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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission File Number
0-22971
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ZEROS USA, Inc.
(Exact name of Registrant as specified in its charter)
Texas 76-0520236
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
507 NORTH BELT EAST, SUITE 550, HOUSTON, TEXAS 77060
(Address of principal executive offices)
(281) 448-6070
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ ] No [X]
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Securities to be registered pursuant to Section 12(g) of the Act.
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ZEROS USA, INC.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Financial Statements of ZEROS USA, Inc.
Condensed Balance Sheets
March 31, 1997 and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Operations
Three and Nine months ended December 31, 1997 . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Cash Flows
Three and Nine months ended December 31, 1997 . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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ZEROS USA, INC.
CONDENSED BALANCE SHEETS
PART 1 - FINANCIAL INFORMATION
(UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS ANALYSIS OR PLAN OF OPERATION
March 31, December 31,
1997 1997
------------ ------------
ASSETS
Current assets:
Cash ..................................................................................... $ 299,741 $ 8,465
Certificates of deposit (Note 5) ......................................................... 474,000
Contracts receivable, current net of an allowance for doubtful contracts of
$0 (Note 2) ......................................................................... 1,800,000 4,500,000
------------ ------------
Total current assets ................................................................ 2,099,741 4,982,465
------------ ------------
Property and equipment:
Office equipment ......................................................................... 16,292 27,023
Less accumulated depreciation ............................................................ (815) (4,171)
------------ ------------
Property and equipment, net ......................................................... 15,477 22,852
------------ ------------
Other assets:
Contracts receivable, noncurrent (Note 2) ................................................ 2,729,752 7,319,629
Master license costs (Note 4) ............................................................ 30,000 30,000
Investment (Note 3) ...................................................................... 25,000 25,000
Investments - other (Note 12) ............................................................ 330,152
Contract rights and other assets (Note 12) ............................................... 190,000
Organizational costs less amortization of $12,573 ........................................ 63,385 53,477
Permit costs ............................................................................. 10,000 10,000
Deposits ................................................................................. 43,700
Total other assets .................................................................. 2,858,137 8,001,958
------------ ------------
Total assets .................................................................................. $ 4,973,355 $ 13,007,275
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................................................... 59,992 46,700
Note payable (Note 5) .................................................................... 474,000
Debentures payable (Note 6) .............................................................. 885,500 1,928,084
Accrued interest ......................................................................... 9,957 192,567
Deferred income taxes (Note 10) .......................................................... 639,600 1,575,193
------------ ------------
Total current liabilities .......................................................... 1,595,049 4,216,544
Long-term debt:
Long-term contract payable (Note 7) ...................................................... 45,096 180,382
Series A convertible bonds (Note 8) ...................................................... 1,097,117
Deferred income taxes (Note 10) .......................................................... 399,320 567,001
Deferred revenue, licensing contracts (Note 9) ........................................... 1,127,948 2,819,871
Minority interest ........................................................................ 3,235
------------ ------------
Total long-term debt ................................................................ 3,170,648 8,880,915
------------ ------------
Shareholders' equity (Note 11):
Preferred stock, $.001 par value, 20,000,000 authorized, 13,315,000 shares
issued and outstanding 13,315 Common stock, $.001 par value, 20,000,000
shares authorized, 12,490,000 shares issued
and 8,490,000 shares outstanding .................................................... 26,000 12,490
Additional paid in capital ............................................................... 532,880
Retained earnings ........................................................................ 1,776,707 3,657,675
Less - common stock in treasury, 4,000,000 shares, at cost (Note 11) ..................... (90,000)
------------
Total shareholders' equity ..................................................... 1,802,707 4,126,360
------------
Total liabilities and shareholders' equity ............................... $ 4,973,355 $ 13,007,275
============ ============
The accompanying notes are an integral part of these financial statements.
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ZEROS USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED ENDED
DEC. 31, 1997 DEC. 31, 1997
------------- -------------
REVENUES - licensing (Notes 1 and 13) $ 3,383,845 $ 5,075,768
COSTS AND EXPENSES:
General and administrative expenses 698,803 2,284,928
OTHER INCOME (EXPENSE):
Interest expense (154,944) (333,889)
Interest income 237,235 527,291
----------- -----------
Earnings before income taxes 2,767,333 2,984,242
Income tax provision (Note 10) 1,023,082 1,103,274
----------- -----------
Net earnings $ 1,744,251 $ 1,880,968
=========== ===========
Primary earnings per share (Note 1) $ .21 $ .27
=========== ===========
Fully diluted earnings per share (Note 1) $ .07 $ .16
=========== ===========
The accompanying notes are an integral part of these financial statements.
