SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-2
HYDRO ENVIRONMENTAL RESOURCES, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
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Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
HYDRO ENVIRONMENTAL RESOURCES, INC.
2903 N.E. 109th Avenue, Suite D
Vancouver, Washington 98682
November 22, 2002
Dear Shareholders:
Our annual meeting of shareholders will be held on Tuesday, December 3,
2002, at 4:00 p.m. Pacific Standard Time, at our offices at 2903 N.E. 109th
Avenue, Suite D, Vancouver, Washington 98682. We are inviting you to attend this
meeting to give us an opportunity to meet you personally, to allow us to
introduce you to key management of your company and its directors, and to answer
your questions.
At this meeting, in addition to electing our directors and ratifying the
appointment of our auditors, you will be asked to approve an amendment to our
Articles of Incorporation. The amendment will increase the number of authorized
shares of common stock from 50,000,000 to 500,000,000. This proposal is very
important to you. The increase in the number of authorized shares of common
stock is designed to give us greater flexibility to issue our shares in
connection with the raising of capital, in connection with acquisitions and
financings, and in connection with stock related compensation plans for our key
employees and others.
We enclose the formal notice of meeting, the proxy statement that explains,
among other things, the amendment of our Articles of Incorporation, the proxy
card, and a copy of the annual report to shareholders describing our operations
for the fiscal year ended December 31, 2001.
I hope that you will be able to attend the meeting in person. Whether or
not you plan to attend the meeting, please sign and return the enclosed proxy
card promptly. Your shares will be voted at the meeting in accordance with your
proxy.
If you have shares in more than one name or if your shares are registered
in more than one way, you may receive multiple copies of the proxy materials. If
so, please sign and return each proxy card you receive so that all of your
shares may be voted. I look forward to meeting you at the annual meeting.
Sincerely,
/s/ David Rosenberg
-------------------
David Rosenberg, President and
Chief Executive Officer
OUR BOARD OF DIRECTORS HAS APPROVED THE PROPOSED AMENDMENT TO OUR ARTICLES OF
INCORPORATION AND RECOMMENDS THAT ALL SHAREHOLDERS VOTE TO APPROVE SUCH
AMENDMENT.
HYDRO ENVIRONMENTAL RESOURCES, INC.
2903 N.E. 109th Avenue, Suite D
Vancouver, Washington 98682
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 3, 2002
TO THE SHAREHOLDERS OF HYDRO ENVIRONMENTAL, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Annual
Meeting") of Hydro Environmental Resources, Inc., an Nevada corporation (the
"Company"), will be held at 4:00 p.m. PST, on Tuesday, December 3, 2002, at 2903
N.E. 109th Avenue, Suite D, Vancouver, Washington 98682, for the following
purposes:
1. To elect the directors of the Company to serve for a one (1) year term.
2. To approve the amendment of the Articles of Incorporation to increase
the number of authorized shares of common stock from 50,000,000 to 500,000,000.
3. To ratify the selection of Cordovano and Harvey, P.C., as independent
public accountants of the Company for the 2002 fiscal year.
4. To transact such other business as may properly come before the meeting
or any postponement or adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on November 9, 2002,
as the record date for the determination of shareholders entitled to notice and
to vote at this Annual Meeting and at any adjournment or postponement thereof.
By Order of the Board of Directors,
/s/ David Rosenberg
-------------------
David Rosenberg, Chief Executive Officer
Vancouver, Washington
November 22, 2002
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN, AND RETURN
THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT ATTENDANCE AT THE MEETING WILL NOT BY ITSELF REVOKE A PROXY.
FURTHERMORE, IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK, OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
HYDRO ENVIRONMENTAL RESOURCES, INC.
2903 N.E. 109th Avenue, Suite D
Vancouver, Washington 98682
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PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
To Be Held On December 3, 2002
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INFORMATION CONCERNING SOLICITATION AND VOTING
General Information
We are furnishing this proxy statement to the shareholders of Hydro
Environmental Resources, Inc., a Nevada corporation (the "Company"), for use at
our Annual Meeting of Shareholders to be held on December 3, 2002, at 4:00 p.m.
PST (the "Annual Meeting"), or at any adjournment or postponement thereof, for
the purposes set forth in this proxy statement and in the accompanying Notice of
Annual Meeting. Our Annual Meeting will be held at 2903 N.E. 109th Avenue, Suite
D, Vancouver, Washington 98682. We intend to mail this proxy statement and
accompanying proxy card on or about November 22, 2002 to all shareholders
entitled to vote at the Annual Meeting.
Voting Rights and Outstanding Shares
Only holders of record of shares of our common stock at the close of
business on November 9, 2002, will be entitled to notice of and to vote at the
Annual Meeting. At the close of business on November 19, 2002, we had
outstanding and entitled to vote 45,292,808 shares of common stock. Each holder
of record of our common stock on such date will be entitled to one vote for each
share held on all matters to be voted upon at the Annual Meeting. Our inspector
of election appointed for the meeting will tabulate all votes. Our inspector
also will separately tabulate affirmative and negative votes, abstentions, and
broker non-votes.
Voting Procedures
o Directors are elected by a plurality of the votes cast.
o The approval of the Articles of Amendment to the Articles of
Incorporation will require the affirmative vote of the holders of a
majority of the issued and outstanding shares of common stock.
1
o The approval of the ratification of our independent auditors for the
fiscal year ending December 31, 2002, will require the affirmative
vote of the holders of a majority of the shares of common stock
present or represented by proxy and entitled to vote at the annual
meeting.
o Abstentions will be counted towards the tabulation of votes cast on
proposals presented to the shareholders and will have the same effect
as negative votes.
o Broker non-votes are counted towards establishment of the required
quorum, but are not counted for any purpose in determining whether a
matter has been approved.
Revocability of Proxies
You may revoke your proxy at any time prior to voting at the Annual Meeting
by:
o Delivering to our Secretary at our principal executive office at 2903
N.E. 109th Avenue, Suite D, Vancouver, Washington 98682, a written
notice of revocation or a duly executed proxy bearing a later date; or
o Attending the Annual Meeting and voting in person.
Your attendance at the meeting will not by itself revoke a proxy.
Furthermore, if a broker, bank, or other nominee holds of record your shares and
you wish to vote at the meeting, you must obtain from the record holder a proxy
issued in your name.
Solicitation
We will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing, and mailing of this proxy statement, the proxy,
and any additional information furnished to shareholders. We also will furnish
copies of solicitation materials to banks, brokerage houses, fiduciaries, and
custodians holding in their names shares of common stock beneficially owned by
others to forward to such beneficial owners. We may reimburse persons
representing beneficial owners of common stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, facsimile, telegram, or
personal solicitation by our directors, officers, or other regular employees. We
will not pay any additional compensation to our directors, officers, or other
regular employees for these services.
ELECTION OF DIRECTORS -
PROPOSAL 5
As provided in our Bylaws, our Board of Directors has nominated a slate of
candidates for election to the Board of Directors for a term of one year and
until their successors have been elected and qualified. Our Bylaws also provide
that the Board of Directors have the right at any time during the ensuing year
to increase the number of directors and to elect such directors by a majority
vote.
2
Our directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the nominees named below. In the event that any nominee should be
unavailable for election, such shares will be voted for the election of such
substitute nominee as our Board of Directors may propose. The persons nominated
for election have agreed to serve if elected, and our Board of Directors has no
reason to believe that these nominees will be unable to serve.
Nominees for Director
The following nominees are standing for election to serve as members of our
Board of Directors to serve until the next annual meeting of shareholders or
until their successors are duly elected and qualified.
Name Age Position Director Since
---- --- -------- --------------
Steve Lennon 40 Vice President and Director June 2002
Michael Lysaght 45 Secretary, Chief Science Officer, July 2002
and Director
David Rosenberg 40 President and Chief Executive Officer October 2002
Mark Shmulevsky 44 Chief Information Officer, Treasurer, July 2002
Vice President, and Director
David A. Youngblood 45 Chief Products Engineer and Director July 2001
Set forth below is biographical information for each person nominated to
serve in office for a one year term expiring at the 2003 Annual Meeting.
Steve Lennon
Mr. Lennon has served as our Vice President and Director since June 2002.
Prior to serving as our Vice President and Director, he served as an
Administrator and Operations Manager for over 20 years for Scott Company
Mechanical Contractors, one of the ten largest mechanical contractors in the
United States of America. Mr. Lennon also currently serves on the Board of
Directors of the Oregon Chemical Contractors Association. He is certified in
certain engineering medias, including pure bond fusion, and infrared fusion.
3
Michael Lysaght
Dr. Lysaght has served as our Secretary, Chief Science Officer, and
Director since July 2002. Prior to serving as our Secretary, Chief Science
Officer, and Director, he served as an officer with the United States Air Force
for over 20 years. During the time he served as an officer with the United
States Air Force, he served as Director of Research and Assistant Professor of
Chemistry at the United States Air Force Academy and Deputy Director for the Air
Vehicles Directorate of the United States Air Force Research Laboratory. Dr.
Lysaght received his PhD in analytical chemistry from the University of
Washington in 1991, with an emphasis of instrumental analysis and fuels
research. His research has been published in several scientific journals,
including Fuel, Analytical Chemistry, Journal of Applied Electrochemistry, and
Review of Scientific Instrumentation.
David Rosenberg
Mr. Rosenberg has served as our Chief Executive Officer since June 2002 and
as our President and director since October 2002. Mr. Rosenberg also serves as
the Vice President and Treasurer of Pizzicato, Inc., a pizza restaurant chain
located in Portland, Oregon. Until February 2002, he served as Pizzicato's Chief
Operating Officer for nine years. Mr. Rosenberg studied international relations
at Hebrew University, Jerusalem, Israel from 1984 to 1989. During that time,
Hebrew University employed him to serve as its Coordinator for Absorption and
Coordinator for Internal Affairs. He also served with the Israeli Defense Forces
until his honorable discharge in 1984.
Mark Shmulevsky
Mr. Shmulevsky has served as our Chief Information Officer, Treasurer, Vice
President, and Director since July 2002. Prior to serving as our officer and
director, he served as a professor as Latvia State University in Riga, Latvia.
