SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K-A4 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act October 16, 1998 Date of Report (Date of Earliest Event Reported) HydroMaid International, Inc. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (Exact Name of Registrant as Specified in its Charter) Nevada 02-23729 87-0575933 (State or other juris- (Commission File No.) (IRS Employer diction of incorporation) I.D. No.) 12222 South 1000 East, Suite #1 Draper, Utah 84020 (Address of Principal Executive Offices) (801) 553-8790 Registrant's Telephone Number Item 1. Changes in Control of Registrant. There have been the following changes to this Item, which was contained in the 8-K-A3 Current Report of the Company dated October 16, 1998. The Company's shareholders approved by majority vote on January 20, 1999, the change of the Company's name to HydroMaid International, Inc. The Proxy Statement was previously filed with the SEC and is incorporated herein by reference. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. There have been the following changes to this Item, which was contained in the 8-K-A3 Current Report of the Company dated October 16, 1998. (a) Financial Statements of Business Acquired. Audited financial statements for the years ended December 31, 1998, December 31, 1997 and for the period from June 24, 1992 to December 31, 1998. (b) Exhibits. (See attached Financial Statements.) All other portions of the previously filed 8-K-A3 Current Report dated October 16, 1998 remain unchanged. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. HydroMaid International, Inc. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) Date: February 24, 1999 By: /s/ Culley W. Davis --------------------------- Culley W. Davis CEO and Chairman of the Board of Directors - ------------------------------------------------------------------------------ HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND FOR THE PERIOD JUNE 24, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998 - ------------------------------------------------------------------------------ INDEX TO FINANCIAL STATEMENTS Page Independent Auditors' Report............................................... 1 Balance Sheet ............................................................. 2 Statements of Operations .................................................. 3 Statements of Stockholders' Equity......................................... 4 Statements of Cash Flows .................................................. 5 Notes to Financial Statements.............................................. 6 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) DRAPER, UTAH We have audited the accompanying balance sheet of HydroMaid International, Inc., A Development Stage Company (formerly Cherokee Minerals and Oil, Inc.), hereinafter referred to as "the Company", as of December 31, 1998 and the related statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1998 and 1997, and for the period June 24, 1992 (inception) through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 1998, and the results of its operations and its cash flows for the years ended December 31, 1998 and 1997, and for the period June 24, 1992 (inception) through December 31, 1998, in conformity with generally accepted accounting principles. February 19, 1999 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ASSETS Current Assets Cash $ 20,342 Accounts receivable 5,130 Inventory, net of valuation allowance of $180,000 479,580 Prepaid expenses 25,210 ----------- TOTAL CURRENT ASSETS 530,262 Property and equipment, net 500,259 Patents, net of accumulated amortization of $123,379 143,874 Deposit on tooling 80,000 Deferred tax asset, net of valuation allowance -- ----------- TOTAL ASSETS $ 1,254,395 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 390,049 Note payable, current portion 6,599 Advances from related party 51,467 ----------- TOTAL CURRENT LIABILITIES 448,115 Note payable 29,964 ----------- TOTAL LIABILITIES 478,079 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS' EQUITY Common stock, par value .001 per share, 30,000,000 shares authorized, 24,000,000 shares issued and outstanding 24,000 Additional paid-in capital 6,072,566 Accumulated deficit, including $4,598,529 during the development stage (5,118,413) Deferred compensation - stock options (201,837) ----------- TOTAL STOCKHOLDERS' EQUITY 776,316 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,254,395 ----------- ----------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 2 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 FOR THE PERIOD JUNE 24, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- JUNE 24, 1992 (INCEPTION) THROUGH 1998 1997 DECEMBER 31, 1998 ----------- ----------- ----------------- Sales $ 54,828 $ -- $ 54,828 Cost of sales 53,045 -- 53,045 ----------- ----------- ----------------- Gross profit 1,783 -- 1,783 Operating expenses 3,259,385 337,087 3,864,365 Research and development 647,139 87,852 735,947 ----------- ----------- ----------------- Loss before income tax benefit (3,904,741) (424,939) (4,598,529) Income tax benefit: Current -- -- -- Deferred 1,450,000 160,000 1,710,000 Less valuation allowance (1,450,000) (160,000) (1,710,000) ----------- ----------- ----------------- Net (loss) $(3,904,741) $ (424,939) $ (4,598,529) ----------- ----------- ----------------- ----------- ----------- ----------------- Basic