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ZEROS USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Nine Months
ended ended
Dec. 31, 1997 Dec. 31, 1997
------------- -------------
OPERATING ACTIVITIES:
Net earnings .............................................................. $ 1,744,251 $ 1,880,968
Adjustments to reconcile net earnings (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ........................................ 4,624 13,264
Preferred and common stock issued for services rendered to
the Company .......................................................... 296,950
Preferred stock issued to licensees pursuant to agreements ........... 6,000 22,500
Common stock issued to related party for manufacturing rights ........ 30,000
Preferred stock issued to related party for certain
assets and rights .................................................... 90,000 90,000
(Increase) decrease in contract receivables, trade ................... (3,618,689) (5,597,954)
Increase (decrease) in:
Accounts payable, trade ......................................... (13,292)
Accrued interest ................................................ 100,358 182,609
Deferred income taxes ........................................... 1,023,082 1,103,274
Accrued interest on contract payable ............................ 45,095 135,287
----------- -----------
Net cash used in operating activities
(605,279) (1,856,394)
INVESTING ACTIVITIES:
Deposits .................................................................. (700) (43,700)
Purchase of certificates of deposit ....................................... (59,000) (474,000)
Purchase of equipment ..................................................... (1,199) (10,731)
Purchase of contract rights and other assets .............................. (190,000) (190,000)
Investments - other ....................................................... (221,389) (330,152)
----------- -----------
Net cash used in investing activities ..................................... (472,288) (1,048,583)
FINANCING ACTIVITIES:
Proceeds from debentures .................................................. 1,042,584
Proceeds from notes payable ............................................... 59,000 474,000
Proceeds from Series A convertible bonds .................................. 962,117 1,097,117
----------- -----------
Net cash provided by financing activities ................................ 1,021,117 2,613,701
----------- -----------
Increase (decrease) in cash and cash equivalents .......................... (56,450) (291,276)
Cash and cash equivalents, beginning of period ............................ 64,915 299,741
----------- -----------
Cash and cash equivalents, end of period .................................. $ 8,465 $ 8,465
=========== ===========
The accompanying notes are an integral part of these financial statements.
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ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ZEROS USA, Inc., (the "Company") was incorporated in the state of Texas
on November 12, 1996. The Company develops and sells ZEROS approved licenses for
a technology having use in industrial waste systems. The Company has a master
license on the system (the "System") called "Zero-emission Energy Recycling
Oxidation System" or "ZEROS" - an energy recycling oxidation system. The Company
sells licenses for the technology and Systems to qualified-end users both
nationally and internationally. The books and records of the Company are
prepared on the accrual basis for financial reporting purposes and the cash
basis for federal income tax purposes. The Company has elected a March 31 fiscal
year end for both financial and tax reporting purposes.
BASIS OF PRESENTATION AND INTERIM PERIOD
The accompanying unaudited financial statements have been prepared by
the Company without audit, pursuant to rules and regulations of the Securities
and Exchange commission (the "SEC") which permit certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles to be condensed or
omitted. In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (which are of a normal recurring nature)
necessary for a fair presentation of the financial statements. The results of
operations for the 3 and 9 month periods ended December 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
REVENUE RECOGNITION
The Company sells the ZEROS approved licenses for a technology and the
System. The Company recognizes revenue on licenses based upon milestones in the
contract process. The milestones include contract signing and delivery of the
technology (75%), training on the technology (15%) and testing of the system
equipment (10%).
The Company takes the position that the sale of a license to the ZEROS
technology and the underlying agreements thereof provide the option to the
licensee to buy a plant for their own use or a third party. The event of the
license sale is a stand alone transaction and should be recognized by the
accrual method of accounting under Generally Accepted Accounting Principles and
not under the principles of accounting for Franchise Fee Revenue as asserted by
the Securities and Exchange Commission ("SEC") in correspondence to the Company.
The Company has engaged recognized experts in this area and has received advice
that supports the Company's financial accounting principles procedures as
correct.
THE SEC HAS INDICATED THAT THEY HAVE A DIFFERING OPINION AND SHOULD
THEY PREVAIL, THE REVENUE POSITION OF THE COMPANY COULD BE SUBSTANTIALLY
NEGATIVELY IMPACTED BY APPROXIMATELY $3,970,000 FOR THE NINE MONTH PERIOD ENDING
DECEMBER 31, 1997.
ORGANIZATION COSTS
Organization costs, primarily legal costs, are being amortized over a
sixty month period. Amortization expense for the 3 and 9 month periods ended
December 31, 1997 were $3,303 and $9,907, respectively.
INVESTMENTS
Investments are recorded at an estimated fair market value based upon
the investment held available for sale criteria in accordance with FASB #115 -
Accounting for Certain Debt and Equity Securities.
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ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
on an accelerated method over the estimated useful lives of the assets as
follows:
Office equipment 5 year
All expenditures for major renewals and betterments are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
When property and equipment are retired or disposed of, the related costs and
accumulated depreciation are removed from the applicable accounts and any gain
or loss is reflected in income. Depreciation expense for the 3 and 9 month
periods ended December 31, 1997 were $1,321 and $3,358, respectively.
ACQUISITION
In February 1997 the Company acquired the majority stock in the amount
of 10,500,000 shares which equates to 91% of the (issued and outstanding) of
Gunner Holdings, Inc. (a Utah corporation), and that had changed its name of
this subsidiary corporation to ZEROS USA, Inc. (a Utah corporation). In June
1997 the subsidiary corporation was merged into ZEROS USA, Inc. Upon
consummation of the merger, 1,490,000 shares of the subsidiary's common stock
held by shareholders other than the Company's were distributed Company's common
stock on a share for share basis.
The shareholders ratified a share structure of the merged companies of
20,000,000 shares of common and 10,000,000 shares preferred. A distribution of
shares was made as follows:
Steve Clark 9,000,000
Capital American 1,000,000
Star Trust 400,000
Agri Capital Trust 400,000
Gunner Trust 690,000
THE BUSINESS NATURE OF AGRI CAPITAL TRUST, STAR TRUST AND GUNNER TRUST
IS BELIEVED TO BE BUSINESS INVESTMENT TRUSTS ESTABLISHED SEVERAL YEARS BEFORE
THE FORMATION OF GUNNER HOLDING, INC., AND ZEROS USA, INC., TO INVEST, MANAGE
ASSETS AND PROVIDE FINANCIAL SERVICE ON BEHALF OF THEIR BENEFICIARIES.