During that time, he also has consulted with many companies, including Intel,
Lucent, and Terabean, and with several governmental agencies. He has served on
the boards of directors of several companies, including Structured Network
Systems, Storied Learning, and RealIntellect.
David A. Youngblood
Mr. Youngblood has served as our director since July 2001 and as our Vice
President and Chief Products Engineer since February 2001. Prior to February
2001, he served as our consultant. Since becoming Chief Products Engineer, he
has orchestrated the development of an all-new ECHFR unit, converted hydrogen
vehicle support systems, and is currently developing several other projects.
Prior to working for us, he served as a Records and Development Technician for
Nikon Research Corporation of America ("NCRA") in Belmont, California from 1997
to 2000. He developed concepts and projects relating to microphotolithography
manufacturing processes for optically exposing silicon wafers and new products.
He also supported NCRA's Director of Electronics and NCRA's mechanical
designers, mechanical engineers, and consultants. He was responsible for
electromechanical packaging, quality manufacturing, lab/facility support,
equipment, and component specification, Cad Design, mechanical and electronic
inspection, circuit board proofing, and general manufacturing practices.
4
Meetings and Committees of the Board of Directors
During the fiscal year 2001, our Board of Directors met nine times and
acting by unanimous consent five times. To our management's best knowledge, each
of the directors who served on our Board of Directors in 2001 (all of whom no
longer serve as our directors) attended at least 75 percent of the aggregate of
the total number of directors' meetings held during the period in which he was a
director.
We do not have audit, nominating, or compensation committees of the Board
of Directors or any committees performing similar functions.
Vote Required
The five candidates receiving the highest number of affirmative votes cast
at the meeting will be elected directors of the Company. Abstentions and broker
non-votes will have the same effect as a vote against this Proposal 1.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
IN FAVOR OF THESE NOMINEES
AMENDMENT OF THE COMPANY'S ARTICLES OF INCORPORATION -
PROPOSAL 6
Summary of Proposed Articles of Amendment
Our Board of Directors adopted a resolution recommending that the
shareholders approve Articles of Amendment to the Articles of Incorporation (the
"Proposed Articles of Amendment"). The Proposed Articles of Amendment increase
the number of authorized shares of common stock from 50,000,000 to 500,000,000.
A copy of the Proposed Articles of Amendment is attached to this proxy statement
as Appendix A.
If the shareholders approve the Proposed Articles of Amendment, the
additional authorized shares of common stock will have rights identical to the
currently issued and outstanding shares of common stock. The shareholders'
approval of the Proposed Articles of Amendment and the issuance of any
additional shares of common stock after the date of the approval of the Proposed
Articles of Amendment will not affect the rights of the holders of the currently
issued and outstanding shares of common stock except for the effects incidental
to an increase in the number of shares of the common stock outstanding, such as
dilution of the earnings per share and voting rights of the current holders of
the common stock.
5
If the Proposed Articles of Amendment are approved by the shareholders,
then our Board of Directors intends to file them with the Secretary of State of
the State of Nevada promptly after shareholder approval. However, as permitted
by the laws of the State of Nevada, our Board of Directors is not required to
file the Proposed Articles of Amendment if it determines that such action would
be in the best interest of the Company. We currently know of no reason why the
Proposed Articles of Amendment would not be filed if approved by the
shareholders.
Our Board of Directors believes that the Proposed Articles of Amendment are
in the best interests of the Company and its shareholders. The Company current
has issued and outstanding [44,792,808] shares of common stock as of November
21, 2002. Therefore, since the Articles of Incorporation currently authorize
only the issuance of up to 50,000,000 shares of common stock, we may issue only
[5,207,192] shares of stock in the future. Our Board of Directors believes that
approval of the Proposed Articles of Amendment will improve our flexibility to
issue additional shares of common stock and securities convertible into common
stock when needed in the future. As such, this flexibility will permit our Board
of Directors to issue shares in connection with capital formation, in connection
with an acquisition or financing, and in connection with stock compensation
plans for our employees and others.
Vote Required
The affirmative vote of the holders of a majority of the shares of common
stock issued and outstanding will be required to approve the Proposed Articles
of Amendment. Abstentions will be counted toward the tabulation of votes cast on
this proposal and will have the same effect as negative votes. Broker non-votes
are counted towards a quorum, but are not counted for any purpose in determining
whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR
OF THE PROPOSED ARTICLES OF AMENDMENT
RATIFICATION OF SELECTION OF
INDEPENDENT PUBLIC ACCOUNTANTS -
PROPOSAL 7
Our Board of Directors has selected Cordovano and Harvey, P.C. as our
independent public accountants for the fiscal year ending December 31, 2002.
Cordovano and Harvey, P.C. has audited our financial statements since fiscal
year 2000. A representative of Cordovano and Harvey, P.C. is not expected to be
present at our Annual Meeting.
6
Shareholder ratification of the selection of Cordovano and Harvey, P.C. as
our independent public accountants is not required by our Bylaws or other
applicable legal requirement. However, the Board of Directors is submitting the
selection of Cordovano and Harvey, P.C. to the shareholders for ratification as
a matter of good corporate practice. If the shareholders fail to ratify the
selection, the Board of Directors will reconsider whether or not to retain that
firm. Even if the selection is ratified, the Board of Directors at its
discretion may direct the appointment of a different independent accounting firm
at any time during the year if it determines that such a change would be in our
best interests and in the best interests of our shareholders.
Audit Fees
During the fiscal year ended December 31, 2001, Cordovano and Harvey, P.C.
billed us $8,450 for the audit of our financial statements for such fiscal year
and for the reviews of our interim financial statements.
Financial Information Systems Design and Implementation Fees
During the fiscal year ended December 31, 2001, Cordovano and Harvey, P.C.
did not bill us for any fees relating to information technology consulting fees.
All Other Fees
During the fiscal year ended December 31, 2001, Cordovano and Harvey, P.C.
billed us $600 for professional services other than audit fees.
Vote Required
The affirmative vote of the holders of a majority of the shares represented
and entitled to vote at the meeting will be required to ratify the selection of
Cordovano and Harvey, P.C. as our independent public accountants for the fiscal
year ending December 31, 2002. Abstentions will be counted toward the tabulation
of votes cast on this proposal and will have the same effect as negative votes.
Broker non-votes are counted towards a quorum, but are not counted for any
purpose in determining whether this matter has been approved.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF
THE RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN SHAREHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of November 7, 2002, by:
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o Each person known by us to be the beneficial owner of more than ten
percent of our outstanding common stock;
o Each of our directors;
o Each of our named executive officers; and
o All directors and officers as a group.
Except as otherwise indicated, we believe that the beneficial owners of our
common stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
Amount of Percent of
Name and Address of Beneficial Owner(1) Ownership(2) Class(3)
- --------------------------------------- ------------ --------
David Harmsen 40,000 *
Steve Lennon 808,125 1.78%
Michael Lysaght 0 0
David Rosenberg 3,179,800 7.02%
Mark Shmulevsky 1,009,479 2.23%
David A. Youngblood 1,086,000 2.40%
Officers and directors as a group (five persons) 6,123,404 13.52%
Each of the persons referred to above do not hold any options, warrants, or
rights to purchase securities from the Company.
- ----------
(1) The address of each beneficial owner is that of the Company at 2903
N.E. 109th Avenue, Suite D, Vancouver, Washington 98682.
(2) We determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission ("SEC"), based on factors including voting
and investment power with respect to shares. Common stock subject to options
currently exercisable, or exercisable within 60 days after November 7, 2002, are
deemed outstanding for computing the percentage ownership of the person holding
such options, but are not deemed outstanding for computing the percentage
ownership for any other person.
(3) Based on an aggregate of 44,792,808 shares of our common stock issued
and outstanding as of November 7, 2002.
*Constitutes less than 1% of all of our issued and outstanding shares of
common stock.
8
EXECUTIVE OFFICERS
Officers
The following table sets forth certain information regarding our executive
officers:
Position Held
Name Position Since
---- -------- -----
David Rosenberg President and Chief Executive Officer 2002
Steven Lennon Vice President and Director 2002
Mark Shmulevsky Vice President, Treasurer, Chief 2002
Information Officer, and Director
David Youngblood Chief Products Engineer and Director 2001
Michael Lysaght Secretary, Chief Science Officer, 2002
and Director
David V. Harmsen Chief Financial Officer 2002
Information concerning Messrs. Rosenberg, Lennon, Shmulevsky, Youngblood,
and Lysaght is included under "Election of Directors."
David V. Harmsen
Mr. Harmsen serves as our Chief Financial Officer. Prior to serving as our
Chief Financial Officer, he provided tax and accounting services to a variety of
clients. Mr. Harmsen serves on a number of boards of directors and has degrees
in accounting, economics, business administration, and philosophy.
Remuneration of Directors and Executive Officers
The following table shows the aggregate annual remuneration of the
following officers or directors who received any remuneration from us during the
fiscal year ended December 31, 2001:
Capacities in Which
Name of Individual Remuneration was Received Aggregate Remuneration
- ------------------ ------------------------- ----------------------
John Wheeler Director $50,000
David Youngblood Chief Products Engineer $40,410.22
9
Relationships Among Directors and Executive Officers
There are no family relationships among any of our directors or executive
officers.
Interests of Management and Others in Certain Transactions
On May 22, 2002, we entered into a consulting agreement with David
Rosenberg, our President and Chief Executive Officer. Mr. Rosenberg agreed to
provide the following services to us:
o To assist us in our capital formation efforts.
o To assist us in retaining directors and hiring key employees.
o To assist us in negotiating contracts with federal, state, and local
government agencies.
o To assist us in establishing our office and hiring of employees for
our office.
o To perform such other duties as the Board of Directors may from time
to time request that he provide to us.
