1.2 million was paid to the Aqua Vision owners and the transaction was not consummated. Effective February 28, 1999, the Company revised its Purchase Agreement and issued 8,000 shares of its Series “AAA” Preferred Stock Cumulative Preferred Voting Stock (described in Note 8) to Aqua Vision’s owners. As a result, Aqua Vision’s owners became the ultimate controlling stockholder of SET. Because the assets were acquired from existing shareholders, the $1.2 million payment was treated as a distribution and the Series “AAA” stock issuance was treated as a recapitalization.

72

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS, continued

Description of Business

The Company designs, manufactures and supplies water filtration systems to the general public. These systems range from portable water bottles that can be filled from nearly any available source to units, which provide entire water facilities at the point of entry for a facility. There are a number of established companies in the water filtration business, with no one company dominating the business.

During the later part of the fiscal year ending February 28, 2002, the Company began discussions with companies researching new technologies in the field of water filtration including -

1   Ozonation; and,
2   Waste water recovery

During May 2002, the Company completed an agreement to acquire rights to Enviro Care Inc., as well as, all applicable intellectual properties, whereby the Company can sell various ozonation products. The Company believes this agreement will open product markets including home, spas, agriculture, medical and other commercial and industrial applications.

During June 2002, the Company entered into an exclusive agreement with Heibei R.O. Environmental Technologies, whereby the Company can sell reverse osmosis-based products, which is currently being developed in China. The agreement shall be for a period of three years with a performance understanding agreed upon at the end of the second year. The Company will be able to purchase Heibei products for cost plus fifteen percent. The Company believes this agreement offers the Company to expand into the home market with a product that is revolutionary and can be produced and sold at a price that is competitive to the market. Additionally, the Company believes the agreement will further enable distribution of portable filtration products.



73

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 1:   ORGANIZATION AND DESCRIPTION OF BUSINESS, continued

Also, during June 2002, the Company entered into a License Agreement for a product known as the “Hand Pump Technology.” The Company licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear TM. The Company will pay a two percent royalty and a one percent license of trademark fee on any sales using this technology during the term of the license. The License Agreement is for an initial term of five years, with five successive five years renewals. The Company intends to market this technology in the United States and internationally.

During 2004, the Company commenced contractual agreements with the
representatives of a Japanese company on an exclusive basis to market and sell the Company’s entire product line throughout Japan.

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of SET and its wholly owned subsidiary, SWT, (collectively, the “Company”). All significant intercompany transactions and balances have been eliminated.

Unaudited Interim Financial Information

The accompanying interim period financial statements together with the related notes are unaudited and, in the opinion of management, include all normal recurring adjustments that the Company considers necessary. Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. Inventories and cost of goods sold have been estimated based on the purchases and sales from the most recent inventory. The interim period financial statements should be read in connection with the audited financial statements and accompanying footnotes.

74

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

The results of operations for the three-month period ending May 31, 2005 are not necessarily indicative of operating results to be expected for the full year.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectibility is reasonably assured. These criteria are typically met when product is shipped. Revenue is not recognized at the time of shipment if these criteria are not met.

The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Trade receivables generally are due in 30 days. Credit losses have consistently been within management’s expectations. An allowance for doubtful accounts is recorded when it is probable that all or a portion of trade receivables balance will not be collected.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the average cost method. Finished goods inventory includes material, labor and manufacturing overhead costs.

Management reviews and estimates realization of inventory on a regular basis with respect to obsolete and slow moving inventory. Although management believes its evaluations are sound, it is at least reasonably possible that such estimates may change in the near term.

Customer Deposits

Customer deposits represent advance payments received for products and is recognized as revenue when products are shipped.

75

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Income Taxes

The Company utilizes Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled.

Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Issuance of Stock for Services

 
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for employee stock-based compensation using the intrinsic method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, as permitted by SFAS No. 123; accordingly, compensation expense for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.
 

For stock options issued to non-employees, the issuance of stock options is accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Compensation expense is recognized in the financial statements for stock options granted to non-employees in the period in which the consideration is obtained from the non-employee.