THE AGRI CAPITAL TRUST, STAR TRUST AND GUNNER TRUST HAVE NO AFFILIATION TO
THE OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS. THE AGRI CAPITAL TRUST,
STAR TRUST AND GUNNER TRUST ARE SHAREHOLDERS OF ZEROS USA, INC.
INCOME TAXES
The Company accounts for its income taxes using the Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes"
(SFAS No. 109) which requires the establishment of a deferred tax asset or
liability for taxable amounts and operating loss and tax credit carryforwards.
Deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be "cash equivalents" for purposes of
the statement of cash flows.
CONCENTRATION OF CREDIT RISK
The Company extends credit to its customers. The Company may extend
certain credit during the normal course of business operations that may be
unsecured. A substantial portion of the customers' ability to pay their debts
(Note 14) to the Company is dependent on the waste management economic sector.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
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ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share ("Basic EPS") is based upon net earnings
divided by the weighted average number of shares of common stock outstanding.
Diluted earnings per share ("Diluted EPS") is computed by dividing (a) net
earnings plus interest on debentures and Series A bonds net of applicable income
taxes by (b) common and equivalent common shares outstanding which would include
conversion of preferred stock, debentures and Series A bonds. Warrants and
warrant rights totaling 52,295 and 3,856,168, respectively, were not included
since they were antidilutive. Warrant rights expire in September 1998.
A summary of the earnings per share data is as follows:
3 MONTHS ENDED 12/31/97
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
BASIC EPS
Net earnings available to
common shareholders $ 1,744,251 8,490,000 $ .21
=====
EFFECT OF DILUTIVE SECURITIES:
Convertible preferred stock 11,747,609
Debentures 30,382 3,856,168
Series A convertible Bonds 32,874 878,626
----------- ----------
DILUTED EPS
Net earnings available
To common shareholders
+ assumed conversions $ 1,807,507 24,972,403 $ .07
=========== ========== =====
9 MONTHS ENDED 12/31/97
-----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
BASIC EPS
Net earnings available to
common shareholders $ 1,880,968 7,053,273 $ .27
=====
EFFECT OF DILUTIVE SECURITIES:
Convertible preferred stock 3,930,110
Debentures 80,522 1,290,063
Series A convertible Bonds 34,576 323,886
----------- ----------
DILUTED EPS
Net earnings available
To common shareholders
+ assumed conversions $ 1,996,066 12,597,332 $ .16
=========== ========== =====
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ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 2 CONTRACTS RECEIVABLE
The Company utilized three year contracts to transact the sale of ZEROS
approved licenses. The terms of each contract indicate a license price of
$2,700,000 to be paid in 3 annual installments of $900,000. Certain assets and
guarantees of the licensees and their guarantors secure these contracts.
Unamortized discount is based upon an imputed interest rate of 9%. The analysis
of the contracts at December 31, 1997 is as follows:
Total contracts receivable $ 13,500,000
Less current amount 4,500,000
------------
Contracts receivable, noncurrent 9,000,000
Unamortized discount (1,680,371)
------------
Noncurrent contacts less
unamortized amount $ 7,319,629
============
The Company at December 31, 1997 had five contracts with three year
terms. The individual contracts mature in February 2000, March 2000, April 2000,
October 2000, and November 2000. The contracts include the right of the licensor
to charge the licensee a royalty of 15% of gross income for each operating
system. Each licensee obtains a geographical area and is allowed to sell
licenses subject to the approval of the Company. The Company is obligated
primarily to provide a training program and counsel on operational assistance.
The Company takes the position that the sale of a license to the ZEROS
technology and the underlying agreements thereof clearly provide the option to
the licensee to buy a plant for their own use or for a third party. The event of
the license sale is a stand alone transaction and should be recognized by the
accrual method of accounting under Generally Accepted Accounting Principles and
not under the principles of accounting for Franchise Fee Revenue as asserted by
the SEC in correspondence to the Company. The Company has engaged recognized
experts in this area and has received advice that supports the Company's
financial accounting principles procedures as correct.
THE SEC HAS INDICATED THAT THEY HAVE A DIFFERING OPINION AND SHOULD
THEY PREVAIL, THE REVENUE POSITION OF THE COMPANY COULD BE SUBSTANTIALLY
NEGATIVELY IMPACTED BY APPROXIMATELY $3,970,000 FOR THE NINE MONTH PERIOD ENDING
DECEMBER 31, 1997.
NOTE 3 INVESTMENT
The Company holds an investment in preferred stock of a capital
corporation company with a 6% dividend per annum. The Company holds twenty
thousand shares of preferred stock recorded at an estimated market value of
$25,000. Each preferred stock share is convertible into ten shares of common
stock at the end of two years (December 1998). The common stock of the capital
corporation is traded Over the Counter (Bulletin Board) with a trading range of
2.00 to 3.00 per share at December 31, 1997. The investment is held as available
for sale based upon a contributed cost of $25,000 and estimated fair market
value of $25,000. No additional valuation has been recorded.