We issued to him 1,000,000 shares of our common stock on May 22, 2002, in
consideration for providing those services to us. We also agreed to issue to him
an additional 1,000,000 shares of common stock in quarterly installments of
250,000 shares of common stock with the first installment to be issued on July
1, 2002, and subsequent installments to be issued on October 1, 2002, January 1,
2003, and April 1, 2003. To date, we have issued Mr. Rosenberg a total of
1,000,000 shares pursuant to the consulting agreement. Mr. Rosenberg has agreed
to allow us to hold in abeyance issuing the remainder of the shares to him until
a mutually agreeable date in the future.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires that our officers and directors and persons who own
more than ten percent of a registered class of our equity securities, file
reports of ownership, and changes of ownership with the SEC. Officers,
directors, and greater than ten percent shareholders are required by the SEC
regulations to furnish us with copies of all such reports they file.
Based solely on our review of the copies of such reports received by us,
and on written representations by our officers and directors regarding their
compliance with the applicable reporting requirements under Section 16(a) of the
Exchange Act, we believe that, with respect to its fiscal year ended December
31, 2001, all of our directors and officers and all of the persons known to us
to own more than ten percent of our common stock, either failed to file on a
10
timely basis or have yet to file the required beneficial ownership reports with
the SEC. We have adopted and implemented a compliance program for our officers
and directors to ensure that they file all required reports not yet filed and to
file when due all reports required to be filed in the future. We anticipate that
all required reports will be filed not later than December 31, 2002.
SHAREHOLDER PROPOSALS
Our next annual meeting is scheduled for May 20, 2003. The deadline for
submitting a shareholder proposal for inclusion in our proxy statement and form
of proxy for our 2003 Annual Meeting of shareholders pursuant to Rule 14a-8 of
the SEC is January 9, 2003. If the date of the annual meeting is advanced by
more than 30 calendar days or delayed by more than 90 calendar days from this
meeting date, we will, in a timely manner, inform all shareholders of the
changed meeting date and of the date by which such proposals must be received.
ANNUAL REPORT TO SHAREHOLDERS
We have included as Appendix B with this proxy statement a copy of our
Annual Report to Shareholders for the year ended December 31, 2001. We
incorporated into our Annual Report to Shareholders certain parts of our Form
10-KSB, filed with the SEC on April 16, 2002. The entire filing, with all
exhibits attached, are available online at the SEC's website, www.sec.gov, or at
FreeEdgar, www.FreeEdgar.com.
OTHER MATTERS
Our Board of Directors knows of no other business to come before the
meeting. However, if other matters properly come before the meeting, it is the
intention of the persons named in the enclosed proxy to vote the shares
represented thereby in accordance with their best judgment.
Please return your proxy as soon as possible. Unless a quorum consisting of
a majority of the outstanding shares entitled to vote is represented at the
meeting, no business can transacted. Therefore, please be sure to date and sign
your proxy exactly as your name appears on your stock certificate and return it
in the enclosed postage prepaid return envelope. Please act promptly to ensure
that you will be represented at this important meeting.
WE WILL PROVIDE, WITHOUT CHARGE, UPON THE WRITTEN REQUEST OF ANY BENEFICIAL
OWNER OF SHARES OF OUR COMMON STOCK ENTITLED TO VOTE AT THE ANNUAL MEETING OF
SHAREHOLDERS, A COPY OF OUR ANNUAL REPORT ON FORM 10-KSB AS FILED WITH THE SEC
FOR OUR FISCAL YEAR ENDED DECEMBER 31, 2001. WRITTEN REQUESTS SHOULD BE MAILED
TO MICHAEL LYSAGHT, SECRETARY, HYDRO ENVIRONMENTAL RESOURCES, INC., 2903 N.E.
109TH AVENUE, SUITE D, VANCOUVER, WASHINGTON 98682.
BY ORDER OF THE BOARD OF DIRECTORS
By: /s/ David Rosenberg
-----------------------
David Rosenberg, Chief Executive Officer
11
Office Use Only
DEAN HELLER
Secretary of State
[SEAL]
202 North Carson Street
Carson City, Nevada 89701-4201
(775) 684 5708
APPENDIX A
Certificate of Amendment
(PURSUANT TO NRS 78.385 and 78.390)
Important: Read attached instructions before completing form.
- --------------------------------------------------------------------------------
Certificate of Amendment to Articles of Incorporation
For Nevada Profit Corporations
(Pursuant to NRS 78.385 and 78.390 - After Issuance of Stock)
- Remit in Duplicate -
1. Name of corporation: Hydro Environmental Resources, Inc.
2. The articles have been amended as follows (provide article numbers, if
available): The first paragraph of Article Four is hereby amended in its
entirety to state as follows: "This Corporation is authorized to issue two
(2) classes of capital stock, referred to as Common Stock and Preferred
Stock, each with a par value of $0.001 per share. This Corporation shall be
authorized to issue a maximum of five hundred million (500,000,000) shares
of Common Stock and a maximum of five million (5,000,000) shares of
Preferred Stock."
3. The vote by which the stockholders holding shares in the corporation
entitling them to exercise at least a majority of the voting power, or such
greater proportion of the voting power as may be required in the case of a
vote by classes or series, or as may be required by the provisions of the
articles of incorporation have voted in favor of the amendment is:
________________ *
4. Officer Signature (Required): David Rosenberg, President and Chief
Executive Officer
*If any proposed amendment would alter or change any preference or any relative
or other right given to any class or series of outstanding shares, then the
amendment must be approved by the vote, in addition to the affirmative vote
otherwise required, of the holders of shares representing a majority of the
voting power of each class or series affected by the amendment regardless of
limitations or restrictions on the voting power thereof.
IMPORTANT: Failure to include any of the above information and remit the proper
fees may cause this filing to be rejected.
APPENDIX B
ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2001
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 2001
Commission File No. 000-27825
HYDRO ENVIRONMENTAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Nevada 73-1552304
(State of organization) (I.R.S. Employer Identification No.)
6170 W. Lake Mead Blvd., Las Vegas, NV 89108
(Address of principal executive offices)
Registrant's telephone number, including area code (702) 597-9070
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
Check whether the issuer (1) filed all reports required to be file by Section 13
or 15(d) of the Exchange Act during the past 12 months and (2) has been subject
to such filing requirements for the past 90 days. Yes [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [ ]
Issuer's revenues during the year ended December 31, 2001: $-0-
As of March 28, 2002, the aggregate market value of the voting and non-voting
common equity held by non-affiliates, approximately 17,522,124 shares of common
stock, based on the average bid and asked price of $0.015 as quoted on the OTC
Bulletin Board, was $262,831.86.
As of March 28, 2002, there were 19,088,124 shares of the issuer's common stock
outstanding.
- --------------------------------------------------------------------------------
THIS ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001, CONTAINS
INFORMATION FROM THE ANNUAL REPORT ON FORM 10-KSB THAT HYDRO ENVIRONMENTAL
RESOURCES, INC. FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2001.
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
None
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Development of the Company
The Company was incorporated under the laws of Oklahoma on
November 10, 1998. The principal activities since inception have
been organizational matters and the sale and issuance of shares
of its $0.001 par value common stock plus research and
development of the ECHFR. The Company was formed to design,
build and manage inexpensive and environmentally friendly fuel
and power producing systems for remote areas of the world that
are without electricity and other sources of power.
On June 16,1999, the rights to the ElectroChem Hydrogen Fuel
Reactor (ECHFR), a prototype-stage technology that produces clean
burning hydrogen gas at low pressure from any water source, were
assigned to the Company in exchange for 15,000,000 shares of
restricted common stock to the inventor, Mr. James Pelto. Mr.
Pelto built the prototype ECHFR and will continue to be involved
in its development and commercialization.
Business of the Company
The objective of the Company is to design, build and manage
inexpensive and environmentally friendly fuel and power producing
systems for remote areas of the world that are without
electricity, cooking fuel, fresh water or power of any kind.
The ECHFR is designed to be used where there is no energy readily
available. All that is required for the ECHFR to work is water
and a proprietary mixture of dry chemicals that are readily
available, light in weight, and easily transported. The Company
is not aware of another power generation system that is similar
to the ECHFR. The ECHFR is a sophisticated mechanical reactor
that creates an electrical current that splits the water
molecule, separating the two hydrogen atoms from the oxygen atom.
The ECHFR activates a formula that removes hydrogen from the
formula on a stand-by or as needed basis using equipment that can
be portable or stationary. The result is clean burning hydrogen
gas that can be used for cooking, heating or refrigeration.
Ultimately, the Company intends to build, market and operate a
stationary power site using a ECHFR system capable of supplying
power for a city of approximately 3,000 people. The Company plans
to market the ECHFR technology in places that are currently
underserved by conventional power companies, including Indonesia,
China, Philippines, Malaysia, Middle East and parts of Central
and South America. In addition to providing fuel, other potential
markets for the ECHFR are industrial mining and wastewater
cleansing and property restoration.
The Industry
The Company believes that its ECHFR technology is unique. There
is no ECHFR or its equivalent used to produce energy anywhere
else at this time. The ECHFR uses water and a proprietary mixture
of chemicals to produce hydrogen gas for cooking, heating and
refrigeration.
A potential competing technology to the ECHFR is the hydrogen
fuel cell. Fuel cells are electro-chemical devices, similar to a
battery, in which hydrogen (either pure hydrogen gas or hydrogen
extracted from a fuel that contains the element) and oxygen from
the air are combined to produce electricity, water and a modest
amount of waste heat. The conversion efficiency can be as high as
80%, but actual values vary with fuel cell types. Each cell
produces 0.5-0.9 volts, so a large number of cells must be
stacked together and electrically connected in a series and
parallel to achieve the desired output. Like a battery, a fuel
cell stack has no moving parts (except for small fans and pumps
to remove or recover waste heat) has near-zero emissions except
for water, and is ultra-quiet. These characteristics make the
fuel cell a highly attractive power source for automobiles and
other vehicles, and for stationary power plants.
Fuel cell power systems can be classified in three groups by type
of application: 1) those intended to replace the internal
combustion engine in automobiles, trucks and buses, 2) those
intended to serve as distributed generation power plant that are
at or close to homes, buildings, and manufacturing plants; and 3)
those that are intended to replace batteries in everything from
cellular telephones, flashlights, computers, radios, golf carts,
powered wheelchairs, to portable outdoor signs.
Hydrogen fuel cell technology is currently being commercialized.