76

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 2:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Loss Per Common Share

Basic net loss per common share is computed by dividing net loss by the weighted average number of outstanding common shares during the periods presented. Basic loss per share and diluted loss per share are the same amount because the impact of additional common shares that might have been issued under the Company’s stock option plan, warrants and convertible debt would be anti-dilutive.

NOTE 3:   PROPERTY AND EQUIPMENT

The following is a summary of property and equipment at May 31, 2005:

Tooling
$ 256,720
Equipment
21,392
Vehicles
31,433
Furniture and fixtures
15,465
Computer equipment
15,726
Leasehold equipment
1,000
 
341,736
   
Less: Accumulated depreciation
295,630
Book Value
46,106
Tooling not in service
72,385
   
Total
$ 118,491
 
As of May 31, 2005, the Company had purchased tooling to be used in connection with the new reverse osmosis-based products to be manufactured in China. The Company intends on depreciating such tooling with the commencement of production and sale to customers. Depreciation will be computed using the straight-line method over a period of 5 years.

77

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 3:   PROPERTY AND EQUIPMENT, continued

The carrying amount of all property and equipment is evaluated periodically to determine if adjustment to the useful life or to the undepreciated balance is warranted. As of May 31 28, 2005, no event has been identified that would indicate an impairment of the value of property and equipment recorded in the accompanying consolidated financial statements.

Total depreciation expense for the three-month period ending May 31, 2005 and 2004 was approximately $6,800 and $600, respectively.

NOTE 4:   INTANGIBLE ASSETS

The following is a summary of intangible assets at May 31, 2005:

Enviro Care technologies
$ 104,000
Hand pump
8,000
Patents
16,182
   
Subtotal
128,182
   
Less: Accumulated amortization
6,950
   
Total
$ 121,232


During May 2002, the Company completed an agreement to acquire rights to Enviro Care Inc., as well as, all applicable intellectual properties, whereby the Company can sell various ozonation products. The Company believes this agreement will open product markets including home, spas, agriculture, medical and other commercial and industrial applications. The Company anticipates that it will be utilizing the technology during the fall of 2005. Once fully operational the Company anticipates amortizing the technology using the straight-line method over a period of 5 years.

78

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 4:   INTANGIBLE ASSETS, continued

Also, during June 2002, the Company entered into a License Agreement for a product known as the “Hand Pump Technology.” The Company licensed all proprietary rights associated with this technology, including patent #6,136,188 and the trademark Aqua Gear TM. The Company will pay a two percent royalty and a one percent license of trademark fee on any sales using this technology during the term of the license. The Company intends to market this technology in the United States and internationally. The License Agreement is for an initial term of five years, with five successive five years renewals.

NOTE 5:   ACCRUED EXPENSES

Accrued expenses consist of the following at May 31, 2005:

Accrued legal expenses
$115,372
Accrued accounting expenses
41,046
Accrued rent
28,477
Accrued claim settlement
12,750
Accrued credit card purchases
10,779
Other accrued expenses
359
   
 
$208,783

The accrued legal expenses represent the attorney fees the Company incurred in connection with the SWT stock exchange agreement and purchase of Aqua Vision (NOTE 1), of which approximately $113,500 will be paid in stock. .

The accrued settlement represents an estimate of the settlement of an employment-related claim, of which $12,750 will be paid in stock.

79

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 6:   LINES OF CREDIT

During March 2005, the Company entered into two lines of credit agreement, totaling $150,000. The lines of credit bear interest at the institutions index rate plus two percent (7.5% at February 28, 2005) and are not repayable until March 31, 2006. The proceeds from the $50,000 line of credit were used to pay down the Note Payable to Related Parties (see Note 7).

NOTE 7: NOTES PAYABLE TO RELATED PARTIES

During December 2004, the Company granted the Tam Trust additional common stock of 1,266,667 shares, valued at $76,000 per year, effective March 1, 2002, for additional interest and continued financial support.

NOTE 7: NOTES PAYABLE TO RELATED PARTIES, continued

As the May 31, 2005, the Company had advances of $373,150 from the Company’s primary investor, Tam Irrevocable Trust (“Tam Trust”). These advances bear interest at 10 percent and are not repayable until March 1, 2006. During the quarter ending May 31, 2005, the proceeds from the $50,000 line of credit were used to pay down the Note Payable to Related Parties (See Note 6). Additionally, the Company remitted the related party cash of $25,000 during the quarter ending May 31, 2005.