loss per share ----------- ----------- ----------------- ----------- ----------- ----------------- Diluted loss per share ----------- ----------- ----------------- ----------- ----------- ----------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 3 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL statements. - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 FOR THE PERIOD JUNE 24, 1992 (INCEPTION) TO DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ACCUMULATED COMMON STOCK ADDITIONAL DEFICIT DURING TOTAL ------------ PAID-IN DEVELOPMENT STOCKHOLDERS' SHARES AMOUNT CAPITAL STAGE EQUITY ---------- ----------- ----------- ------------ ------------- AT INCEPTION ON JUNE 24, 1992 -- $ -- $ -- $ -- $ -- CHEROKEE MINERALS AND OIL, INC.: Common stock activity from April 30, 1919 through June 24, 1992 105,859 1,059 287,547 288,606 Common stock issued for services at $0.09/share 2,368,680 23,686 183,260 206,946 Net loss from April 30, 1919 through December 31, 1996 -- -- -- -- (519,884) ENVIRONMENTAL SYSTEMS & SOLUTIONS, INC.: Common stock issued for patents at $0.04/share 5,000,000 50,000 103,500 -- 153,500 Contributed capital -- -- 280,066 -- 280,066 Net loss for the period June 24, 1992 (inception) through December 31, 1996 -- -- -- (268,849) (268,849) ----------- ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1996 7,474,539 74,745 854,373 (268,849) 140,385 Environmental Systems and Solutions, Inc. - contributed capital -- -- 548,251 -- 548,251 Environmental Systems & Solutions, Inc. - net loss for the year ended December 31, 1997 -- -- -- (424,939) (424,939) ----------- ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1997 7,474,539 74,745 1,402,624 (693,788) 263,697 CHEROKEE MINERALS AND OIL, INC.: Common stock issued for cash 2,000,000 2,000 8,000 -- 10,000 Common stock issued in connection with Reorganization 22,080,000 22,080 -- -- 22,080 Common stock cancelled in connection with Reorganization (2,554,539) (2,555) -- -- (2,555) Common stock par value change from $.01/share to $.001/share -- (22,270) 22,270 -- -- ENVIRONMENTAL SYSTEMS & SOLUTIONS, INC.: Common stock issued for cash at $0.01/share 200,000 2,000 -- -- 2,000 Common stock issued for cash at $8.00/share 151,625 1,516 1,211,484 -- 1,213,000 Common stock issued for cash at $8.00/share 178,375 1,784 1,425,216 -- 1,427,000 Common stock cancelled at $0.01 per/share (10,000) (100) -- -- (100) Adjustment in connection with Reorganization (5,520,000) (55,200) -- -- (55,200) Contributed capital -- -- 1,767,947 -- 1,767,947 Stock options -- -- 235,025 -- 235,025 Net loss for the year ended December 31, 1998 -- -- -- (3,904,741) (3,904,741) Deferred compensation - stock options -- -- -- -- (201,837) ----------- ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1998 24,000,000 $ 24,000 $ 6,072,566 $(4,598,529) $ 776,316 ---------- ----------- ----------- ------------ ------------- ---------- ----------- ----------- ------------ ------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 4 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 FOR THE PERIOD JUNE 24, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- JUNE 24, 1992 (INCEPTION) THROUGH 1998 1997 DECEMBER 31, 1998 ----------- ----------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) $(3,904,741) $ (424,939) $(4,598,529) Adjustment to reconcile net (loss) to net cash used by operating activities: Depreciation and amortization 74,684 19,433 177,108 Stock options 33,188 -- 33,188 Expenses paid by related party -- 422,295 605,802 Changes in current assets and liabilities: Accounts receivable (5,130) -- (5,130) Prepaid expenses (25,210) -- (25,210) Inventory (452,456) (17,000) (479,581) Accounts payable and accrued expenses 377,572 -- 390,048 ----------- ----------- ----------- NET CASH (USED) BY OPERATING ACTIVITIES (3,902,093) (211) (3,902,304) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment (400,740) -- (400,740) Acquisition of patents (56,348) -- (56,468) Deposit on tooling (80,000) -- (80,000) ----------- ----------- ----------- NET CASH (USED) BY INVESTING ACTIVITIES (537,088) -- (537,208) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on note payable (1,415) -- (1,415) Advances from related party 51,467 -- 51,467 Proceeds from issuance of common stock 2,640,000 -- 2,640,000 Proceeds from contribution of paid-in capital 1,767,947 -- 1,769,802 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 4,457,999 -- 4,459,854 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH 18,818 (211) 20,342 CASH AT BEGINNING OF PERIOD 1,524 1,735 -- ----------- ----------- ----------- CASH AT END OF PERIOD $ 20,342 $ 1,524 $ 20,342 ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Non-cash transactions: Acquisition of property, equipment, and patents $ 37,978 $ 125,956 $ 259,006 ----------- ----------- ----------- ----------- ----------- ----------- Issuance of common stock for patents and services $ -- $ -- $ 360,446 ----------- ----------- ----------- ----------- ----------- ----------- Disbursements by related party $ -- $ 548,251 $ 731,758 ----------- ----------- ----------- ----------- ----------- ----------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 5 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 1: REORGANIZATION, BASIS OF ACCOUNTING AND FINANCIAL STATEMENT PRESENTATION, NATURE OF