According to a report documenting perspectives, insights and
discussions presented by industry leaders at a recent conference
on The Business Case for Fuel Cells (July 15-16, 1999), total
worldwide R&D spending on fuel cell technology is nearly $1
billion per year with funding provided by vehicle manufacturers,
equipment manufacturers, utilities, and government agencies in
the U.S., Europe and Japan. About 80% of the funding is directed
toward the development of fuel cell systems for electric vehicles
such as automobiles, trucks, buses and golf carts.
Companies such as Daimler Chrysler and Ford have recognized the
future commercial potential of hydrogen fuel cells for the
automotive industry and have developed strategic alliances with
and have invested over $500 million in Ballard Power Systems, a
leading company in the commercialization of the hydrogen fuel
cell. Ballard, together with its alliance partners and associated
companies, plans to bring to market their first portable power
products in 2001; their first transit bus engines in 2002; their
first stationary power products between 2002 and 2003; and their
first automotive engines between 2003 and 2005.
Manufacturers and marketers of hydrogen fuel cells include
Ballard Power Systems, DCH Technology, Inc., ONSI, Ergenics, H
Power Corp., and Powerball Technologies. These companies produce
fuel cells on a made-to-order basis. Competitors may be able to
develop technologies that are as effective as, or more effective,
easier or cheaper to use, than those offered by the Company. The
Company's existing and potential competitors have substantially
greater financial, marketing, sales, manufacturing, distribution
and technological resources than the Company. There is no
assurance that the Company will be able to successfully compete.
Patents
The Company is presently in the process of upgrading its
technical documentation and will re-apply for patents using these
upgraded procedures. There is no assurance that the patents will
issue and there is no assurance that if the patents issue that
they will not infringe on other patents. Management does not have
an estimated time frame for the patents to be issued. If the
patents issue, their duration will be from 17 to 20 years from
the date of issuance.
Government regulation
Although the Company is not aware of any government approvals
required prior to or in conjunction with its marketing of the
ECHFR in Indonesia, China, Philippines, Malaysia, Middle East and
parts of Central and South America, there is no assurance that
such government approvals will not be required in the future. In
addition, compliance with government or regulatory requirements,
if any, could have a material adverse affect on the operations of
the Company.
Employees
The Company presently has 2 officers and 3 directors. The
officers and directors are engaged in other business activities
and devote no more than 50% of their time to the business of the
Company. The Company currently has 5 full-time employees and
plans to hire additional employees during the next twelve months
to market the ECHFR. Additionally, the Company plans to retain
consulting engineers on a project-by-project basis. However,
there is no assurance that any employees will be hired or any
consultants will be retained.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns no property. In March of 2002, the Company
relocated its corporate offices to 6170 W. Lake Mead Blvd., Las
Vegas, NV 89108 and is in the process of establishing a
manufacturing facility in Astoria, Oregon for the purpose of
commencing manufacturing and production.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal
proceedings and, to the best of its knowledge, no such action by
or against the Company has been threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No such matters were submitted during the most recent quarter.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Market Information
The Company's Common Stock, $.001 par value, the only class of
common equity of the Company, is traded on over-the-counter under
the symbol "HYVR." Trading commenced on October 5, 2000. The
following table sets forth the range of high and low bid
quotations for the Company's common stock on the OTC Bulletin
Board for each quarter commencing October 5, 2000.
Low Bid High Ask
4th Qtr. 2000 $0.06 $1.12
1st Qtr. 2001 $0.06 $0.50
2nd Qtr. 2001 $0.07 $0.39
3rd Qtr. 2001 $0.10 $1.01
4th Qtr. 2001 $0.10 $0.30
1st Qtr. 2002 $0.01 $0.15
The source of this information is America Online Finance
quotation services and broker-dealers making a market in the
Company's common stock. These prices reflect inter-dealer
prices, without retail markup, markdown or commission and may not
represent actual transactions.
Holders
As of March 28, 2002, there were approximately 418 holders of
record of the Company's Common Stock (not including beneficial
owners holding in "street-name").
Dividends
The Company has paid no cash dividends on its Common Stock and
management does not anticipate that such dividends will be paid
in the foreseeable future.
Sales of Unregistered Securities
Share sold for cash
During February 1999, the Company offered for sale 11,300,000
shares of its $.001 par value common stock for $.001 per share
pursuant to an exemption from registration claimed under Rule 504
of Regulation D of the Securities Act of 1933, as amended (the
"Act"). The Company sold all 11,300,000 shares for net proceeds
of $9,375, after deducting offering costs totaling $1,925.
Reverse stock split
On August 16, 2001, subsequent to shareholder approval at the
Company's Annual Meeting of Shareholders, the Company completed
its redomiciling merger with Hydro Environmental Resources, Inc.,
a Nevada corporation, and, pursuant to the Plan of Merger, each
five (5) shares of common stock of the Oklahoma corporation was
exchanged for one share of the Nevada corporation. Following the
Plan of Merger, the Company's issued and outstanding common
shares totaled 6,929,028. The loss per share and weighted
average common shares outstanding disclosures in the accompanying
financial statements have been restated to reflect the reverse
stock split.
Stock-based compensation
During the year ended December 31, 2001, the Company issued
750,000 shares of its common stock to its attorney in exchange
for legal services. The market value of the common stock ranged
from $.20 to $.26 per share. Stock-based compensation expense of
$178,000 was recognized in the accompanying financial statements
for the year ended December 31, 2001.
During the year ended December 31, 2001, the Company issued
4,739,174 shares of its common stock to unrelated third parties
in exchange for marketing, funding, administrative, managing, due
diligence and other consulting services. The market value of the
common stock ranged from $.15 to $.25 per share. Stock-based
compensation expense of $957,063 was recognized in the
accompanying financial statements for the year ended December 31,
2001.
On May 31, 2001, the Company gifted 150,000 shares of its
restricted common stock to a shareholder. The market value of the
common stock on the transaction date was $.25 per share. Stock-
based compensation expense of $37,500 was recognized in the
accompanying financial statements for the year ended December 31,
2001.
On July 10, 1999, the Company entered into a consulting agreement
with an unrelated third party to provide financial advisory
services to the Company. Upon signing the agreement, the Company
agreed to issue the consultant 750,000 shares of its $.001 par
value common stock. The transaction was valued at the estimated
fair value of the common stock on the date of issuance as
determined by the Board of Directors based on contemporaneous
equity transactions and other analysis. The Company recorded
stock-based compensation in the accompanying financial statements
totaling $750.
ITEM 6. MANAGEMENT'S PLAN OF OPERATION
Forward-looking statements are statements that estimate the
happening of future events and are not based on historical facts.
Forward-looking statements may be identified by the use of
forward-looking terminology, such as "could", "may", "will",
"expect", "shall", "estimate", "anticipate", "probable",
"possible", "should", "continue", "intend" or similar terms,
variations of those terms or the negative of those terms. The
forward-looking statements specified in this report have been
compiled by management of the company on the basis of assumptions
made by management and considered by management to be reasonable.
Future operating results of the company, however, are impossible
to predict and no representation, guaranty, or warranty is to be
inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking
statements represent estimates of future events and are subject
to uncertainty as to possible changes in economic, legislative,
industry, and other circumstances. As a result, the
identification and interpretation of data and other information
and their use in developing and selecting assumptions from and
among reasonable alternatives require the exercise of judgment.
To the extent that the assumed events do not occur, the outcome
may vary substantially from anticipated or projected results,
and, accordingly, no opinion is expressed on the achievability of
those forward-looking statements. No assurance can be given that
any of the assumptions relating to the forward-looking statements
specified in this report are accurate, and we assume no
obligation to update any such forward-looking statements.
We plan to satisfy our cash requirements, over the next twelve
months, through cash infusions from our principal shareholder, in
exchange for restricted stock. However, we will need to raise
additional capital in the next twelve months. Our management is
considering the following options:
(a) a private offering and sale of our common stock;
(b) a public offering and sale of our common stock; or
(c) a combination of private and public sale of our common
stock.
As of December 30, 2001, all cash infusions from our President,
Jack H. Wynn, and Frederic Strader have been classified as a
liability and are disclosed in the accompanying balance sheet as
due to officer.
A summary of our product research and development for the term of
the plan is as follows:
We are performing ongoing research on the recovery and
reconstruction of compounds used by the ElectroChem Hydrogen Fuel
Reactor (ECHFR) to produce hydrogen. It is estimated that over 40
percent of these formula compounds can possibly be reused,
possibly lowering the cost of production. In addition, there may
be several potentially profitable by-products created by ECHFR
that we could market worldwide, such as:
(a) An on-site power plant could be designed for particular
needs where electricity and/or gas are necessary to
process cooking oil; and
(b) In the treatment of wastewater at abandoned mine sites
and other wastewater dumps or quarries, the ECHFR could
operate the process by creating power using the actual
wastewater to be treated
Subject to the implementation and success of one or more of the
financing options discussed in the first paragraph, we plan to
move our lab facility and expand our capabilities to include
commencing production in the first three months of 2002.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements that constitute Item 7 of this report
and a table of contents thereto commence on page F-1 through F-14,
which follow.
HYDRO ENVIRONMENTAL RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
Index to Financial Statements
Page
Report of Independent Auditors ............................. F-2
Balance sheet, December 31, 2001 ........................... F-3
Statements of operations, for the years ended December 31,
2001 and 2000, and from November 10, 1998 (inception)
through December 31, 2001 ............................... F-4
Statement of shareholders' deficit, from November 10,
1998 (inception) through December 31, 2001 .............. F-5
Statements of cash flows, for the years ended December 31,
2001 and 2000, and from November 10, 1998 (inception)
through December 31, 2001 ............................... F-6
Notes to the financial statements .......................... F-7
To the Board of Directors and Shareholders
Hydro Environmental Resources, Inc.
REPORT OF INDEPENDENT AUDITORS
We have audited the balance sheet of Hydro Environmental
Resources, Inc. (a development stage company) as of December
31, 2001, and the related statements of operations,
shareholders' deficit, and cash flows for the years ended
December 31, 2001 and 2000, and from November 10, 1998
(inception) December 31, 2001. 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 auditing
standards generally accepted in the United States of
America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
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 Hydro Environmental Resources, Inc. as of
December 31, 2001, and the results of its operations and its
cash flows for the years ended December 31, 2001 and 2000,
and from November 10, 1998 (inception) through December 31,
2001, in conformity with accounting principles generally
accepted in the United States of America.