NOTE 4 MASTER LICENSE COSTS
The Company acquired a master license for the energy recycling
oxidation system in January 1997. The major terms of the acquisition of the
master license indicated that the company is to pay $4,000,000 plus certain
legal costs related to negotiation of a master license of the ZEROS System by M.
Ltd., a Bahamian business entity and owner of the ZEROS System technology to a
foreign entity ("the Master Licensor").
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ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 4 MASTER LICENSE COSTS (CONTINUED)
The Company paid $30,000 in legal costs to acquire its rights under the
Master Licensee Agreement. Pursuant to the terms of the contract the initial
master license cost of $4,000,000 has been earned by the licensor upon the
signing of the contract. The $4,000,000 contract amount is payable by January
2005. The present value of the contract at its signing date of $1,926,848
reflects a discount of 9% imputed interest rate and has been deferred until
paid. The master license cost has been initially recorded at the transfer costs
of $30,000.
Pursuant to the terms of the contract, an additional $12,000,000 in
master licensing fees will be earned by the Master Licensor when the sale of
four equipment systems occurs by the Company (at the rate of $3,000,000 per
equipment sale). These costs will be payable as the equipment systems
construction deposits are collected.
The contract also indicates that the Company will pay certain
commissions and fees to the Master Licensor as follows:
(1) 5% of license fees sold to third parties.
(2) 5% of gross profit resulting from sales of energy
recycling systems by the licensee to sub-licensees.
(3) 5% of gross income resulting from the sale of products
produced from energy recycling systems sold through
sub-licensees.
(4) 5% royalty fees on gross income on units owned and
operated by the licensee (ZEROS USA, Inc.).
NOTE 5 NOTES PAYABLE
At December 31, 1997 notes payable consisted of:
Bank note, due April, 1998 with
interest at 7.0%, collateralized
by $75,000 certificate of deposit $ 75,000
Bank note, interest due quarterly
at 7.35% and principal due May,
1998 collateralized by a $100,000
certificate of deposit 100,000
Bank note, interest due quarterly
at 7.35% and principal due May,
1998 collateralized by $100,000
certificate of deposit 100,000
Bank note, interest due quarterly
at 7.25% and principal due July, 1998
collateralized by $50,000 certificate
of deposit 50,000
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ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 5 NOTES PAYABLE (CONTINUED)
Bank note, interest due quarterly
at 7.0% and principal due July, 1998
collateralized by $90,000 certificate
of deposit 90,000
Bank note, interest due quarterly at
7.0% and principal due December, 1998
collateralized by $59,000 certificate
of deposit 59,000
---------
$ 474,000
=========
NOTE 6 DEBENTURES PAYABLE
The Company has $1,928,084 of debentures payable to various
individuals and entities. The debentures including interest are due and
payable on various dates ranging from January 1998 to July 1998. The
interest rate on the debentures is 10% per annum. Each dollar of
debenture is secured by two shares of Company common stock. Effective
June 1997, the Company authorized an additional 20 million shares of
common stock to complete the securitization of Company stock for the
debenture holders. The debentures are exchangeable during the term of
the debenture into Company common stock.
NOTE 7 LONG-TERM CONTRACT PAYABLE
The Company has entered into a long-term contract payable for
the purchase of the exclusive master license of the "ZEROS" System
Technology (Note 4). The purchase price of the contract is $4,000,000
due in January 2005. Interest expense has been imputed at 9% per annum
for the contract with the calculation as follows:
Contract amount $ 4,000,000
Unamortized discount (1,892,770)
Deferred recognition of cost (1,926,848)
------------
Contract payable long-term $ 180,382
============
NOTE 8 SERIES A CONVERTIBLE BONDS
The Company has $1,097,117 of Five-year Series A Convertible
Bonds payable to various individuals and entities. Principal on the
Five year Convertible Bonds is due July 31, 2002. The interest rate on
the bonds is 12% per annum and is payable annually. The bonds may be
converted at the holder's option for Series A Preferred Stock. Each
dollar of bond principal is convertible into one share of stock.
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ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 9 DEFERRED REVENUE
Deferred revenue is recorded based upon milestones achieved in
the contract process (Note 2). The milestones include the contract
signing and delivery of the technology (75%), training on the
technology (15%) and engineering support in testing of the equipment
used in the system (10%). The analysis of deferred revenue at December
31,1997 is as follows:
From contract
signing date to
December 31, 1997
-----------------
Total contract revenues $ 13,500,000
Less discount imputed interest of 9% (2,220,515)
------------
Total licensing income 11,279,485
Less portion recognized (8,459,614)
------------
Deferred revenue $ 2,819,871
============
The deferred revenue represents deferred revenue on
installment contracts from licensees with maturity dated in February,
March, April, October and November of the year 2000.
The Company takes the position that the sale of a license to
the ZEROS technology and the underlying agreements thereof provide the
option for the licensee to buy a plant for their own use or for a third
party. The event of the license sale is a stand alone transaction and
should be recognized by the accrual method of accounting under
Generally Accepted Accounting Principles and not under the principles
of accounting for Franchise Fee Revenue as asserted by the SEC in
correspondence to the Company. The Company has engaged recognized
experts in this area and has received advice that supports the
Company's financial accounting principles procedures as correct.
THE SEC HAS INDICATED THAT THEY HAVE A DIFFERING
OPINION AND SHOULD THEY PREVAIL, THE REVENUE POSITION OF THE
COMPANY COULD BE SUBSTANTIALLY NEGATIVELY IMPACTED BY
APPROXIMATELY $3,970,000 FOR THE NINE MONTH PERIOD ENDING
DECEMBER 31, 1997.