BUSINESS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REORGANIZATION As of December 10, 1998, Cherokee Minerals and Oil, Inc. ("Cherokee"), a Nevada corporation was a dormant entity with no assets. After its inception in 1919 and two name changes, Cherokee acquired and explored placer-mining leases in the early 1980s. Cherokee has not had any significant operations since approximately 1985; its revenues and expenses for 1998 and 1997 are not significant. See "Basis of Accounting and Financial Statement Presentation" below. On December 11, 1998, Cherokee entered into an Agreement and Plan of Reorganization (the "Plan") structured to result in the acquisition by Cherokee of at least 80% of the issued and outstanding shares of restricted common stock of Environmental Systems & Solutions, Inc. ("ESSI"), a Nevada corporation. Such transaction is hereinafter referred to as "the Reorganization." The Reorganization is intended to qualify as a tax-free reorganization under Section 368 (a) (1) (B) of the 1986 Internal Revenue Code. Effective with the closing of the Reorganization, certain Cherokee stockholders agreed to cancel approximately 2,555,000 of their common shares. Under the terms of the Plan, the former stockholders of ESSI (1) received four shares of Cherokee for each one share of ESSI and (2) will ultimately acquire approximately 92% of the issued and outstanding common stock of Cherokee, assuming that all ESSI stockholders execute the Plan. ESSI was previously a privately held company, with no public market for its stock. As of December 31, 1998, the former stockholders of ESSI owned about 91% of the 24 million post-Reorganization shares of Cherokee's issued and outstanding common stock; such shares are restricted securities under Federal law. (See Notes 5 and 6). Cherokee's common stock trades on the OTC Bulletin Board of the National Association of Securities Dealers. BASIS OF ACCOUNTING AND FINANCIAL STATEMENT PRESENTATION The financial statements of Cherokee for the years ended December 31, 1997 and 1996 were audited by another independent public accounting firm. Such firm's January 15, 1998 report on Cherokee's 1997 financial statements disclosed that there was then a question as to the entity's ability to continue as a going concern, which is an assumption under generally accepted accounting principles ("GAAP"). For reasons explained below, the accompanying 1997 financial statements (and the financial statements for the period from inception to December 31, 1997) of Cherokee differ significantly from such financial statements as previously issued. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 6 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 1: (CONTINUED) BASIS OF ACCOUNTING AND FINANCIAL STATEMENT PRESENTATION (CONTINUED) The Reorganization is accounted for as a capital stock transaction (as opposed to a "business combination," as that term is defined by GAAP) in the accompanying financial statements. Accordingly, the Reorganization has been reported as a recapitalization of ESSI, which is considered the acquirer for accounting purposes (a "reverse acquisition"). Through its former stockholders, ESSI is deemed the acquirer for accounting purposes because of (a) its majority ownership of Cherokee, (b) its representation on Cherokee's board of directors, and (c) executive management positions held by former ESSI officers. The accompanying pre-December 11, 1998 financial statement information of Cherokee (the legal acquirer), which has been retroactively restated for the equivalent number of common shares issued in the Reorganization, is essentially that of ESSI. The historical stockholders' deficiency of ESSI and Cherokee's accumulated deficit have been carried forward to the post-acquisition period; no goodwill has been recorded. Reorganization transaction costs such as legal fees have been expensed as incurred. Because the accompanying balance sheet is subsequent to the Reorganization's closing date, presentation of pro forma financial information as if the Reorganization had occurred on January 1, 1997 is not required. NATURE OF BUSINESS In January of 1999, Cherokee changed its name to HydroMaid International, Inc. (the "Company"). ESSI (hereinafter also referred to as the "Company"), which was incorporated in 1992, is engaged in the development, manufacture, and sale of a patented water-powered garbage disposal. Such disposal, known as the HYDRO-MAID, is hereinafter referred to as "the Product." Technological improvements and field-testing were completed in 1997, when the Company had its initial operating activity. The Product was then introduced in early 1998; sales from inception to December 31, 1998 have been nominal. The Company operates from a leased facility of approximately 8,100 square feet near Salt Lake City, Utah. Its domestic manufacturing and assembly plant is in Illinois. Certain components and production tooling are being manufactured in China, along with some assembly operations. (See Note 9). Management plans to (a) capitalize on New York City's 1997 lift of a long-standing ban on residential in-sink garbage disposals, (b) enter European, Asian, and South American markets, and (c) penetrate the U.S. home building market. Total assets outside the United States (deposits on tooling in China) were $80,000 at December 31, 1998; foreign operations were not significant in 1998 or 1997. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 7 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 1: (CONTINUED) INTRODUCTION TO THE SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary of significant accounting policies of the Company presented below is designed to assist in understanding the Company's financial statements. Such financial statements and accompanying notes are the representations of Company management, who is responsible for their integrity and objectivity. These accounting policies conform to GAAP in all material respects, and have been consistently applied in preparing the accompanying financial statements. REVENUE RECOGNITION When revenues first become significant, management intends to adopt appropriate revenue recognition accounting policies in material conformity with GAAP. INVENTORIES Raw materials and finished goods are stated at the lower of cost (first-in, first-out) or estimated market value. Management periodically reviews inventory and outstanding purchase commitments to identify any significant obsolete and slow-moving items, and adjusts the financial statements accordingly. RESEARCH AND DEVELOPMENT COSTS ("R & D COSTS") R & D costs are charged to expense when incurred. Such costs include pre-production prototype tools and dies (principally located in Illinois), modifications of the Product's original design, and engineering activities intended to advance the Product's technology to the point of commercial production. PATENTS In 1992, the Company acquired trademarks and several patents on the Product. The Company capitalizes the cost of patents and related expenses and amortizes them over the shorter of the remaining legal life or their estimated economic life. Amortization expense for the years ended December 31, 1998 and 1997 was $17,206 and $19,433, respectively. PROPERTY AND EQUIPMENT GENERAL Repairs, maintenance, and similar costs that do not significantly improve or extend the useful lives of the assets are expensed as incurred. When an asset is sold or retired, the cost and accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in current operations. - ----------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 8 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 1: (CONTINUED) PRODUCTION TOOLING Completed tooling used or to be used in commercial production is carried at cost less depreciation, which is based on a five-year life using the straight-line method. The cost of special-purpose property and equipment (such as tools, dies and molds) constructed by a related-party vendor includes design/production labor and an allocation of estimated overhead. OTHER PROPERTY AND EQUIPMENT Equipment, fixtures, and leasehold improvements are stated at cost less accumulated depreciation or amortization. Leasehold improvements are amortized over the shorter of the remaining lease term or their estimated economic life. Equipment and fixtures are depreciated on a straight-line basis over estimated useful lives of five years. INCOME TAXES Using the liability method required by Statement of Financial Accounting Standards (SFAS) No. 109, the estimated tax effects of temporary differences between financial and income tax reporting are recorded in the period in which the events occur. Such differences between the financial and tax bases of assets and liabilities result in future tax deductions or taxable income. (See Note 10). STATEMENT OF CASH FLOWS For purposes of the statement of cash flows, the Company considers all interest-bearing deposits with an original maturity of three months or less as cash equivalents. USE OF ESTIMATES Management uses estimates and assumptions in preparing financial statements in accordance with GAAP. Such estimates and assumptions affect the reported amounts of certain assets and liabilities, disclosures relating to any contingent assets and liabilities, as well as reported revenues and certain expenses. Actual results could vary from the estimates used to prepare the accompanying financial statements. WARRANTY COSTS AND RELATED MATTERS The Company provides an unconditional ten-year warranty of the Product's workmanship and materials. Estimated warranty expense is recorded in the year of sale based on historical experience and management's review of Product quality as compared to the current state of the technology. - ----------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 9 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 1: (CONTINUED) STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS For employee compensatory stock option plans, which will eventually vest, compensation expense is recognized during the periods in which related employee services are rendered. Such expense is generally measured by determining the excess, if any, of the grant-date estimated fair market value (FMV) of the underlying stock over the amount to be paid by the employee in conformity with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Compensatory stock options and similar equity instruments issued to non-employees in exchange for goods or services are accounted for based on the estimated fair value of (1) the goods or services received or (2) the equity instrument issued, whichever is more reliably measurable. This accounting policy is in conformity with SFAS No. 123, "Accounting for Stock-Based Compensation." Because the options discussed in the preceding paragraph were