As explained in Note 2 to the financial statements, Hydro
Environmental Resources, Inc. conducted significant
transactions with its president and certain shareholders
during the periods presented.
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company
is in default on certain loans at December 31, 2001 and has
suffered significant operating losses since inception, which
raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these
matters are also described in Note 1. The financial
statements do not include any adjustments that might result
from the outcome of this uncertainty.
Cordovano and Harvey, P.C.
Denver, Colorado
April 10, 2002
F-2
HYDRO ENVIRONMENTAL RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2001
<Table>
<s> <c>
ASSETS
Cash.......................................................... $ 311
Computer equipment, net of $1,411 of
accumulated depreciation (Note 1)............................ 3,316
Patent rights and interests, net of $7,500 of
accumulated amortization (Note 2)............................ 7,500
--------
$11,127
========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable and accrued liabilities........................$156,628
Due to officer (Note 2)......................................... 210,579
Due to shareholders (Note 2).................................... 356,297
Notes payable, convertible to common stock (Note 4)............. 25,000
Accrued interest on notes payable (Note 4)...................... 1,750
Loans payable, convertible to common stock (Note 8)............. 183,000
Accrued interest on loans payable (Note 8)...................... 10,363
--------
Total liabilities................................ 943,617
--------
Shareholders' deficit (Note 4):
Preferred stock, $.001 par value; 5,000,000 shares
authorized; -0- shares issued and outstanding.............. -
Common stock, $.001 par value; 50,000,000 shares authorized;
12,238,124 shares issued and outstanding................... 12,238
Additional paid-in capital...................................1,592,360
Deficit accumulated during development stage................(2,537,088)
-----------
Total shareholders' deficit................... (932,490)
---------
$ 11,127
=========
</Table>
See accompanying summary of significant accounting policies and
notes to the financial statements.
F-3
HYDRO ENVIRONMENTAL RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<Table>
<s> <c> <c> <c>
November 10,
1998
For the Years Ended (Inception)
December 31, through
------------------- December 31,
2001 2000 2001
-------- -------- ------------
Operating expenses:
Research and development............... $ 33,315 $ 37,481 $ 114,197
General and administrative:
Stock-based compensation (Note 5):
Consulting services................ 1,202,063 -- 1,202,813
Legal services..................... 178,000 -- 178,000
Other.............................. 37,500 -- 37,500
Related parties (Note 2)........... 12,000 12,000 37,000
Payroll............................ 129,352 -- 129,352
Professional and consulting
services......................... 326,508 13,345 339,853
Depreciation and amortization...... 4,411 3,000 8,911
Other.............................. 262,263 148,488 430,658
--------- ---------- -----------
Total operating expenses.... 2,185,412 214,314 2,478,283
--------- ---------- -----------
Loss from operations....(2,185,412) (214,314) (2,478,283)
Non-operating income.................... 1,000 -- 1,000
Interest expense:
Related parties (Note 2).............. (10,647) (9,125) (20,742)
Amortization of debt issue
costs (Note 4)..................... (26,250) -- (26,250)
Other................................. (12,113) (700) (12,813)
---------- ---------- -----------
Loss before income taxes.........(2,233,422) (224,139) (2,537,088)
Income tax provision (Note 3)........... -- -- --
---------- ---------- -----------
Net loss..............$(2,233,422) $(224,139) $(2,537,088)
=========== ========== ============
Basic and diluted loss per share*......$ (0.31) $ (0.04)
========== ==========
Basic and diluted weighted average
common shares outstanding *.......... 7,098,661 6,360,000
========== ==========
* Restated for August 16, 2001 reverse stock split.
</Table>
See accompanying summary of significant accounting policies and notes
to the financial statements.
F-4
HYDRO ENVIRONMENTAL RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
<Table>
<s> <c> <c> <c> <c> <c> <c> <c>
Deficit
Accumulated
Preferred stock Common Stock Additional During the
----------------- --------------------- Paid-In Development
Shares Par Value Shares Par Value Capital Stage Total
------ --------- ---------- --------- ----------- ----------- -----------
Balance, November 10, 1998
(inception)..................... - $ - - $ - $ - $ - $ -
Office space contributed by
the president (Note 2).......... - - - - 1,000 - 1,000
Net loss........................... - - - - - (1,010) (1,010)
------ --------- ---------- --------- ----------- ---------- -----------
Balance, December 31, 1998 - - - - 1,000 (1,010) (10)
February 25, 1999, sale of
common stock to officer
and affiliates for cash
($.001/share) (Note 2)........... - - 4,250,000 4,250 - - 4,250
February 25, 1999, sale of
common stock, net of
$1,925 of offering costs
($.001/share) (Note 5)........... - - 11,300,000 11,300 (1,925) - 9,375
March 1, 1999, capital contribution
by the president (Note 2)........ - - - - 3,210 - 3,210
May 31, 1999, expenses paid by
the president on behalf of
the Company (Note 2)............. - - - - 1,700 - 1,700
June 16, 1999, shares issued in
exchange for patent interest and
rights ($.001/share) (Note 2).... - - 15,000,000 15,000 - - 15,000
July 10, 1999, shares issued
in exchange for financial
advisory agreement ($.001/share)
(Note 5)......................... - - 750,000 750 - - 750
Office space and use of equipment
contributed by the president
(Note 2)......................... - - - - 12,000 - 12,000
Net loss............................ - - - - - (78,517) (78,517)
------- --------- ---------- -------- ---------- ---------- -----------
Balance, December 31, 1999 - - 31,300,000 31,300 15,985 (79,527) (32,242)
July 2, 2000, sale of
common stock to an individual,
$.05 per share .................. - - 800,000 800 39,200 - 40,000
July 2, 2000, sale of
common stock to an individual,
$.10 per share .................. - - 200,000 200 19,800 - 20,000
Office space and use of equipment
contributed by the president
(Note 2)......................... - - - - 12,000 - 12,000
Net loss............................ - - - - - (224,139) (224,139)
-------- --------- ---------- -------- ------- ---------- ----------
Balance, December 31, 2000 - - 32,300,000 32,300 86,985 (303,666) (184,381)
March 12, 2001, shares issued
to attorney in exchange for
legal services (Note 5).......... - - 200,000 200 51,800 - 52,000
May 17, 2001, shares issued as
debt issue costs related to
promissory notes (Note 4)........ - - 125,000 125 26,125 - 26,250
May 17, 2001, shares issued
in exchange for consulting
services (Note 5)................ - - 345,526 345 72,215 - 72,560
May 31, 2001, shares gifted to a
shareholder (Note 5)............. - - 150,000 150 37,350 - 37,500
May 31, 2001, shres issued
in exchange for consulting
services (Note 5)................ - - 934,552 935 232,703 - 233,638
June 17, 2001, sale of
common stock..................... - - 590,000 590 28,910 - 29,500
Reverse stock split through
Plan of Merger (Note 5).......... - - (27,716,050) (27,716) 27,716 - -
August 24, 2001, shares issued
to attorney in exchange for
legal services (Note 5).......... - - 200,000 200 49,800 - 50,000
September 10, 2001, shares
issued to attorney in exchange
for legal services (Note 5)...... - - 50,000 50 9,950 - 10,000
September 10, 2001, shares issued
to shareholders in exchange for
consulting services (Note 5)..... - - 1,000,000 1,000 199,000 - 200,000
October 23, 2001, shares issued
to attorney in exchange for
legal services (Note 5).......... - - 300,000 300 65,700 - 66,000
October 23,2001, shares
issued in exchange for
consulting services (Note 5)..... - - 1,500,000 1,500 328,500 - 330,000
October 30, 2001, shares
issued in exchange for
consulting services (Note 5)..... - - 879,096 879 130,986 - 131,865
November 6, 2001, shares
issued in exchange for
consulting services (Note 5)..... - - 180,000 180 26,820 - 27,000
November 30, 2001, shares
issued in exchange for
consulting services (Note 5)..... - - 900,000 900 161,100 - 162,000
December 5, 2001, shares issued to
shareholder in exchange for
consulting services (Note 2)..... - - 300,000 300 44,700 - 45,000
Office spaced and use of equipment
contributed by the president
(Note 2)......................... - - - - 12,000 - 12,000
Net loss............................ - - - - - (2,233,422) (2,233,422)
-------- --------- ---------- -------- ------- ----------- -----------
Balance, December 31, 2001.... - $ - 12,238,124 $ 12,238 $1,592,360 $(2,537,088) $ (932,490)
======== ========= ========== ======== ========== ============ ===========
</Table>
See accompanying summary of significant accounting policies
and notes to the financial statements.