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ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 10 INCOME TAXES
The Company's deferred tax assets relate principally to
non-deductible accrued expenses, a net operating loss carry-forward and
deferred revenue. Deferred tax liabilities relate to contracts
receivable that are not recognized for taxable income purposes.
A summary of deferred tax assets and liabilities follows:
Deferred tax assets:
Temporary differences,
primarily deferred revenue $ 1,130,964
Net operating loss carry-forward 1,096,559
Asset valuation reserve 0
-----------
2,227,523
Deferred tax liabilities (4,369,717)
-----------
Net deferred tax liabilities $ 2,142,194
===========
The net operating losses of $2,966,078 as of December 31,1997
begin to expire in the year ending March 31, 2012. The provision for
income taxes in the statement of income for the 3 and 9 month periods
ended December 31, 1997 includes the following:
For 3 Month For 9 Month
period ended period ended
December 31, 1997 December 31, 1997
----------------- -----------------
Current tax expense $ 0 $ 0
Deferred income taxes primarily
related to contracts receivable:
Deferred - current 628,356 935,593
Deferred - non-current 394,726 167,681
----------- -----------
Income tax provision $ 1,023,082 $ 1,103,274
=========== ===========
NOTE 11 STOCKHOLDERS' EQUITY
In June 1997 the Company amended its articles of incorporation
to authorize twenty million shares of common stock at a $.001 par value
and ten million shares of preferred stock at a $5 stated value used
for dividend calculations.
The Company entered into an acquisition agreement for Gunner
Holdings on December 31, 1996. The business combination was transacted
whereby the merged companies would have the following share structure.
Common Stock Authorized 20,000,000
Preferred Stock Authorized 10,000,000
The post merger common stock issue was for distribution of
shares as follows:
Steve Clark 9,000,000
Capital American Associates 1,000,000
Gunner Shareholders 1,490,000
The 10,000,000 shares of Preferred Stock were authorized for
the capital development needs of the Company.
Effective June 1997 in conjunction with the merger of the
Company and its subsidiary, ZEROS USA, Inc., a Utah corporation,
1,490,000 shares of the subsidiary's common stock were converted into
shares of the Company's Common Stock on a share for a share basis. The
preferred stock was amended in July 1997 in conjunction with the merger
to authorize twenty million shares of preferred stock at $.001 par
value. In September 1997 the Company exchanged 3,000,000 preferred
stock shares for 4,000,000 common shares of the president's common
stock. The Company also issued 1,000,000 shares of common stock to a
related party for manufacturing rights and a split revenue agreement
and restricted Mr. Clark from onsite direct involvement in oilfield
fires and blowouts. During the nine-month period, the Company also
issued preferred stock of 750,000 shares, 2,500,000 shares and
4,065,000 shares, respectively, to licensees, the Company president,
key officers and shareholders for services rendered. In November 1997
the Company issued 3,000,000 shares of preferred stock to a related
party for certain assets and contract rights. The preferred stock is
convertible one for one into common stock and has no preferential
rights, participation rights, call prices or dates, sinking fund or
redemption requirements, unusual voting rights, or cumulated preferred
dividends.
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ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 12 RELATED PARTY TRANSACTIONS
The Company incurred approximately $67,000 and $200,000 for
the 3 and 9 month periods ended December 31, 1997, respectively, in
administrative fees for office expenses including subleases, from
affiliated companies.
The Company incurred master license transfer costs of $30,000
from a foreign corporation and will pay fees and royalties for this
master license based upon certain terms of the agreement with an
initial contract amount of $4,000,000.
The investment-other includes advances to a related party of
$251,389 to establish a project site (Alameda, California) and obtain
project rights and $62,100 to a related party real estate partnership
to establish an office in Banning, California.
In November 1997 the Company obtained from a related party
certain contract rights and other assets valued at $190,000 through
exchange of cash of $100,000 and preferred stock valued at $90,000.
The Company incurred air charter travel expenses of
approximately $144,000 and $383,000 for the 3 and 9 month periods ended
December 31, 1997, respectively, from entities under the control of the
president of the Company. In April 1997 the Company entered into an
aircraft reimbursement agreement with a related party which requires
the Company to pay 120 regular payments of $16,000 per month for
aircraft rental. The commitments for the next five years based upon a
fiscal year ending March 31, are as follows:
1998 $ 192,000
1999 192,000
2000 192,000
2001 192,000
2002 192,000
Thereafter 960,000
-----------
Total $ 1,920,000
===========
NOTE 13 MAJOR CUSTOMERS
Since its inception in November 12, 1996 the Company has had revenue
from licenses sold to five licensees of approximately $1,692,000 each. During
the current nine month period three licenses have been sold, each ZEROS license
represents approximately 33% or $1,692,000 of revenue.
NOTE 14 FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, certificates of
deposit, contracts receivable, an investment in preferred stock, a long-term
contract payable, note payable, debentures payable and Five Year Series A
Convertible Bonds.
Cash
The Company maintains its cash in bank deposit accounts, which, at
times, may exceed federally insured limits and a money market investment account
at a brokerage firm. The Company has not experienced any losses and it believes
it is not exposed to any substantial credit risks affecting cash. At December
31, 1997, $375,547 of its cash in banks was maintained in excess of federally
insured amounts.