granted before the Company became a publicly held entity, GAAP allows use of the "minimum value method" to measure the expense associated with such equity instruments. Under this method, minimum value is the grant-date estimated FMV of the stock less the present value of the exercise price based on a risk-free rate of return over the contractual life of the option. The ten year risk - free rate of return in mid-1997, which approximated 5.5%, was used to compute present value. Such method ignores the expected volatility of the underlying stock that may provide much of an option's fair value. The Company has not declared any cash dividends since inception; hence, expected dividends have not been considered in the fair value computation (See Notes 6 and 7). LOSS PER COMMON SHARE Loss per common and common equivalent share is based on the weighted average number of common shares and common share equivalents (as retroactively adjusted for the effect of the Reorganization) outstanding during the year in accordance with SFAS No. 128. (See Note 15). ELEMENTS OF OTHER COMPREHENSIVE INCOME For the years ended December 31, 1998 and 1997, the Company did not have any elements of other comprehensive income as defined by SFAS No. 130, "Reporting Comprehensive Income." Therefore, no statement of comprehensive income has been presented. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PAGE 10 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 2: RELATED PARTY TRANSACTIONS AND RELATIONSHIPS The names and relationships of known related parties referred to in these notes are set forth below (Company stock beneficial ownership percentages, which are as of December 31, 1998, are rounded): - - Culley W. Davis: founder, CEO, and chairman of the Board of Directors; direct and beneficial 13% stockholder, including his ownership through Pinnacle Enterprises, Inc. (PEI), which is wholly owned by Culley W. Davis; and owner of Company stock options (See Note 6). - - Bruce H. Haglund, Esq.: legal counsel to ESSI, an officer and director of the Company, the brother-in-law of the Company's CFO, owner of Company stock options (See Note 6), and a stockholder of the Company. - - Leonard W. Burningham, Esq.: legal counsel to Cherokee, and a stockholder of the Company. - - Pacific American Cultural Exchange, Inc. ("PACE"): a Japanese corporation which will be 50% owned by the Company (see Note 11), and the licensee of certain rights to manufacture and market the Product in Asia. - - Hideyuki Nakamura: 50% interest in PACE, and owner of the right to acquire 100,000 shares of the Company's common stock in exchange for a 50% equity interest in PACE. - - Don Sullivan, sole owner of Metric Tool & Die, an Illinois corporation ("MTD"): a stockholder of the Company, with the right to acquire an additional 50,000 shares of the Company's common stock under certain conditions (see Note 11). MTD is the Company's domestic subcontractor for manufacturing and assembly. Other related party transactions are discussed elsewhere in these notes to the financial statements. NOTE 3: CONCENTRATION OF CREDIT RISK Financial instruments which may subject the Company to credit risk principally consist of uninsured cash-in-bank balances. At various times during the year, the Company's bank balance may exceed the FDIC-insured amount. As of December 31, 1998, the Company bank balance reported by its principal financial institution was less than such amount. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 11 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 4: PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1998: Production tooling $ 129,385 Other machinery and equipment 122,206 Computer hardware and software 19,994 Furniture and fixtures 54,439 Vehicles 98,990 Leasehold improvements 109,329 Demonstration equipment 21,500 ------------- 555,841 Accumulated depreciation and amortization $ (55,584) ------------- Book value $ 500,259 ------------- ------------- Depreciation and amortization expense (excluding patents) was $55,584 in 1998; there was no such expense in 1997. NOTE 5: COMMON STOCK At December 31, 1998, there were 24 million common shares issued and outstanding with a par value of $ 0.001 per share; 30 million shares have been authorized. The number of shares has been adjusted as described in Note 1. There are certain restrictions on the sale or other transfer of the Company's common stock issued under the Plan. Such stock, generally referred to as "Rule 144 stock," was not registered under the Securities Act of 1933, as amended (the Act), in reliance upon an exemption from its requirements. Each exchanging shareholder agreed to (1) acquire such stock for his own account and (2) hold the stock for investment purposes only. In addition, the stock certificates are required to contain a legend (a) documenting these restrictions and (b) requiring a legal opinion that any proposed sale is exempt from registration under the Act. NOTE 6: STOCK OPTIONS A. EMPLOYEE INCENTIVE STOCK OPTIONS Options to acquire 700,000 post-Reorganization common shares with an exercise price of $0.25/share were outstanding at December 31, 1998 under the plan described below. As of that date, Culley Davis owned options to acquire 100,000 shares. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 12 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 6: STOCK OPTIONS (CONTINUED) Effective June 1, 1997, the Company adopted a stock option and incentive plan intended to qualify under Section 422A of the Internal Revenue Code. A maximum of 2 million shares (as adjusted for the Reorganization) are issuable under the plan, which has a life of ten years. Employee options to purchase common stock for $0.25/share ($1/share on the grant dates, represented as not less than the estimated pre-Reorganization fair market value of ESSI common stock) are exercisable in equal annual installments beginning in January of 2000. For employees who are more-than-10% stockholders, such options are required to have a minimum exercise price of 110% of the grant-date estimated fair market value (FMV) and expire five years after issuance. Options granted to other employees have a ten-year term. The pre-March 18, 1998 options of other employees have an exercise price equal to or greater than the grant-date estimated FMV. The employee's rights under the plan are contingent upon (a) continued employment with the Company for at least six months after the grant date and (b) providing a representation that option shares are acquired for investment only, and not for sale. In addition, the employee agrees to not dispose of shares acquired from exercising stock options within two years of the grant date or within one year after the exercise date. A summary of stock option activity, including the options described in section B of this note, during the two years ended December 31, 1998 is presented below. POST-MERGER SHARES YEAR ENDED DECEMBER 31 1998 1997 ---- ---- Outstanding at January 1 567,500 None Granted 132,500 567,500 Exercised - - Expired - - Cancelled - - Forfeited - - ---------- ---------- Outstanding at December 31 700,000 567,500 ---------- ---------- ---------- ---------- Exercisable at December 31 None None The weighted average grant-date fair value of nonstatutory stock options granted (a) in 1998 approximated $7.00/share and (b) in 1997 was equal to or less than the $1 exercise price. The weighted average fair value of nonstatutory stock options granted in 1998 when the grant-date market price differed from the exercise price was $8/share. The weighted average remaining contractual life of stock options outstanding at December 31, 1998 approximated 9 years. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 13 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 6: STOCK OPTIONS (CONTINUED) B. NONSTATUTORY STOCK OPTIONS Of the options outstanding at December 31, 1998, Bruce Haglund owns options to acquire 100,000 shares. Two attorneys who are employed by Bruce Haglund own options to purchase a total of 20,000 shares. These equity instruments are nonstatutory stock options, expire after ten years, and are required to have an exercise price of not less than 85% of the grant-date estimated FMV. Such options are exercisable as described in section A of this note. Incentive stock options may not be granted to non-employees. Any grant of nonstatutory stock options must be approved by a majority of disinterested directors of the Company. For accounting purposes, the vesting of such options is not contingent upon the optionee providing any future services. C. SIMILAR EQUITY INSTRUMENTS Under the plan, the Company may also grant stock appreciation rights (SARs) and restricted stock awards; as of December 31, 1998, no such equity instruments had been granted. D. OTHER MATTERS The plan contains a "poison-pill" clause that is triggered by certain defined events. Such events include (1) the acquisition of a majority of the Company's outstanding common stock, (2) a reorganization/merger/consolidation where the Company is not the surviving entity, and (3) the sale of all or substantially all of the Company's assets as an entirety. If such an event occurs, all outstanding options and SARs immediately become exercisable or fully vest and restricted stock vests free of any restrictions. NOTE 7: STOCK-BASED COMPENSATION AND OTHER EXPENSE As discussed in Note 1, compensatory stock options and similar equity instruments issued to non-employees are accounted for using the fair value method of SFAS No. 123. The related expense (principally professional fees) approximated $ 21,000 in 1998 and none in 1997. Incentive stock options granted to employees are accounted for using the intrinsic value method of APB No. 25. The estimated compensation expense approximated $13,000 in 1998 and none in 1997. If the fair value method of accounting had been applied to such options, the reported 1998 net loss would have increased by approximately $ 60,000 (less than $.003 per share). - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 14 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 8: NOTE PAYABLE The Company is indebted to Culley Davis, who financed the purchase of a 1999 Ford truck used by the Company for product demonstrations at remote locations. The note (original amount: $37,978) is payable in monthly installments of $770 including principal and interest, is secured by the truck, and bears interest at a fixed rate of 7.9%. The principal of this note matures as follows: YEAR ENDING DECEMBER 31 AMOUNT ------------- ------------- 1999 $ 6,599 2000 7,140 2001 7,725 2002 8,358 2003 6,831 ------------- $ 36,653 ------------- ------------- NOTE 9: ECONOMIC DEPENDENCY AND POLITICAL RISK OF FOREIGN VENDORS The Company's production plans call for virtually all