F-5
HYDRO ENVIRONMENTAL RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<Table>
<s> <c> <c> <c>
November 10,
1998
For the Years Ended (Inception)
December 31, through
------------------------ December 31,
2001 2000 2001
---------- ----------- ------------
Cash flows from operating activities:
Net loss............................... $(2,233,422) $(224,139) $(2,537,088)
Adjustments to reconcile net loss to
net cash used by operating
activities:
Depreciation and amortization....... 4,411 3,000 8,911
Stock-based compensation (Note 5)... 1,443,813 -- 1,444,563
Services contributed by
officers (Note 2).................. -- -- 12,000
Office space and use of equipment
contributed by the president
(Note 2)........................... 12,000 12,000 25,000
Changes in operating liabilities:
Accounts payable and accrued
liabilities....................... 141,513 20,321 168,741
------------ --------- -----------
Net cash provided by
(used in) operating
activities............... (631,685) (188,818) (877,873)
------------ --------- -----------
Cash flows from investing activities:
Purchases of equipment.................. (4,727) -- (4,727)
------------ --------- -----------
Net cash used in
financing activities...... (4,727) -- (4,727)
------------ --------- -----------
Cash flows from financing activities:
Capital contributions from the
president (Note 2).................... -- -- 4,910
Proceeds from advances from the
Company's president (Note 2).......... 36,394 143,684 233,678
Repayment of advances from the
president (Note 2).................... -- (17,999) (23,099)
Proceeds from advances from the
Company's shareholders (Note 2)....... 425,457 -- 425,457
Repayment of advances from
shareholders (Note 2)................. (69,160) -- (69,160)
Proceeds from notes and loans
convertible to common stock
(Note 4).............................. 208,000 -- 208,000
Proceeds from sale of common stock...... 29,500 60,000 105,050
Payment of offering costs............... -- -- (1,925)
------------- --------- -----------
Net cash provided by
financing activities...... 630,191 185,685 882,911
------------- --------- -----------
Net change in cash........ (6,221) (3,133) 311
Cash, beginning of period................. 6,532 9,665 --
------------ --------- -----------
Cash, end of period....................... $ 311 $ 6,532 $ 311
============ ========= ===========
Supplemental disclosure of cash flow
information:
Income taxes........................... $ -- $ -- $ --
============ ========= ===========
Interest............................... $ -- $ -- $ --
============ ========= ===========
Non-cash financing activities:
Common stock issued in exchange for
patent interests and rights
(Note 2).............................. $ -- $ -- $ (15,000)
============ ========= ===========
</Table>
F-6
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Financial Statements
(1) Nature of Operations and Summary of Significant Accounting
Policies
Nature of Operations
The Company was incorporated under the laws of Oklahoma on November
10, 1998. The principal activities since inception have included
the acquisition of patent interests and rights for an Electro-Chem
Hydrogen Fuel Reactor ("ECHFR"), research and development of the
ECHFR, and the sale and issuance of shares of its $.001 par value
common stock. The Company was formed to design, build and manage
inexpensive and environmentally friendly fuel and power producing
systems for remote areas of the world that are without electricity
and other sources of power.
Basis of presentation
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As
shown in the accompanying financial statements, the Company is a
development stage company that is in default on certain loans at
December 31, 2001 and has suffered significant operating losses
since inception. These factors, among others, may indicate that
the Company will be unable to continue as a going concern for
reasonable period of time.
The financial statements do not include any adjustments relating to
the recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis and ultimately to attain
profitability. The Company's management intends to satisfy cash
requirements through cash infusions from officers and principal
shareholders in exchange for debt or restricted common stock. In
addition, management plans to continue the policy of issuing common
stock in exchange for services. Management is also considering (1)
a private offering and sale of common stock, (2) a public offering
and sale of common stock, or (3) a combination of the two previous
options. The Company's future success is ultimately dependent upon
its ability to create and provide effective and competitive
services on a timely and cost-effective basis.
Development stage company
Hydro Environmental Resources, Inc. (the "Company") is in the
development stage in accordance with Financial Accounting Standards
Board ("FASB") Statements of Financial Accounting Standards
("SFAS") No. 7 "Accounting and Reporting by Development Stage
Enterprises".
Use of estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, and contingent assets and liabilities at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-7
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Financial Statements
Cash equivalents
For the purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
The Company had no cash equivalents at December 31, 2001.
Equipment and depreciation
Equipment is stated at cost and is depreciated over its estimated
useful life using the straight-line method.
Upon retirement or disposition of the furniture and equipment, the
cost and accumulated depreciation are removed from the accounts and
any resulting gain or loss is reflected in operations. Repairs and
maintenance are charged to expense as incurred and expenditures for
additions and improvements are capitalized.
Intangible assets
Intangible assets are stated net of accumulated amortization and
include the patent application rights and interests to the
proprietary technology and processes involving the ECHFR valued at
$15,000. The $15,000 is amortized on a straight-line basis over
five years. Amortization expense for the years ended December 31,
2001 and 2000, and for the period from November 10, 1998
(inception) through December 31, 2001 totaled $3,000, $3,000, and
$7,500, respectively.
Impairments on long-lived assets
The Company evaluates the recoverability of long-lived assets in
accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121
requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets.
Debt issue costs
Debt issue costs consist of common stock issued to note holders
during the year ended December 31, 2001. Debt issue costs are
deferred and amortized over the period of the notes. Amortized
deferred issue costs are recorded as interest expense. All of the
notes matured during the year ended December 31, 2001; therefore,
the debt issue costs are included in the accompanying financial
statements as interest expense.
Income taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to differences between
the recorded book basis and the tax basis of assets and liabilities
for financial and income tax reporting. The deferred tax assets
and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when
the assets and liabilities are recovered or settled. Deferred
taxes are also recognized for operating losses that are available
to offset future taxable income and tax credits that are available
to offset future federal income taxes.
F-8
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Financial Statements
Fair value of financial instruments
The Company's financial instruments, including cash and current
liabilities are carried at cost, which approximates their fair
value because of the short-term maturity of these instruments.
Loss per share
The Company reports net loss per share using a dual presentation of
basic and diluted loss per share. Basic net loss per share excludes
the impact of common stock equivalents. Diluted net loss per share
utilizes the average market price per share when applying the
treasury stock method in determining common stock equivalents. The
Company has a simple capital structure for all periods presented;
therefore, basic and diluted losses per share at December 31, 2001
and 2000 are equal.
Stock-based compensation
The Company accounts for stock-based employee compensation
arrangements in accordance with Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees" and complies
with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation expense
is based on the difference, if any, on the date of grant, between
the fair value of the Company's stock and the exercise price. The
Company accounts for stock issued to non-employees in accordance
with the provisions of SFAS No. 123. SFAS 123 requires the fair
value based method of accounting for stock issued to non-employees
in exchange for services.
Companies that elect to use the method provided in APB 25 are
required to disclose pro forma net income and pro forma earnings
per share information that would have resulted from the use of the
fair value based method. The Company has elected to continue to
determine the value of stock-based compensation arrangements with
employees under the provisions of APB 25. Pro forma disclosures
are not included in the accompanying financial statements as there
were no employee stock-based compensation arrangements as of
December 31, 2001.
(2) Related Party Transactions
The president provided office space to the Company at no charge for
all periods presented. The office space was valued at $500 per
month and is included in the accompanying financial statements as
rent expense with a corresponding credit to additional paid-in
capital.
During the years ended December 31, 2001 and 2000, the president
contributed the use of office equipment to the Company. The use of
equipment was valued at $500 per month and is included in the
accompanying financial statements as office expense with a
corresponding credit to additional paid-in capital.
During the year ended December 31, 2001, shareholders advanced the
Company $425,457 for working capital. The advances do not carry an
interest rate and are due on demand. The Company repaid $69,160 as
of December 31, 2001. The $365,297 balance owed at December 31,
2001 is included in the accompanying financial statements as due to
shareholders.
F-9
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Financial Statements
During the years ended December 31, 2001, 2000 and 1999, the
president loaned the Company $24,777, $134,559, and $53,600,
respectively, for working capital. The loans bear interest at six
percent and are due on demand. As of December 31, 2001, the
Company had repaid $23,099. As of December 31, 2001, accrued
interest receivable on the advances totaled $20,742. The $210,579
balance of outstanding advances and accrued interest is included in
the accompanying financial statements as due to officer.
On December 5, 2001, the Company issued 300,000 shares of its
common stock to a shareholder in exchange for consulting services.
The market value of the common stock on the transaction date was
$.15 per share resulting in stock-based compensation expense of
$45,000.
On September 10, 2001, the Company issued 1,000,000 shares of its
common stock to shareholders in exchange for consulting services.
The market value of the common stock on the transaction date was
$.20 per share. Stock-based compensation expense of $200,000 was
recognized in the accompanying financial statements for the year
ended December 31, 2001.
During the year ended December 31, 1999, the president contributed
$3,210 to the Company for working capital and paid a $1,700 expense
on behalf of the Company. These amounts are included in the
accompanying financial statements as additional paid-in capital.
On June 16, 1999, the Company issued 15 million shares of its $.001
par value common stock in exchange for an assignment of the
interest and rights in a patent pending in Australia for an Electro-
Chem Hydrogen Fuel Reactor. The transaction has been valued at
predecessor cost in the accompanying financial statements.
On February 25, 1999, 4,250,000 shares of common stock were sold to
an officer and affiliates of the Company for $4,250 ($.001 per
share).
On November 17, 1998, an affiliate advanced the Company $100 to
open its bank account. The Company repaid the $100 on February 24,
1999.
(3) Income Taxes
A reconciliation of the U.S. statutory federal income tax rate to
the effective rate is as follows:
December 31,
------------------------
2001 2000
----------- -----------
U.S. federal statutory graduated rate............... 34.00% 30.80%
State incomne tax rate,
net of federal benefit............................. 0.00% 6.12%
Permanent differences............................... -0.27% 0.00%
Net operating loss for which no tax
benefit is currently available..................... -33.73% -36.92%
---------- --------
0.00% 0.00%
========== ========
At December 31, 2001, deferred taxes consisted of a net tax asset
of $854,586, due to operating loss carryforwards of $2,462,067,
which was fully allowed for, in the valuation allowance of
$854,586. The valuation allowance offsets the net deferred tax
asset for which there is no assurance of recovery. The change in
the valuation allowance for the years ended December 31, 2001 and
2000 totaled $753,469 and $82,751. Net operating loss
carryforwards will expire through 2021.
F-10
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Financial Statements
The valuation allowance will be evaluated at each balance sheet
date, considering positive and negative evidence about whether the
asset will be realized. At that time, the allowance will either be
increased or reduced; reduction could result in the complete
elimination of the allowance if positive evidence indicates that
the value of the deferred tax asset is no longer impaired and the
allowance is no longer required.
Should the Company undergo an ownership change as defined in
Section 382 of the Internal Revenue Code, the Company's tax net
operating loss carryforwards generated prior to the ownership
change will be subject to an annual limitation, which could reduce
or defer the utilization of these losses.