Certificates of Deposit
The Company has one year certificates of deposit with commercial banks,
in amounts which exceed federally insured deposit limits. The Company has not
experienced any losses and believes it is not exposed to any significant risks
affecting certificates of deposit.
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15
ZEROS USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - - UNAUDITED
FOR THE THREE AND NINE MONTH PERIOD ENDED DECEMBER 31, 1997
NOTE 14 FINANCIAL INSTRUMENTS (CONTINUED)
Investment
Management believes this investment in preferred stock (Note 3) is
fairly stated at its estimated net realizable value and a reserve for additional
valuation allowances is not required.
Contracts receivable
Management believes the carrying value of contracts receivable (Note 2)
is fairly stated at estimated net realizable values and a reserve for
uncollectability is not required. Management also believes the carrying value of
these contracts receivable represents fair value of these financial instruments
because terms are similar to those in the lending market for comparable loans
with comparable risks using an imputed interest rate of 9% (Note 2).
Long-term contract payable
Management believes the carrying value of the long-term contract
payable represents the fair value of this financial instrument because its terms
are similar to those in the lending market for comparable loans with comparable
risks utilizing a present value rate of 9% (Note 7).
Notes payable
Management believes the carrying value of notes payable approximates
fair value of these financial instruments.
Debentures payable
Management believes the carrying value of debentures payable represents
fair value of these financial instruments because terms are similar to those in
the lending market for comparable loans with comparable risks.
Series A convertible bonds
Management believes the carrying value of the Series A convertible bond
represents fair value of these financial instruments because terms are similar
to those in the lending market for comparable loans with comparable risks.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
ZEROS was organized in November 1996 for the primary purpose of selling
licenses, secondarily, acting as a manufacturer's representative selling
equipment and thirdly, providing licensee support services for a fee in
connection with the Zero-emission Energy Recycling Oxidation System (the "ZEROS
System"). The ZEROS System is a closed, waste disposal and energy production
system which processes toxic and non-toxic waste and recycles the processed
waste into marketable energy, carbon dioxide products, brine and other products.
The waste processing is performed with zero emissions and is an alternative to
the traditional "smokestack" incineration. The Company holds an exclusive
license to sell licenses and equipment in connection with the ZEROS System
technology to customers pursuant to a Master License Agreement.
The Company was organized November 12, 1996 and operates on a fiscal
year ending March 31 however, the Company did not commence operations or other
business activity until January 1997 and, as a result, no financial data is
available for prior period comparisons. The Company's revenues are derived from
the sale of licenses and equipment ordinarily upon deferred payment terms. As a
result, although the Company may record substantial revenues, it may not have
sufficient cash flows to finance its current operations. As a result of its
financing activities, the Company believes that it has sufficient funds to
conduct its planned operations for at least the next twelve months. There can be
no assurance, however, that sufficient cash will be available as needed to fully
execute the Company's business plan.
QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1997
Revenues. Revenues during the nine months ended December 31, 1997 were
$ 5,075,768 as the Company implemented its strategy of focusing on sales of
licenses. Although the Company reported revenues of $ 3,383,845 during its
fiscal quarter ended December 31, 1997, the only cash generated during the
period came from the private placement of $ 962,117 of Five Year Series A
Convertible Bonds. Negotiations are in varying stages with regard to the sale or
lease of ZEROS System equipment to existing licensees. Although the total
estimated cost of these plants has been defined, the financing necessary to
commence construction has not been finalized. Therefore, until the buyer of the
ZEROS System equipment has delivered the required payment, the Company cannot be
assured of the sale of the equipment.
Each licensee must obtain its own financing to pay its license fees to
ZEROS and to pay a manufacturer to construct and equip its ZEROS System to the
licensee's specifications. Although the Company believes that several of its
licensees have sufficient capital to pay such fees and construction costs
without third party financing, each of the licensees has engaged Capital
American Associates, Inc. ("Capital") to arrange financing for it. As of the
date hereof, no commitment for construction or permanent financing has been
obtained by any of the licensees. The Company and Capital believe that such
financing can be obtained on terms and conditions adequate to meet the
licensees' needs. Of course, there can be no assurance that such financing can
be obtained, or if obtained, that the terms will be favorable enough to produce
a profit for the licensees.
General and Administrative Expense. General and Administrative cost
during the nine months ended December 31, 1997 were $ 2,284,928. Costs were
primarily attributable to start-up expense related to the Company's expansion
into new geographic areas and to salaries, travel and related expenses in
connection with the sale of ZEROS's System licenses and further development of
the Company's proprietary technology. Also, additional start-up expenses were
related to a corporate staff to support and enhance substantive sales efforts.
Cost as a percentage of revenues were 45% during the nine months ended December
31, 1997.
Net cash used in operations was $ 1,856,394 for the nine months ended
December 31, 1997. The cash usage primarily reflects the expansion of the
Company's working capital needs. In November 1997 the Company entered into an
asset sales agreement with OCS, Inc., under which the Company acquired certain
accounts receivable, certain contracts and certain equipment, including
equipment used for testing ZEROS System, in consideration of $100,000 in cash
and 3,000,000 share of Series C Convertible Preferred Stock. Other than such
equipment, the Company does not anticipate the need for significant fixed
assets.