product assembly (about 40,000 units/month - unaudited) and cutting blade manufacturing to take place in China in the near term. The product assembly has been contracted to one company - - MVP Enterprises. Two other Chinese companies have been engaged to manufacture a total of about 70,000 blades/month (unaudited). In addition to the political risk in China, there is also an element of economic dependency inherent in these relationships. In the future, the Company may contract with other offshore entities for blade manufacturing and product assembly. There could be political risk associated with dependence on vendors in those foreign countries. The Company intends that all design/engineering of tools and dies, research and development activities, and domestic product assembly (about 2,000 units/month - unaudited) will be accomplished by MTD. In this instance, there is economic dependence on Don Sullivan's personal expertise and his continuing availability to the Company. NOTE 10: INCOME TAXES As a result of the Reorganization, Cherokee's tax net operating loss (NOL) carryforward was eliminated by operation of tax law. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 15 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 10: INCOME TAXES (CONTINUED) For the period from inception to December 31, 1998, the Company is considered a start-up entity for federal and state income tax purposes. All expenses are capitalized for tax purposes and expensed for financial reporting purposes; this difference is the only significant temporary difference as of December 31, 1998 and 1997. As a result, the Company's tax NOL carryforward is zero at December 31, 1998 and 1997. The Company's accounting NOL carryforward approximates $4,580,000 at December 31, 1998. The related deferred tax asset approximated $1,450,000 and $160,000 at December 31, 1998 and 1997, respectively. Because the Company is a development stage enterprise and there is no reasonable assurance that such asset will be realized in future years, the Company has recorded a 100% valuation allowance against this deferred tax asset. A summary of the activity in the valuation allowance for the deferred tax asset during the two years ended December 31, 1998 is presented below: AMOUNT -------------- Balance at January 1, 1997 $ 100,640 Adjustment for 1997 deferred tax asset 158,502 ------------- Balance at December 31, 1997 259,142 1998 adjustments: Deferred tax asset 1,448,843 Certain direct credits to stockholders' equity related to stock option accounting 87,664 ------------- Balance at December 31, 1998 $ 1,795,649 ------------- ------------- In 1998, an additional income tax benefit (and an equal amount of valuation allowance) of approximately $88,000 has been allocated to items credited directly to stockholders' equity. Approximately $235,000 relating to stock option accounting (see Note 6) was credited to additional paid-in capital. - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- PAGE 16 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 11: COMMITMENTS AND CONTINGENT LIABILITIES A. LEASE COMMITMENT The Company conducts its domestic operations from a facility leased for a five-year period ending October 31, 2003 with an option to renew until approximately September 2005. Annual rent is $81,000 for the twelve-month period ending October 15, 1999; such rent increases 3% per annum thereafter. The Company is also responsible for insurance, utilities, property taxes and common area maintenance costs, which will total approximately $16,000 for the year ended December 31, 1999. Such costs are subject to increase thereafter based on the lessor's actual expenses. The following is a schedule of the approximate future minimum rental payments (including related costs, based on 1999 amounts) required by the above operating lease: YEAR ENDING DECEMBER 31 AMOUNT ------------ ---------------- 1999 $ 97,500 2000 100,000 2001 102,500 2002 105,000 2003 89,500 Thereafter - ------------- $ 494,500 ------------- ------------- B. COMMITMENTS TO ISSUE COMMON STOCK AND OTHER MATTERS On January 12, 1999, the Company executed a contract to (a) memorialize the ongoing manufacturing and consulting arrangement with MTD and Don Sullivan (DS) and (b) purchase at least 19,000 finished product units from MTD in calendar 1999 at a fixed price. One provision of such contract requires the Company to enter into an agreement whereby 50,000 shares of its common stock will be issued to DS, contingent upon (1) his continued employment by MTD and (2) MTD maintaining its existing business relationship with the Company. Although a definitive agreement regarding the stock issuance had not been consummated as of February 19, 1999, the Company and DS have agreed in principle that, if the above-noted conditions are not satisfied, the rights to such common stock will be forfeited as follows: FORFEITURE NUMBER OF DATE SHARES ----------- --------- 12/31/1999 30,000 12/31/2000 20,000 12/31/2001 10,000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PAGE 17 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 11: COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) On December 4, 1998, the Company and PACE entered into a master agreement which includes the following provisions: - - The Company granted the rights to manufacture and market the Product in Asia to PACE. Such rights become exclusive if certain