As of May 31, 2005, accrued interest on these advances was approximately $144,500 that is included in accrued interest due to related parties.

On March 29, 2005, the Company granted the Tam Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. As the warrants provide for the purchase of common stock at below the Company’s market price on the date of grant, the

80

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 7: NOTES PAYABLE TO RELATED PARTIES, continued

Company recorded unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $6,100 as of May 31, 2005.

Additionally, on March 29, 2005, the Company granted the Tam Trust 1,972,133 restricted shares of the Company’s common stock. These shares were granted at a price of $0.03 per share and vest over a three-year period, beginning November 1, 2004. As the Tam Trust was granted the common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these shares of $493,000. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $95,900 for the fiscal year ending February 28, 2006.

NOTE 8:   CAPITAL STRUCTURE

Common Stock

During the three-month period ending May 31, 2005, the Company issued an aggregate of 2,150,000 common shares to various investors for cash for an approximate total value of $535,000.

During the three-month period ending May 31, 2005, the Company issued 154,700 in restricted shares, estimated value $47,400, for services provided in connection with Form 10 filing.

Preferred Stock

The Board of Directors has the authority to issue Preferred Stock and to fix and determine its series, relative rights and preferences to the fullest extent permitted by the laws of the State of Nevada and its articles of incorporation. As of February 28, 2005, three classes of Preferred Stock were authorized and none was outstanding.

81

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 8:   CAPITAL STRUCTURE, continued

Consulting Agreements

During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services for the Company. As consideration for services to be rendered, the consultants received 480,000 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $225,600 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded amortization of approximately $37,600 as of May 31, 2005.

On March 29, 2005, the Company expanded the consulting agreement with one officer to provide management consulting services for the Company. As consideration for services to be rendered, the consultant received 316,312 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing   on December 1, 2004, 2005 and 2006. The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $79,100 and recorded to unearned compensation.   The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded amortization of approximately $15,400 as of May 31, 2005.  

Warrants

On March 29, 2005, the Company expanded the consulting agreements with two officers to provide management consulting services for the Company. As further consideration for services to be rendered, the consultants were granted 1,000,000 warrants redeemable on restricted

82

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 8:   CAPITAL STRUCTURE, continued

shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. The fair market value of the warrants earned during the period ending November 30, 2004 was estimated at $55,300 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded amortization of approximately $10,700 as of May 31, 2005.

On March 29, 2005, the Company granted the Tam Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. As the warrants provide for the purchase of common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded amortization of approximately $6,100 as of May 31, 2005 .

The fair market value for these warrants was estimated at the date of grant using a Black-Scholes security pricing model with the following assumptions for the fiscal year 2004: risk-free interest rate of 6.5%; expected life of the option of 3 years; zero dividend yield; and a volatility factor of the expected market price of SET common stock of 250%.


83

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 9:   RELATED PARTY TRANSACTIONS

Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the Company. The agreement shall be automatically renew for successive one-year terms unless the Company or employee provides written notice of non-renewal.

During November 2004, the Company entered into consulting agreements with two officers to provide management consulting services for the Company. As consideration for services to be rendered, the consultants received 480,000 restricted shares of the Company’s common stock at $.225 per share (below market). The common shares are to be distributed in equal installments commencing on December 1, 2004, 2005 and 2006. The fair market value of the options earned during the period ending November 30, 2004 was estimated at $225,600 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreements. The Company has recorded accumulated compensation expense of approximately $37,600 as of May 31, 2005.

During December 2004, all Series AAA at 12% Cumulative Convertible Preferred Shares were converted into 4,500,000 shares of restricted common stock issued to the Tam Irrevocable Trust. In addition, all dividends accrued and unpaid on the AAA Preferred were waived.

During December 2004, the Company granted the Tam Trust additional common stock of 1,266,667 shares, valued at $76,000 per year, effective March 1, 2002, for additional interest and continued financial support.