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Interest Expense and Interest Income. Interest expense increased to
$333,889 during the nine months ended December 31, 1997. Interest costs were
primarily attributable to notes payable and bank loans. Interest income
increased to $527,291 during the nine months ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
On November 16, 1996 the Company entered into a Master License
Agreement with M, Ltd., which requires the payment of $4,000,000 no later than
eight years after the effective date of the agreement and an additional
$3,000,000 to be paid for each of the first four plants sold by the Company to
other Licensees. The payment of $12.0 million to be made in connection with the
first four plants is not required until the Company has received payments from
licensees.
During the nine months ended December 31, 1997 the Company raised
$1,042,584 by the sale of its One-Year 10% Secured Debentures (the
"Debentures"), and $1,097,117 by the sale of Series A Five-year 12% Percent
Convertible Bonds. The Company has also secured financing for certain of its
activities by pledging certain of its certificates of deposit to secure its
credit facilities. In addition, the Company has available through July 16, 1998
a $1,000,000 revolving line of credit secured by government securities. The
Company believes its capital initiatives will continue to be of a sufficient
magnitude to fund working capital requirements.
The Debentures have various maturity dates starting January 1998 with a
monthly total of $200,000 and averaging $227,664 per month during the three
months ended March 31, 1998 and $292,367 per month during the three months ended
June 30, 1998. The Company expects that most of the Debentures will be
exchanged, pursuant to their terms, for common stock versus monetary redemption
at maturity. Over the succeeding twelve months, maturity on the Company's
outstanding indebtedness is $1,928,084 on the Debentures and $474,000 on secured
commercial bank debt (See Footnote 5 to the Financial Statements for December
31,1997.)
The Company had an aggregate of $474,000 of commercial bank debt
outstanding as of December 31, 1997 pursuant to a series of one-year term loans
maturing at various dates from March 18, 1998 to August 12, 1998, made by
Citizens Bank & Trust Company of Baytown, Texas. The loans are for one year on a
fully secured basis, with interest paid quarterly at 7.00-7.35% per annum. The
Company borrowed such funds for working capital and to fund the acquisition of
certain assets from OCS.
As a result of its financing activities, the Company believes that it
has sufficient funds to conduct its planned operations for at least the next
twelve months. There can be no assurance, however, that sufficient cash will be
available as needed to fully execute the Company's business plan.
FROM TIME TO TIME THE COMPANY MAY ISSUE FORWARD-LOOKING STATEMENTS
RELATING TO SUCH THINGS AS ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS
PROSPECTS, ACQUISITION ACTIVITIES AND SIMILAR MATTERS.
THE COMPANY NOTES THAT A VARIETY OF FACTORS COULD CAUSE THE COMPANY'S
ACTUAL RESULTS AND EXPERIENCE TO DIFFER MATERIALLY FROM THE ANTICIPATED RESULTS
OR OTHER EXPECTATIONS EXPRESSED IN THE COMPANY'S FORWARD-LOOKING STATEMENTS. THE
RISKS AND UNCERTAINTIES THAT MAY AFFECT THE COMPANY'S BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATION INCLUDE DIFFICULTIES AND DELAYS IN COMPLETING
AND INTEGRATING BUSINESS ACQUISITIONS; DELAYS AND DIVERSION OF ATTENTION
RELATING TO PERMITTING AND OTHER REGULATORY COMPLIANCE; DIFFICULTIES AND DELAYS
RELATING TO MARKETING AND SALES ACTIVITIES; AND GENERAL UNCERTAINTIES
ACCOMPANYING THE EXPANSION INTO NEW GEOGRAPHIC SERVICE AREAS.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ZEROS USA, Inc., Registrant
ZEROS USA, Inc.
Date August 14, 1998 By: /s/ Steve Clark
-------------------------------- --------------------------------
Steve Clark, President
Chief Executive Officer
Date August 14, 1998 By: /s/ Chet Gutowsky
-------------------------------- --------------------------------
Chet Gutowsky
Chief Financial Officer
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PART II. OTHER INFORMATION
Item 5. Other Information.
On September 30, 1997 the Company entered into an agreement to issue
1,000,000 shares of the Common Stock of the company in consideration for an
agreement with OCS to authorize OCS to manufacture the ZEROS System equipment.
Pursuant to such agreement, OCS would manufacture, install, test, and maintain
the ZEROS System equipment as well as provide each licensee with a product
warranty, training, inspections, and technical support. The Company will receive
a 10% interest in the revenues resulting from the design, manufacture, assembly
and installation of equipment in connection with the ZEROS System equipment
manufactured by OCS.