(4) Notes Payable
Convertible promissory notes
During the year ended December 31, 2001, the Company received
$25,000 in exchange for convertible promissory notes and 125,000
shares of the Company's $.001 par value common stock. The notes
were as follows:
Note payable to individual, dated February 12, 2001,
interest rate at 8.00 percent, maturing August 5, 2001.......$ 5,000
Note payable to individual, dated February 12, 2001,
interest rate at 8.00 percent, maturing August 5, 2001....... 5,000
Note payable to individual, dated February 12, 2001,
interest rate at 8.00 percent, maturing August 5, 2001....... 5,000
Note payable to individual, dated February 12, 2001,
interest rate at 8.00 percent, maturing August 5, 2001....... 5,000
Note payable to individual, dated February 12, 2001,
interest rate at 8.00 percent, maturing August 5, 2001....... 5,000
-------
$25,000
=======
On May 17, 2001, the Company issued 125,000 shares of its
restricted common stock to promissory note holders as debt issue
costs for the notes. The market value of the common stock on the
transaction date was $.21 per share. Debt issue costs of $26,250
were recognized in the accompanying financial statements as
interest expense for the year ended December 31, 2001. Interest
expense of $28,000 (including $26,250 of debt issue costs) was
recognized in the accompanying financial statements for the year
ended December 31, 2001.
Each $5,000 note is convertible into 125,000 shares of the
Company's $.001 par value common stock.
The notes were in default as of December 31, 2001.
F-11
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Financial Statements
(5) Shareholders' Deficit
Preferred stock
The Board of Directors is authorized to issue shares of preferred
stock in series and to fix the number of shares in such series as
well as the designation, relative rights, powers, preferences,
restrictions, and limitations of all such series. The Company had
no preferred shares issued and outstanding at December 31, 2001.
Common stock
Share sold for cash
During February 1999, the Company offered for sale 11,300,000
shares of its $.001 par value common stock for $.001 per share
pursuant to an exemption from registration claimed under Rule 504
of Regulation D of the Securities Act of 1933, as amended (the
"Act"). The Company sold all 11,300,000 shares for net proceeds of
$9,375, after deducting offering costs totaling $1,925.
Reverse stock split
On August 16, 2001, subsequent to shareholder approval at the
Company's Annual Meeting of Shareholders, the Company completed its
redomiciling merger with Hydro Environmental Resources, Inc., a
Nevada corporation, and, pursuant to the Plan of Merger, each five
(5) shares of common stock of the Oklahoma corporation was
exchanged for one share of the Nevada corporation. Following the
Plan of Merger, the Company's issued and outstanding common shares
totaled 6,929,028. The loss per share and weighted average common
shares outstanding disclosures in the accompanying financial
statements have been restated to reflect the reverse stock split.
Stock-based compensation
During the year ended December 31, 2001, the Company issued 750,000
shares of its common stock to its attorney in exchange for legal
services. The market value of the common stock ranged from $.20 to
$.26 per share. Stock-based compensation expense of $178,000 was
recognized in the accompanying financial statements for the year
ended December 31, 2001.
During the year ended December 31, 2001, the Company issued
4,739,174 shares of its common stock to unrelated third parties in
exchange for marketing, funding, administrative, managing, due
diligence and other consulting services. The market value of the
common stock ranged from $.15 to $.25 per share. Stock-based
compensation expense of $957,063 was recognized in the accompanying
financial statements for the year ended December 31, 2001.
On May 31, 2001, the Company gifted 150,000 shares of its
restricted common stock to a shareholder. The market value of the
common stock on the transaction date was $.25 per share. Stock-
based compensation expense of $37,500 was recognized in the
accompanying financial statements for the year ended December 31,
2001.
On July 10, 1999, the Company entered into a consulting agreement
with an unrelated third party to provide financial advisory
services to the Company. Upon signing the agreement, the Company
agreed to issue the consultant 750,000 shares of its $.001 par
value common stock. The transaction was valued at the estimated
fair value of the common stock on the date of issuance as
determined by the Board of Directors based on contemporaneous
equity transactions and other analysis. The Company recorded stock-
based compensation in the accompanying financial statements
totaling $750.
F-12
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Financial Statements
(6) Commitments and Contingencies
Office lease
The Company entered into an operating lease for office space on
February 1, 2001. The lease commenced February 1, 2001 and expires
January 31, 2004. Minimum monthly payments under the lease total
$2,600. Future minimum lease payments are as follows:
December 31,
2002.........................................$ 31,200
2003......................................... 31,200
2004......................................... 2,600
---------
$ 65,000
=========
Contingencies
On August 1, 2001, the Company received a subpoena from the
Securities and Exchange Commission ("SEC") to appear, through its
custodian of records, for testimony and to produce documents. The
subpoena required the Company to produce all documents supporting
the contentions made in its 2001 press releases. The Company plans
to produce the required documents, thus relieving it of the need to
appear for testimony. The Company received a notice from the SEC
via telephone that the informal investigation had been closed;
however, the Company has not received a written confirmation.
On August 6, 2001, the Company received a subpoena from the SEC to
appear, through its custodian of records, for testimony and to
produce documents (see Item 1: Legal Proceedings). The subpoena
requires the Company to produce the September 29, 2001 Stock
Purchase Agreement between the Company and PowerTek Holdings, Ltd.
and all related agreements. The Company plans to produce the
required documents, thus relieving it of the need to appear for
testimony. The Company received a notice from the SEC via
telephone that the informal investigation had been closed; however,
the Company has not received a written confirmation.
(7) Energy Production Agreement
During February of 2001, the Company signed a contract with Orini
Lumber Processors Limited ("Orini") of Orini, New Zealand. The
Company agreed to construct and develop an ElectroChem Hydrogen
Fuel Reactor ("ECHFR") system for the production of energy suitable
for the purposes required by Orini for $1,500,000. Under the terms
of the contract, the Company would (a) satisfy Orini that the
system is economical and financially viable and satisfactory for
long-term use for the purpose it is designed for and (b) satisfy
Orini that the system is safe and had no hazardous or injurious
side effects to the ecology or to the environment and any by-
products are capable of being disposed of cheaply and efficiently
and there is no unsatisfactory risk to the staff operating the
system. Once the Company satisfied Orini of the above clauses,
Orini would pay a deposit of 25 percent of the purchase price and
the balance of the purchase price upon the successful installation
and operation of the system. The contract was subsequently
terminated.
F-13
HYDRO ENVIRONMENTAL RESOURCES, INC.
Notes to Financial Statements
(8) Stock Purchase Agreement
During June of 2001, the Company signed a stock purchase agreement
with PowerTek. PowerTek agreed to purchase shares of the Company's
common stock equal to the number of shares issued and outstanding,
on a fully diluted basis, on the date of closing for $500,000.
Also, PowerTek agreed to expend not less than $2 million on
research and development in the field of hydrogen powered fuel cell
technology. The resulting research and development and related
technology shall be licensed to the Company on a non-exclusive,
royalty-free basis for a seven-year period subject to various terms
listed in the agreement.
Prior to closing, PowerTek agreed to loan the Company funds for
working capital at an interest rate of ten percent. Upon closing,
the amounts owed under the loans will be credited against
PowerTek's $2,000,000 research and development expenditure
obligation under the agreement. If the closing does not occur,
PowerTek has the option to demand immediate payment in full, or to
convert the loans to the Company's common stock at a price of 75
percent of the average quoted market price of the stock at the
close of the thirty business days immediately preceding the
conversion demand date.
The agreement was terminated on September 1, 2001. As of December
31, 2001, the Company owed PowerTek $183,000 for loans advanced
during the year ended December 31, 2001. $10,363 of interest had
accrued on the loans as of December 31, 2001. A settlement of the
debt was reached among the companies on March 13, 2002 (see Note
10).
(9) License Agreement
On October 25, 2001, the Company announced it signed a license
agreement for the marketing and manufacturing of the ECHFR System
with Allied Energy, Inc. The license is a non-exclusive worldwide
license, which provides for the commercial exploitation of the
system and for further design and development.
The license provides for a 5 percent royalty of net sales for
outside manufacture and an 8 percent royalty if manufactured by the
Company. On completion of the design and construction of the first
commercial model to the licensee's specifications, the agreement
also provides for a one-time fee of $500,000 to be paid to the
Company as well as 20 percent of the founders' stock of the
licensee company.
The license further provides for the licensee to further sub-
license on terms and conditions approved by the Company.
(10) Subsequent events
On March 11, 2002, the Company accepted a total of $150,000 from
two shareholders in exchange for two $75,000 promissory notes. The
notes are interest-free and mature on March 11, 2004. The notes
may be converted into shares the Company's common stock at the
discretion of both parties.
On March 13, 2002, the Company entered into a settlement agreement
with PowerTek for the debt and accrued interest owed by the Company
to PowerTek (see Note 8). In accordance with the settlement
agreement, the Company paid PowerTek $150,000 against the debt and
PowerTek forgave the remaining balance due.
F-14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's
accountants since the formation of the Company required to be
disclosed pursuant to Item 304 of Regulation S-B.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 18(a) OF THE EXCHANGE
ACT
The members of the Board of Directors of Hydro serve until the
next annual meeting of the stockholders, or until their
successors have been elected. The officers serve at the pleasure
of the Board of Directors.
Name Age Position Director Since
- -------------------------------------------------------------------------
Jack H. Wynn 71 President and Director November 1998
John L. Wheeler 58 Director December 2000
David A. Youngblood 43 Director July 2001
Jack H. Wynn
Mr. Wynn has been the sole officer and a director of the Company
since its inception in November 1998 until December 2000. Mr.
Wynn helped the Company raise funds for research and development
as well as developing a present marketing plan and was
instrumental in taking the Company public. He also is currently
the owner of North Bay Corporate Services Firm in Hayward,
California which he founded in 1998. Prior to founding Hydro
Environmental Resources, Inc., from 1980 to 1983, Mr. Wynn was
Chairman of the Board of Scanner Energy, an Oklahoma leasing and
oil production corporation with leases in numerous states. From
1984 to 1989, Mr. Wynn formed and operated the Oklahoma Transfer
and Registrar Corporation, which was later transferred to San
Francisco, California as Securities Transfer Pacifica
Corporation. During his years as owner and manager, the company
contracted and transferred shares for over 60 public
corporations. While at the company, Mr. Wynn developed a state
of the art computer system used by many transfer agents today.
During this time, he was also instrumental in the development and
growth of Power Train corporation, a company which successfully
developed the hydraulic power system used in heavy industry
today. From 1972 to 1980, Mr. Wynn was a partner with Scholen,
Wynn & Associates, a securities and insurance brokerage firm.