On March 29, 2005, the Company expanded the consulting agreement with one officer to provide management-consulting services for the Company. As consideration for services to be rendered, the consultant received 316,312 restricted shares of the Company’s common stock at $0.03 per share (below market). The common shares are to be distributed in equal installments commencing   on December 1, 2004, 2005 and 2006.

84

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 9:   RELATED PARTY TRANSACTIONS, continued

The fair market value of the restricted share earned during the period ending November 30, 2004 was estimated at $79,100 and recorded to unearned compensation.   The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreement. The Company has recorded compensation expense of approximately $15,400 as of May 31, 2005.
 
Additionally, on March 29, 2005, the Company granted the Tam Trust 1,972,133 restricted shares of the Company’s common stock. These shares were granted at a price of $0.03 per share and vest over a three-year period, beginning November 1, 2004. As the Tam Trust was granted the common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these shares of $493,000. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $95,900 as of May 31, 2005.

On March 29, 2005, the Company expanded the consulting agreements with two officers to provide management-consulting services for the Company. As further consideration for services to be rendered, the consultants were granted 1,000,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. The fair market value of the warrants earned during the period ending November 30, 2004 was estimated at $55,300 and recorded to unearned compensation. The Company is amortizing the estimated fair market value of the unearned compensation over the three-year term of the consulting agreements. The Company has recorded compensation expense of approximately $10,700 as of May 31, 2005.

85

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 9:   RELATED PARTY TRANSACTIONS, continued

On March 29, 2005, the Company granted the Tam Trust 500,000 warrants redeemable on restricted shares of the Company’s stock at $.225 per share. The warrants are distributed in equal installments commencing on December 1, 2004, 2005 and 2006 but are exercisable through December 1, 2008. As the warrants provide for the purchase of common stock at below the Company’s market price on the date of grant, the Company recorded unearned interest relating to the estimated value of these warrants of $27,200. The Company is amortizing the estimated fair market value of the unearned interest over a three-year term. The Company has recorded interest expense of approximately $7,600 as of May 31, 2005.

During May 2005, the Company paid down $25,000 on the Note Payable to Related Parties.

Contributed Executive Services
 
Effective December 1, 2001, the Company entered into an employment agreement with the President of the Company. The agreement is for five years and provides for a salary of $10,000 per year plus one percent of the net after tax profits of the Company as reported in the Company's Form 10-KSB. The agreement shall be automatically renew for successive one-year terms unless the Company or employee provides written notice of non-renewal.  

As the President of the Company has decided not to accept his salary until the Company has become profitable, the Company recorded additional paid in capital in the accompanying consolidated statements of changes in stockholders’ deficit.

86

 
 

 

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of May 31, 2005

NOTE 10:   SUBSEQUENT EVENTS

During the first five months of fiscal year ending February 28, 2006, a shareholder presented an opportunity to the Company to repurchase approximately 100,000 common shares, at prices under the market ranging from $0.15 to $0.17 that the Company accepted for an approximate total value of $22,800.

Also during July 2005, the Company issued 2,000,000 common shares to an investor for cash for a total value of $450,000.




87

 
 

 

PART III

ITEM 1. Index to Exhibits .

Exhibit No.
 
Description
   
2A*
Plan of Exchange between Seychelle Environmental Technologies, Inc. and Seychelle Water Technologies, Inc.
   
3A*
Articles of Incorporation
   
3B*
Articles of Merger of Royal Net, Inc. into Seychelle Environmental Technologies, Inc
   
3C*
Amendment to Articles of Incorporation re: Series "A" Preferred Stock
   
3D*
Amendment to Articles of Incorporation re: Series "AA" Preferred Stock
   
3E*
Amendment to Articles of Incorporation re: Series "AAA" Preferred Stock
   
3F*
Bylaws
   
10A*
Purchase Agreement with Aqua Vision
   
10B*
Amended Purchase Agreement with Aqua Vision
   
10C*
Purchase Agreement with Aqua Gear
   
10D*
Employment Contract with Carl Palmer
   
10E**
Employment Contract with Richard Parsons
   
10F**
Employment Contract with James Place
   
23**
Auditor’s Consent
* Previously filed with the Securities and Exchange Commission
** Incorporated herein

 
SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.