In November 1997 the Company entered into an asset sales agreement with
OCS under which the Company acquired the accounts receivable, certain contracts
and certain equipment, including equipment used for testing ZEROS Systems, in
consideration of $100,000 in cash and 3,000,000 shares of Series C Convertible
Preferred Stock. Other than such equipment, the Company does not anticipate the
need for significant fixed assets. The Company currently has no plans for
capital expenditures except for additional expenditures for furniture, fixtures
and equipment at levels comparable to prior periods.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Articles of Incorporation of ZEROS (incorporated by reference to the
Company's Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 3.2)
3.2 Bylaws of ZEROS (incorporated by reference to the Company's Registration Statement on Form
10-SB/A, Commission file 0-22971, Exhibit 3.3)
4.1 Designation of Rights and References of Series A Preferred Stock (incorporated by reference to
the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 4.1)
4.2 Designation of Rights and References of Series B Preferred Stock (incorporated by reference to
the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 4.2)
4.3 Designation of Rights and References of Series C Preferred Stock (incorporated by reference to
the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 4.3)
4.4 Designation of Rights and References of Series D Preferred Stock (incorporated by reference to
the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 4.4)
4.5 One-year 10% Secured Debentures (incorporated by reference to the Company's Registration
Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 4.5)
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20
4.6 Series A Five-year 12% Convertible Bond (incorporated by reference to the Company's
Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 4.6)
4.7 Series B Ten-year 10% Convertible Bond ( incorporated by reference to the Company's
Registration Statement Form 10-SB/A, Commission file 0-22971, Exhibit 4.7)
4.8 Promissory Note due April 18, 1998 in the amount of $75,000 with interest at 7.0% (
incorporated by reference to the Company's Registration Statement on Form 10SB/A, Commission
file 0-22971, Exhibit 4.8)
4.9 Promissory Note (Loan Number 01693161) due May 30, 1998 in the amount of $100,000 with
interest at 7.35% (incorporated by reference to the Company's Registration Statement on Form
10-SB/A, Commission file 0-22971, Exhibit 4.9)
4.10 Promissory Note (Loan Number 01693162) due May 30, 1998 in the amount of $100,000 with
interest at 7.35% (incorporated by reference to the Company's Registration Statement on Form
10-SB/A, Commission file 0-22971, Exhibit 4.10)
4.11 Promissory Note due July 7, 1998 in the amount of $50,000 with interest at 7.00% (incorporated
by reference to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971,
Exhibit 4.11)
4.12 Promissory Note due August 12, 1998 in the amount of $90,000 with interest at 7.0%
(incorporated by reference to the Company's Registration Statement on Form 10-SB/A, Commission
file 0-22971, Exhibit 4.12) 10.1 Master License Agreement dated November 15, 1996 by and
between ZEROS and M, Ltd. (incorporated by reference to the Company's Registration Statement
on Form 10-SB/A, Commission file 0-22971, Exhibit 10.1)
10.2 Agreement in Principle to Acquire OCS Assets (incorporated by reference to the Company's
Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 10.2)
10.3 Reimbursement Agreement dated April 1, 1997 by and between ZEROS and M, Ltd. (incorporated by
reference to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971,
Exhibit 10.3)
10.4 Agreement for Sale of ZEROS Approved License dated May 31, 1997 by and among ZEROS, ZEROS
California Corporation and Lawson ZEROS Corporation (incorporated by reference to the
Company's Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 10.4)
10.5 Agreement for Sale of ZEROS Indian Approved License dated March 31, 1997 by and between ZEROS
and ZEROS California Corporation (incorporated by reference to the Company's Registration
Statement on Form 10-SB/A, Commission file 0-22971, Exhibit 10.5)
10.6 Agreement for Sale of ZEROS Approved License dated February 28, 1997 by and between ZEROS and
ZEROS Piney Creek (incorporated by reference to the Company's Registration Statement on Form
10-SB/A, Commission file 0-22971, Exhibit 10.6)
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10.7 Agreement for Sale of ZEROS Environmental Approved License dated October 29, 1997 by and
between ZEROS and ZHM, Inc. (incorporated by reference to the Company' Registration Statement
on form 10-SB/A, Commission file 0-22971, Exhibit 10.7)
10.8 Agreement for Sale of ZEROS Environmental Approved License dated November 2, 1997 by and among
ZEROS, ZEROS California Corporation and ZEROS Western Corporation (incorporated by reference
to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit
10.8)
10.9 Form of Financial Services Agreement between ZEROS and Capital American Associates,
Incorporated (incorporated by reference to the Company's Registration Statement on form
10-SB/A, Commission file 0-22971, Exhibit 10.9)
10.10 Directors and Officers Insurance and Company Reimbursement Policy (incorporated by reference
to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971, Exhibit
10.10)
10.11 Asset Sales Agreement dated November 15, 1997 by and between ZEROS and OCS, Inc. (incorporated
by reference to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971,
Exhibit 10.11)
10.12 Employment Agreement dated October 1,1997 by and between ZEROS and Steve Clark (incorporated
by reference to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971,
Exhibit 10.12)
10.13 Employment Agreement dated October 1, 1997 by and between ZEROS and Jesse Blanco (incorporated
by reference to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971,
Exhibit 10.13)
10.14 Employment Agreement dated October 1,1997 by and between ZEROS and Chet Gutowsky (incorporated
by reference to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971,
Exhibit 10.14)
10.15 Employment Agreement dated October 1, 1997 by and between ZEROS and Celso Suarez (incorporated
by reference to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971,
Exhibit 10.15)
10.16 Manufacturing Agreement dated September 30, 1997 by and between ZEROS and OCS, Inc.
(incorporated by reference to the Company's Registration Statement on Form 10-SB/A, Commission
file 0-22971, Exhibit 10.16)
10.17 Supplement to Master License Agreement dated November 15, 1996 by and between ZEROS and M,
Ltd. (incorporated by reference to the Company's Registration Statement on Form 10-SB/A,
Commission file 0-22971, Exhibit 10.17)
10.18 Professional Services Agreement by and between ZEROS and James Winchester (incorporated by
reference to the Company's Registration Statement on Form 10-SB/A, Commission file 0-22971,
Exhibit 10.18)
(b) Reports of From 8-K -
None.
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