sales quotas are met. - - The Company will receive a royalty of $50/unit, up to a maximum of $5 million. Such maximum shall be reduced to the extent PACE establishes a credit facility for the manufacture/purchase of units in the defined territory. - - Hideyuki Nakamura, PACE's sole owner, agreed to provide $200,000 of working capital to PACE for operating expenses. - - Hideyuki Nakamura agreed to assign 50% of the issued and outstanding capital stock of PACE to the Company, which in turn agreed to issue 100,000 post-merger shares of the Company's common stock to Hideyuki Nakamura. - - The Company's executive management personnel will hold key officer positions with PACE. PACE and the Company have also agreed to enter into one or more definitive agreements to accomplish certain of the above matters. As of February 19, 1999, such agreements had not been executed. At December 31, 1998, the Company did not have an investment in PACE and, accordingly, the accompanying statements of operations do not include any equity in PACE's earnings or loss. NOTE 12: GOING CONCERN/LIQUIDITY CONSIDERATIONS As discussed in Note 1, the Company is a development stage enterprise developing the HYDRO-MAID water-powered garbage disposal. Introductory sales have been nominal and management projects that the Company will require significant additional capital in order to lower manufacturing costs, reduce the selling price to competitive levels, and provide marketing and distribution. Although the Company issued common stock for $1.2 million in cash during January, 1999, management projects that significant additional capital will be needed. Accordingly, there is uncertainty about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PAGE 18 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 13: ADVANCES FROM RELATED PARTY In 1998, Culley W. Davis made unsecured advances to the Company totaling $1,478,467, which included $1,427,000 of proceeds from sales of his Company stock to investors at $8 per share. The stock sold by Culley W. Davis was personally owned by him or PEI and the proceeds were advanced to the Company according to an agreement between the parties. During December 1998, the Company issued 178,375 shares of common stock to Culley W. Davis valued at $8 per share as reimbursement stock for his personal shares sold. The stock sale proceeds received by the Company have been reported as an original stock issuance in the accompanying financial statements. The remaining balance of $51,467 represents advances to the Company by Culley W. Davis and PEI. These advances are non-interest bearing and have been reported as a current liability in the accompanying balance sheet. NOTE 14: DISBURSEMENTS BY RELATED PARTY Prior to 1998, the Company had insignificant cash transactions. PEI disbursed substantially all cash for the Company's activities involving operations, investment and financing, including $548,251 for the year ended December 31, 1997. Such disbursements are included in additional paid-in capital in the accompanying financial statements. For the year ended December 31, 1998, such disbursements by PEI were not signigicant. NOTE 15: YEAR 2000 (UNAUDITED) Many computerized systems use only two digits to record the year in date fields and such systems may not be able to accurately process dates ending in the year 2000 and thereafter. The effects of this problem will vary from system to system and may adversely affect a company's operations as well as its ability to prepare financial statements. Management has adopted a plan to review its internal computer systems to determine the effects, if any, of the year 2000 problem. The effect of external year 2000 problems, if any, cannot be determined. NOTE 16: LOSS PER SHARE (SEE PAGE 20) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PAGE 19 - -------------------------------------------------------------------------------- HYDROMAID INTERNATIONAL, INC. (FORMERLY CHEROKEE MINERALS AND OIL, INC.) (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NOTE 16: LOSS PER SHARE Basic loss per share is computed by dividing loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects per share amounts that would have resulted if certain dilutive potential common stock had been issued. The weighted average number of common shares outstanding set forth below have been retroactively adjusted as if the Reorganization had occurred on June 24,1992. The following reconciles amounts reported in the accompanying financial statements. YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997 ----------------------------- ----------------------------- LOSS SHARES PER-SHARE LOSS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ ----------- ------------- ------ Net loss per financial statements Contingently issuable shares Loss attributable to common stockholders- basic loss per share Effect of other dilutive securities: Options Loss attributable to common stockholders- diluted loss per share JUNE 24, 1992 (INCEPTION) THROUGH DECEMBER 31, 1998 ------------------------- LOSS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ Net loss per financial statements Contingently issuable shares Loss attributable to common stockholders- basic loss per share Effect of other dilutive securities: Options Loss attributable to common stockholders- diluted loss per share - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 20