Dated: September 16, 2005

By: /s/ Carl Palmer
Carl Palmer
President
88

Exhibit 10E
AGREEMENT

THIS AGREEMENT is made and entered into on the day and date indicated below by and between Seychelle Environmental Technologies, Inc. ("The Company") and Richard Parsons ("PARSONS").

WHEREAS , The Company wishes to issue a total of 240,000 of its common shares;

WHEREAS, PARSONS wishes to acquire common shares of the Company under the terms and conditions of this Agreement, and the Company wishes to transfer the Shares under the terms and conditions of this Agreement; and

WHEREAS , all parties hereto wish to be governed by the terms and conditions thereof;

NOW, THEREFORE , in consideration of the premises and mutual covenants in this Agreement and intending to be legally bound, the parties hereto agree as follows:

SECTION 1. TRANSFER OF SHARES

1.1 Transfer of Shares. The Company agrees that it will issue to PARSONS a total of 240,000 Shares at a price of $.03 per share, subject to the terms and conditions of this Agreement.

1.2 Transfer of Shares Free and Clear of Any Restrictions Except as Indicated. The parties hereby agree and warrant that such transfer of the Shares will be made free and clear of any liens or encumbrances whatsoever and any other restrictions such as would fail to give PARSONS full, complete, and unencumbered title to the Shares; provided, however, that PARSONS hereby grants to The Company the right to call a portion of the Shares as indicated below at the original purchase price should PARSONS leave the employment of the Company prior to December 1, 2007. The Company shall have one year to exercise its call provision as to any Shares that become eligible for such provision. The Company' call provisions are as follows:

Prior to December 1,2005, all Shares may be called;
Prior to December 1,2006, a total of 160,000 Shares may be called; and
Prior to December 1,2007, a total of 80,000 Shares may be called.

1.3 Extinguishment of Call Provisions. Notwithstanding the requirements of section 1.2 above, in the event of the death or permanent disability (as defined by the rules and regulations of the Social Security Administration) of PARSONS, or upon the transfer of greater than 50% ownership of the Company to an unaffiliated third party, the call provisions of section 1.2 above shall no longer apply. PARSONS, or his successors and assigris, shall have the right to remove any restrictive endorsements or legends from any and all stock certificates, and this Agreement shall be terminated.

1.4 Transfer of Shares Subject to this Agreement. The transfer of the Shares to PARSONS shall apply to his heirs, legatees, estate, personal representatives, administrators, executors or successors in interest.
1
 
 

 

SECTION 2. ESCROW OF THE SHARES

2.1 Certificates. PARSONS hereby agrees to place three (3) stock certificates, each for 80,000 Shares with the Company. The shares will be held in escrow by the Company to secure the faithful performance of this Agreement. On or after each December 1st, beginning December 1, 2005, one stock certificate will be released from escrow to PARSONS until all certificates have been released; provided that PARSONS is employed by the Company on said dates, except as provided in section 1.3 above.

2.2 Escrow of Shares Applies to Successors. The escrow provisions of the Shares transferred by PARSONS shall apply to his heirs, legatees, estate, personal representatives, administrators, executors or successors in interest.

SECTION 3. TRANSFER PROVISIONS

Restriction on Transfers. Each party hereto agrees that he will not, without the prior written consent of the other party, sell, give, assign, or otherwise transfer ownership (any such event being referred to as "sell or transfer") any of the common shares of the Company owned by him at any time except pursuant to the provisions of this Agreement, and any attempt to sell or transfer-any of their common shares other than in accordance with the terms and provisions of this Agreement shall be null and void and of no effect whatsoever.

SECTION 4. DISPOSITION OF SHARES UPON BANKRUPTCY OR LIQUIDATION OF SHAREHOLDER

4.1 Mandatory Purchase By The Company Upon Bankruptcy or Liquidation of PARSONS. Upon the filing of a petition for Bankruptcy or Liquidation by PARSONS, the Company shall have the immediate and unqualified right to purchase and PARSONS (or successors and assigns) shall sell all of the common shares owned by PARSONS which are subject to a call provision at the original purchase price of the common stock. Such sale and purchase shall take place at the principal offices of the Company no later than the one hundred twentieth (l20th) day after the date of occurrence of the event giving rise to the mandatory purchase, upon the applicable terms and conditions hereinafter set forth in this Agreement.