Mr. Wynn has over twenty years experience in the life insurance
industry, including ten years with Occidental Life Insurance.
John L. Wheeler
Mr. Wheeler has been qualified as an attorney at law in Australia
since 1965. He started private practice in 1970. Since forming
his own practice, he has been involved in many notable cases,
which have been groundbreaking legal precedents throughout the
years. He has on numerous occasions been asked to advise the
government or opposition on proposed legislation. He has
practiced in commercial law and has advised on public company
acquisitions and mergers domestically and internationally.
Beginning in 1991 Mr. Wheeler spent several years in the United
States with an Australian group listing public corporations.
Currently he is involved in assisting in the development of
public corporations specializing in new technology. Mr. Wheeler
was the foundation president of the Big Brother Big Sister
movement in Australia and held that position for 10 years. He
has been a member of other charities, including Boys Town
Queensland, Pregnancy Help and Centrecare.
David A. Youngblood
David Youngblood is the Supervisor of Research at the Company.
Prior to the opening of the Company's headquarters in February
2001, he was instrumental in Finance, Human Resources, Lab Design
and many other facets of company start-up as a consultant. Since
taking the Research and Development position, he orchestrated the
development of an all-new ECHFR unit, converted hydrogen vehicle,
support systems, and is currently developing several projects not
yet released. Prior to his positions with the Company, Mr.
Youngblood from 1997-2000 accepted a R&D Technician position with
Nikon Research Corporation of America in Belmont, California. His
role was developing of concepts and projects related to
Microphotolithography manufacturing processes for optically
exposing of silicon wafers and new products with the NRCA
Engineering staff. His duties were reporting and supporting the
Director of Electronics and support of mechanical designers,
mechanical engineers and consultants. Other responsibilities
included Electromechanical packaging, quality manufacturing,
lab/facility support, equipment and component specification, Cad
Design, Mechanical and Electronic inspection, circuit board
proofing and general manufacturing practices.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), requires that the Company's
officers and directors, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities,
file reports of ownership and changes of ownership with the SEC.
Officers, directors and greater than ten percent (10%)
shareholders are required by SEC regulation to furnish the
Company with copies of all such reports they file.
Based solely on its review of the copies of such reports received
by the Company, and on written representations by the Company's
officers and directors regarding their compliance with the
applicable reporting requirements under Section 16(a) of the
Exchange Act, the Company believes that, with respect to its
fiscal year ended December 31, 2001, all of the Company's
directors and officers and all of the persons known to the
Company to own more than ten percent (10%) of the Company's
Common Stock, either failed to file, on a timely basis, or have
yet to file the required beneficial ownership reports with the
SEC.
ITEM 10. EXECUTIVE COMPENSATION
None of the Company's officers and/or directors receive any
compensation for their respective services rendered to the
Company, nor have they received such compensation in the past.
They have agreed to act without compensation until authorized by
the Board of Directors, which is not expected to occur until the
Company has generated revenues from operations. As of the date of
this proxy statement, the Company has no funds available to pay
directors. Further, none of the directors are accruing any
compensation pursuant to any agreement with the Company.
No retirement, pension, profit sharing, stock option or insurance
programs or other similar programs have been adopted by the
Company for the benefit of its employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information known to the
Company with respect to the beneficial ownership of its common
stock as of March 28, 2002, by (i) each person known by the
Company to be the beneficial owner of more than 5% of the
outstanding Common Stock, (ii) each director of the Company,
(iii) each named executive officer, and (iv) all directors and
officers as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed
below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject
to community property laws where applicable.
Name and Address of
Beneficial Owner (1) Amount of Ownership (2) Percent of Class
Jack H. Wynn 1,480,000 7.8%
John Wheeler 0 *
David A. Youngblood 86,000 *
Officers and directors
as a Group (3 persons) 1,566,000 8.2%
* constitutes less than one 1 percent (1%) of all issued and
outstanding shares of Common Stock.
- ----------
(1) Unless otherwise indicated, the address of each
beneficial owner is that of the Company.
(2) Beneficial ownership is determined in accordance with the
rules of the SEC, based on factors including voting and
investment power with respect to shares. Common stock
subject to options currently exercisable, or exercisable
within 60 days after March 28, 2002, are deemed outstanding
for computing the percentage ownership of the person holding
such options, but are not deemed outstanding for computing
the percentage ownership for any other person.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The president provided office space to the Company at no charge
for all periods presented. The office space was valued at $500
per month and is included in the accompanying financial
statements as rent expense with a corresponding credit to
additional paid-in capital.
During the years ended December 31, 2001 and 2000, the president
contributed the use of office equipment to the Company. The use
of equipment was valued at $500 per month and is included in the
accompanying financial statements as office expense with a
corresponding credit to additional paid-in capital.
During the year ended December 31, 2001, shareholders advanced
the Company $425,457 for working capital. The advances do not
carry an interest rate and are due on demand. The Company repaid
$69,160 as of December 31, 2001. The $365,297 balance owed at
December 31, 2001 is included in the accompanying financial
statements as due to shareholders.
During the years ended December 31, 2001, 2000 and 1999, the
president loaned the Company $24,777, $134,559, and $53,600,
respectively, for working capital. The loans bear interest at
six percent and are due on demand. As of December 31, 2001, the
Company had repaid $23,099. As of December 31, 2001, accrued
interest receivable on the advances totaled $20,742. The
$210,579 balance of outstanding advances and accrued interest is
included in the accompanying financial statements as due to
officer.
On December 5, 2001, the Company issued 300,000 shares of its
common stock to a shareholder in exchange for consulting
services. The market value of the common stock on the
transaction date was $.15 per share resulting in stock-based
compensation expense of $45,000.
On September 10, 2001, the Company issued 1,000,000 shares of its
common stock to shareholders in exchange for consulting services.
The market value of the common stock on the transaction date was
$.20 per share. Stock-based compensation expense of $200,000 was
recognized in the accompanying financial statements for the year
ended December 31, 2001.
During the year ended December 31, 1999, the president
contributed $3,210 to the Company for working capital and paid a
$1,700 expense on behalf of the Company. These amounts are
included in the accompanying financial statements as additional
paid-in capital.
On June 16, 1999, the Company issued 15 million shares of its
$.001 par value common stock in exchange for an assignment of the
interest and rights in a patent pending in Australia for an
Electro-Chem Hydrogen Fuel Reactor. The transaction has been
valued at predecessor cost in the accompanying financial
statements.
On February 25, 1999, 4,250,000 shares of common stock were sold
to an officer and affiliates of the Company for $4,250 ($.001 per
share).
On November 17, 1998, an affiliate advanced the Company $100 to
open its bank account. The Company repaid the $100 on February
24, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Financial Statements and Schedules
A list of the Financial Statements and Financial Statement
Schedules filed as part of this Report is set forth in Item 7,
and appears at page F-1 of this Report, which list is
incorporated herein by reference.
(a) Exhibits
Number Description
3.1 Articles of Incorporation (State of Nevada)
(incorporated by reference to the Form 10-QSB
filed with the Commission on August 20,
2001).
3.2 By-laws (State of Nevada) (incorporated by
reference to the Form 10-QSB filed with the
Commission on August 20, 2001).
3.3 Articles of Merger (incorporated by reference
to the Form 10-QSB filed with the Commission
on August 20, 2001).
4.1 Form of Common stock Certificate (incorporated
by reference to Exhibit 3.1 to the Registration
Statement on Form 10-SB filed
with the Commission on March 22, 2000).
10.1 Assignment of Patent and Intellectual Property Rights
related to the ElectroChem Hydrogen Fuel Reactor
(incorporated by reference to Exhibit 6.1 to the
Registration Statement on Form 10-SB filed with the
Commission on March 22, 2000).
10.2 License Agreement with Allied Energy, Inc.
(incorporated by reference to Exhibit 10.2 to the
Form 10-QSB filed with the Commission on November 14,
2001).
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during
the quarter ended December 31, 2001.
PROXY CARD FOR
HYDRO ENVIRONMENTAL RESOURCES, INC. (the "Corporation")
This proxy is solicited on behalf of the Board of Directors of the
Corporation for the Annual Meeting of Shareholders to be held on December 3,
2002. The Board of Directors recommends a vote "FOR" the following:
1. Election of Directors:
Withhold authority
to vote for any
individual nominee
FOR election WITHHOLD vote (write number(s) of
Nominees of all nominees from all nominees nominee(s) below):
- -------- --------------- ----------------- ------------------
1 - Steve Lennon
2 - Michael Lysaght
3 - David Rosenberg
4 - Mark Shmulevsky
5 - David A. Youngblood
2. Approval of the Articles of Amendment to the Articles of Incorporation:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval of the selection of Cordovano and Harvey, P.C. as the
Corporation's independent accountants for the fiscal year ended December
31, 2002.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Votes MUST be indicated using black or blue ink. The undersigned hereby appoints
David Rosenberg, proxy, with full power of substitution, to vote all shares of
Common Stock of the undersigned in the Corporation at the Annual Meeting of
Shareholders to be held on December 3, 2002, and at any adjournment thereof,
upon all subjects that may properly come before the meeting. IF SPECIFIC
DIRECTIONS ARE NOT GIVEN WITH RESPECT TO ANY MATTERS TO BE ACTED UPON AT THE
ANNUAL MEETING AND THIS PROXY CARD IS SIGNED AND RETURNED, THE PROXY WILL VOTE
IN ACCORDANCE WITH THE ABOVE RECOMMENDATION AND MAY EXERCISE DISCRETIONARY
AUTHORITY WITH RESPECT TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE
MEETING.
Please date and sign exactly as your name or names appear on this proxy card. If
the shares are held jointly, each shareholder should sign. If signing as an
executor, trustee, administrator, custodian, guardian, corporate officer, or
pursuant to a power of attorney, please so indicate below.
Dated: By:
---------------------------------------
Printed Name:
---------------------------------------
[ ] Check this box if you have either a change of address or comments, and
please note the same on this proxy card.
Mail this Proxy Card to: Hydro Environmental Resources, Inc.
2903 N.E. 109th Avenue, Suite D
Vancouver, Washington 98682