4.2 Terms of Payment for Shares. Payment of the purchase price for the common shares shall be made in cash or past services at the closing, except as otherwise provided herein.

4.3 Transfer of Shares Subject to this Agreement. The provisions of this Section 4 shall apply to the heirs, legatees, estate, personal representatives, administrators, executors or successors in interest of the parties or any subsequent holder, as the case may be, and each of them shall hold such common shares subject to rights, obligations and restrictions set forth in this Agreement.

2
 
 

 

SECTION 5. RESTRICTIVE ENDORSEMENTS .

5.1 Placing Restrictive Endorsements on Certificates Representing the Shares. The certificates representing the Shares during the term of this Agreement shall bear such notation or other statement concerning the restrictions on such Shares imposed by this Agreement as shall be required by Colorado law in order to make these restrictions enforceable against subsequent shareholders.

5.2 Removal of Restrictive Endorsements. If, for any reason, any of the Shares are no longer subject to the restrictions and provisions hereof, the Company shall promptly issue, execute and deliver a new certificate or certificates for such Shares without such endorsement upon the request of the holder thereof and the surrender to the Company of the certificates containing such endorsement.

SECTION 6. TRANSFER OF SHARES .

6.1 Restriction on Transfer. PARSONS hereby authorizes and directs the Company not to make any transfer of record of any of the Shares subject to this Agreement otherwise than in accordance with the terms and provisions hereof.

SECTION 7. TERM OF AGREEMENT .

7.1 Termination of this Agreement. This Agreement shall remain in effect until terminated by (a) written agreement of all of the parties hereto (unless any such party and any permitted transferee thereof no longer own Shares in the Company, in which event such party's agreement to terminate will not be necessary); (b) cessation of the Company's business and winding up of its affairs; or (c) in accordance with section 1.3 above.

7.2 Removal of Restrictive Endorsements. Upon termination of this Agreement, the Shareholders, or any subsequent holder of their Shares, shall surrender the certificate or certificates representing their Shares to the Company, and the Company shall issue a new certificate or certificates in lieu thereof for an equal number of Shares without the restrictive endorsement referred to herein.

SECTION 8. WARRANTIES

8.1 Warranties. Each party hereto represents and warrants to each other party hereto that he has the authority to enter into this Agreement, to perform all terms and conditions thereunder, and to be bound thereby.

8.2 Survival of Warranties. The warranties and representations contained herein shall survive the termination date in Section 7 above for a period of two years from the date thereof.


3
 
 

 

SECTION 9. NOTICES .

9.1 Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed first class, postage prepaid, by registered or certified mail to the intended recipient at their address as set forth in the records of the Company from time to time.

SECTION 10. MISCELLANEOUS .

10.1 Miscellaneous. This Agreement sets forth the entire understanding and agreement of the parties hereto concerning the subject matter hereof. No representation, promise, inducement or statement of intention has been made by or on behalf of any party hereto concerning the subject matter hereof which is not set forth in this Agreement, except that the parties hereto hereby acknowledge and agree that this Agreement is intended to and shall supersede all previous plans and agreements, verbal or otherwise, by and between any party hereto and the Company regarding the Company and its business.

10.2 Applicable Law. This Agreement was contracted in Nevada and shall be subject to the laws thereof.

IN WITNESS WHEREOF , the parties hereto have executed this Agreement on the 1st day of December 2004.



/s/ SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.



/s/ RICHARD PARSONS, individually


4

Exhibit 10F
AGREEMENT

THIS AGREEMENT is made and entered into on the day and date indicated below by and between Seychelle Environmental Technologies, Inc. ("The Company") and James Place ("PLACE").

WHEREAS, The Company wishes to issue a total of 240,000 of its common shares;

WHEREAS , PLACE wishes to acquire common shares of the Company under the terms and conditions of this Agreement, and the Company wishes to transfer the Shares under the terms and conditions of this Agreement; and

WHEREAS, all parties hereto wish to be governed by the terms and conditions thereof;

NOW, THEREFORE , in consideration of the premises and mutual covenants in this Agreement and intending to be legally bound, the parties hereto agree as follows:

SECTION 1. TRANSFER OF SHARES

1.1 Transfer of Shares. The Company agrees that it will issue to PLACE a total of 240,000 Shares at a price of $.03 per share, subject to the terms and conditions of this Agreement.

1.2 Transfer of Shares Free and Clear of Any Restrictions Except as Indicated. The parties hereby agree and warrant that such transfer of the Shares will be made free and clear of any liens or encumbrances whatsoever and any other restrictions such as would fail to give PLACE full, complete, and unencumbered title to the Shares; provided, however, that PLACE hereby grants to The Company the right to call a portion of the Shares as indicated below at the original purchase price should PLACE leave the employment of the Company prior to December 1, 2007. The Company shall have one year to exercise its call provision as to any Shares that become eligible for such provision. The Company's call provisions are as follows:

Prior to December 1, 2005, all Shares may be called;
Prior to December 1,2006, a total of 160,000 Shares may be called; and
Prior to December 1,2007, a total of 80,000 Shares may be called.

1.3 Extinguishment of Call Provisions. Notwithstanding the requirements of section 1.2 above, in the event ofthe death or permanent disability (as defined by the rules and regulations of the Social Security Administration) of PLACE, or upon the transfer of greater than 50% ownership of the Company to an unaffiliated third party, the call provisions of section 1.2 above shall no longer apply. PLACE, or his successors and assigns, shall have the right to remove any restrictive endorsements or legends from any and all stock certificates, and this Agreement shall be terminated.

1.4 Transfer of Shares Subject to this Agreement. The transfer of the Shares to PLACE shall apply to his heirs, legatees, estate, personal representatives, administrators, executors or successors in interest.

1
 
 

 

SECTION 2. ESCROW OF THE SHARES

2.1 Certificates. PLACE hereby agrees to place three (3) stock certificates, each for 80,000 Shares with the Company. The shares will be held in escrow by the Company to secure the faithful performance of this Agreement. On or after each December 1st, beginning December 1, 2005, one stock certificate will be released from escrow to PLACE until all certificates have been released; provided that PLACE is employed by the Company on said dates, except as provided in section 1.3 above.

2.2 Escrow of Shares Applies to Successors. The escrow provisions of the Shares transferred by PLACE shall apply to his heirs, legatees, estate, personal representatives, administrators, executors or successors in interest.

SECTION 3. TRANSFER PROVISIONS

Restriction on Transfers. Each party hereto agrees that he will not, without the prior written consent of the other party, sell, give, assign, or otherwise transfer ownership (any such event being referred to as "sell or transfer") any of the common shares ofthe Company owned by him at anytime except pursuant to the provisions of this Agreement, and any attempt to sell or transfer any of their common shares other than in accordance with the terms and provisions of this Agreement shall be null and void and of no effect whatsoever.

SECTION 4. DISPOSITION OF SHARES UPON BANKRUPTCY OR LIQillDATION OF SHAREHOLDER

4.1 Mandatory Purchase By the The Company Upon Bankruptcy or Liquidation of PLACE. Upon the filing of a petition for Bankruptcy or Liquidation by PLACE, the Company shall have the immediate and unqualified right to purchase and PLACE( or successors and assigns) shall sell all of the common shares owned by PLACE which are subject to a call provision at the original purchase price of the common stock. Such sale and purchase shall take place at the principal offices of the Company no later than the one hundred twentieth (120th) day after the date of occurrence of the event giving rise to the mandatory purchase, upon the applicable terms and conditions hereinafter set forth in this Agreement.
.   -
4.2 Terms of Payment for Shares. Payment of the purchase price for the common shares shall be made in cash or past services at the closing, except as otherwise provided herein.

4.3 Transfer of Shares Subject to this Agreement. The provisions of this Section 4 shall apply to the heirs, legatees, estate, personal representatives, administrators, executors or successors in interest of the parties or any subsequent holder, as the case may be, and each of them shall hold such common shares subject to rights, obligations and restrictions set forth in this Agreement.


2
 
 

 

SECTION 5. RESTRICTIVE ENDORSEMENTS .

5.1 Placing Restrictive Endorsements on Certificates Representing the Shares. The certificates representing the Shares during the term of this Agreement shall bear such notation or other statement concerning the restrictions on such Shares imposed by this Agreement as shall be required by Colorado law in order to make these restrictions enforceable against subsequent shareholders.

5.2 Removal of Restrictive Endorsements. If, for any reason, any of the Shares are no longer subject to the restrictions and provisions hereof, the Company shall promptly issue, execute and deliver a new certificate or certificates for such Shares without such endorsement upon the request of the holder thereof and the surrender to the Company of the certificates containing such endorsement.

SECTION 6. TRANSFER OF SHARES.

6.1 Restriction on Transfer. PLACE hereby authorizes and directs the Company not to make any transfer of record of any of the Shares subject to this Agreement otherwise than in accordance with the terms and provisions hereof.

SECTION 7. TERM OF AGREEMENT.

7.1 Termination of this Agreement. This Agreement shall remain in effect until terminated by (a) written agreement of all of the parties hereto (unless any such party and any permitted transferee thereof no longer own Shares in the Company, in which event such party's agreement to terminate will not be necessary); (b) cessation of the Company's business and winding up of its affairs; or (c) in accordance with section 1.3 above.

7.2 Removal of Restrictive Endorsements. Upon termination of this Agreement, the Shareholders, or any subsequent holder of their Shares, shall surrender the certificate or certificates representing their Shares to the Company, and the Company shall issue a new certificate or certificates in lieu thereof for an equal number of Shares without the restrictive endorsement referred to herein.

SECTION 8. WARRANTIES

8.1 Warranties. Each party hereto represents and warrants to each other party hereto that he has the authority to enter into this Agreement, to perform all terms and conditions thereunder, and to be bound thereby.

8.2 Survival of Warranties. The warranties and representations contained herein shall survive the termination date in Section 7 above for a period of two years from the date thereof.



3
 
 

 

SECTION 9. NOTICES.

9.1 Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed firstclass, postage prepaid, by registered or certified mail to the intended recipient at their address as set forth in the records of the Company from time to time.

SECTION 10. MISCELLANEOUS.

10.1 Miscellaneous. This Agreement sets forth the entire understanding and agreement of the parties hereto concerning the subject matter hereof. No representation, promise, inducement or statement of intention has been made by or on behalf of any party hereto concerning the subject matter hereof which is not set forth in this Agreement, except that the parties hereto hereby acknowledge and agree that this Agreement is intended to and shall supersede all previous plans and agreements, verbal or otherwise, by and between any party hereto and the Company regarding the Company and its business.

10.2 Applicable Law. This Agreement was contracted in Nevada and shall be subject to the laws thereof.


IN WITNESS WHEREOF , the parties hereto have executed this Agreement on the 1 st day of December 2004.



/s/ SEYCHELLE ENVIRONMENTAL TECHNOLOGIES, INC.


/s/ James Place

4



Exhibit 23


ARMANDO C. IBARRA
Certified Public Accountants
A Professional Corporation

Armando C. Ibarra, C.P.A
Members of the CaJifomia Sodety of Certified Public Accountants
Armando Ibarra, Jr., C.P.A., JD
Members of the American Institute of Certified Public Accountanls
 
Registered with the Puhlic Company Accounting Oversight Board

September 15,2005

To Whom It May Concern:

The firm of Armando C. Ibarra, Certified Public Accountants, APC consents to the inclusion of our report of August 16, 2005, on the audited consolidated financial statements of Seychelle Environmental Technologies, Inc., as of February 28, 2005 and February 29, 2004, in any filings that are necessary now or in the near future with the U.S. Securities and Exchange Commission.

Very truly yours,

/s/ Armando C. Ibarra, CPA
ARMANDO C. IBARRA, C.P.A.





371 E. Street, Chula Vista, CA 91910
Tel: (619) 422-1348
Fax: (619) 422-1465